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, 2005.

    |_| Transition Report pursuant to Section 13 or 15(d) of The Exchange Act
                                     of 1934

                           Commission File No. 0-21079

                                PHLO CORPORATION

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

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

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


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

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

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

                    Common Stock, par value $.0001 per share

                                (Title of Class)

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

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 no 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
November 4, 2005, was approximately $1,627,160.

The outstanding number of shares of the issuer's common stock as of November 4,
2005 was 341,825,251.

<PAGE>



                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number                                                                               Page
<S>                                                                                <C>
      PART I

1.    Business .......................................................................

2.    Properties .....................................................................

3.    Legal Proceedings ..............................................................

4.    Submission of Matters to a Vote of Security Holders ............................

      PART II

5.    Market for the Registrant's Common Equity and Related Shareholder Matters ......

6.    Management's Discussion and Analysis or Plan of Operations .....................

7.    Financial Statements and Footnotes .............................................

8.    Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure .....................................................................

8A    Controls and Procedures ........................................................

      PART III

9.    Directors and Executive Officers ...............................................

10.   Executive Compensation .........................................................

11.   Security Ownership of Certain Beneficial Owners and Management .................

12.   Certain Relationships and Related Transactions .................................

13.   Exhibits .......................................................................

14.   Principal Accounting Fees and Services .........................................

      Signatures .....................................................................

      Certifications .................................................................
</TABLE>


<PAGE>

                                     PART I

                     RISK FACTORS AND CAUTIONARY STATEMENTS

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

Item 1. BUSINESS

General

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

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

During the year ended March 31, 2004, further tests were completed by some of
the world's top scientists in the rehydration field confirming that AQUIS(TM)
Rapid Response Rehydration is superior to current solutions formulated in
accordance with the World Health Organization's most advanced specifications.
AQUIS(TM) beverages are also based on a patent-pending biotechnology of the
Company. Tests were conducted by a team of scientists at the International
Center for Diarrheal Disease Research, Bangladesh ("ICDDRB") and demonstrate
that the use of AQUIS(TM) results in superior and faster absorption of both
electrolytes and water as compared with the use of other leading oral
rehydration solutions in the world, including those based on the World Health
Organization's most advanced specifications. These results have been presented
at two of the most highly regarded conferences in the world in the field of
rehydration, the American Gastroenterological Association meeting in New
Orleans, May 15, 2004 and the 10th Asian Conference on Diarrhoeal Diseases and
Nutrition (10th ASCODD) in Dhaka, Bangladesh (December, 7-9 2003). Additionally,
AQUIS(TM) has a superior taste which is conducive to increased fluid intake by
those drinking it. The ICDDRB pioneered the discovery of oral rehydration
solutions and recently received the Gates Award for Global Health in recognition
of this contribution.

Subsequent to the end of the fiscal year, the Company announced that it has
commenced initial sales to the athletic departments of colleges and universities
of its AQUIS(TM) Rapid Response Rehydration product line.

Financing Activities

During the fiscal year ended March 31, 2005, the Company raised $650,973, net of
costs and fees, in the private placement of equity.

<PAGE>

Recent Developments

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

During the fiscal year ended March 31, 2004, further tests were completed by
some of the world's top scientists in the rehydration field confirming that
AQUIS(TM) Rapid Response Rehydration is superior to current solutions formulated
in accordance with the World Health Organization's most advanced specifications.
AQUIS(TM) beverages are also based on a patent-pending biotechnology of the
Company. Tests were conducted by a team of scientists at the International
Center for Diarrheal Disease Research, Bangladesh ("ICDDRB") and demonstrate
that the use of AQUIS(TM) results in superior and faster absorption of both
electrolytes and water as compared with the use of other leading oral
rehydration solutions in the world, including those based on the World Health
Organization's most advanced specifications. These results have been presented
at two of the most highly regarded conferences in the world in the field of
rehydration, the American Gastroenterological Association meeting in New
Orleans, May 15, 2004 and the 10th Asian Conference on Diarrhoeal Diseases and
Nutrition (10th ASCODD) in Dhaka, Bangladesh (December, 7-9 2003). Additionally,
AQUIS(TM) has a superior taste which is conducive to increased fluid intake by
those drinking it. The ICDDRB pioneered the discovery of oral rehydration
solutions and recently received the Gates Award for Global Health in recognition
of this contribution.

Subsequent to the end of the fiscal year, the Company announced that it has
commenced initial sales to the athletic departments of colleges and universities
of its AQUIS(TM) Rapid Response Rehydration product line.

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

Product Overview

The Company's AQUIS(TM) Rapid Response Rehydration System ("AQUIS(TM)") has been
shown, in tests conducted by some of the world's top scientists in the
rehydration field, to be superior to current solutions formulated in accordance
with the World Health Organization's most advanced specifications. AQUIS(TM) is
being marketed initially to institutional purchasers (including the colleges and
universities, sports teams, U.S. Military, foreign governments, agencies of the
United Nations, and non-profit organizations, including any humanitarian
organizations). There are two formulations of AQUIS(TM), one of which is
directed to rehydration (available in Orange, Grape, Lemon-Lime and Tropical
Punch flavors) and one of which addresses diarrhea caused by diseases such as
dysentery and cholera (available in Strawberry flavor). Dehydration from these
causes is a major problem for the U.S. Military, resulting in tremendous costs
both in terms of dollars and loss of active personnel. These diseases also bring
suffering and death to millions of people in many parts of the world today. Both
types of Aquis contain the Company's proprietary, biologically active
micro-particle delivery system.

The Company's Oesis Personal Performance Spray Products contain the Company's
patented VEP/PPC preparation and the Company's biologically active
micro-particle delivery system, delivered through 1-ounce sprays. Oesis Spray
Products provide cellular membrane repair and protection from toxicants while
creating focus and mental alertness without the secondary depression. Oesis
Personal Performance Sprays were manufactured in three flavors, Lemon Mint,
Cherry Vanilla Mint, and Passion Fruit. The Spray Products were marketed to the
major natural food chains, the major chain and independent convenience stores,
drug stores, mass merchandisers, and supermarkets. During the fiscal year, the
Company redirected its marketing focus with respect to Oesis to
government/military fronts. The Company believes that the technology contained
in the Oesis products would be ideal for use in a performance product,
particularly one containing caffeine and carbohydrates, to be marketed to the
U.S. Military.

The Company's "ZO - Vital Cell Defense" beverage line features fruit drinks,
lemonades, iced black teas and iced green teas and is offered in 16 ounce
bottles. "ZO - Vital Cell Defense" with its patented VEP/PPC and sustained
release micro-encapsulation delivery technology was manufactured in Cranberry
Berry, Orange Carrot, Pink

<PAGE>

Lemonade,  Tropical Punch,  Kiwi  Strawberry,  Raspberry  Vanilla and Blackberry
Cherry,  in addition to four  flavors of iced black tea and four flavors of iced
green  tea.  The  manufacture  of ZO - Vital  Cell  Defense  beverages  has been
suspended for an extended period due to the acquisition of the Company's primary
distributors of ZO by Coca-Cola  Enterprises (CCE), extended negotiations by the
Company with CCE and The  Coca-Cola  Company (CCC)  regarding a joint effort,  a
major management  overhaul at CCC, and the Company's focus during this period on
final  commercialization  and initial  production  and  marketing  of  AQUIS(TM)
products.

Marketing and Distribution

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

Industry Overview/Competition

The Company's goal is to develop products which are proprietary (patented and
patent-pending) and which serve a major perceived consumer need not currently
being effectively addressed by other products. The Company's AQUIS(TM) Rapid
Response Rehydration System is being marketed to institutional purchasers
including colleges and universities, sports teams, the U.S. Military, U.N.
agencies, foreign governments and other institutional purchasers. AQUIS(TM) has
been shown, in tests conducted by some of the world's top scientists in the
rehydration field, to be superior to current solutions formulated in accordance
with the World Health Organization's most advanced specifications. AQUIS(TM)
beverages are also based on a patent-pending biotechnology of the Company.
AQUIS(TM) solutions provide superior rehydration through advanced liposomal
electrolyte delivery technology (micro-encapsulating the electrolyte payload for
direct absorption into the bloodstream). Direct absorption begins immediately
upon the drinking of AQUIS(TM). Dehydration is an important issue in the
athletic arena, for the U.S. Military (particularly in situations such as Iraq),
and for humanitarian aid organizations around the world. AQUIS(TM) products are
not intended to compete against the soda-pop versions of rehydration beverages
which are sold to consumers.

The Company's ZO - Vital Cell Defense line of beverages competes in the "New
Age" beverage category. The Company's line of ready to drink beverages competes
directly with such brands as Arizona, SoBe, Snapple and others, although the
Company believes that its ZO beverage line, with its proprietary, patented
composition and biologically active micro-particle delivery technology,
differentiates itself from these other major brands. The category of "New Age"
beverages is the fastest growing category in the beverage industry today.

The Company's Oesis Personal Performance Spray Products are based on a patented
biotechnology which is unlike any other on the market. Oesis is unique in its
ability to stimulate cellular membrane repair. Additionally, unlike other
dietary supplements that are taken in pill form, Oesis' micro-particle delivery
system allows its beneficial effects to quickly reach cells throughout the body,
rather than being destroyed by the acidic environment of the stomach.

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

<PAGE>

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

Management and Employees

As of March 31, 2005, the Company had two employees.

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

Product Liability Insurance

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

Government Regulation

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

Item 2. PROPERTIES.

The Company is currently subleasing office space for a three year term ending on
March 31, 2007 for $8,671 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, 2005 are
as follows:

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

(b) During the fiscal year, litigation was commenced against the Company based
on the liability of one of its affiliates. The Company vigorously defended the
action, but, also during the fiscal year, a judge turned over

<PAGE>

$105,652 of the Company to the creditor. The Company's counsel believed that the
judge  exceeded  his  authority  under law in ruling  against  the  Company on a
procedural  basis prior to a decision  through trial on the merits.  The Company
has filed a  complaint  against  the judge for his  actions  and intends to seek
disciplinary action against the creditor's lawyers.

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

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

The Company disputes all allegations made by the Division of Enforcement (except
for the fact that Phlo did not timely make certain periodic filings) and is
vigorously defending the SEC action. The Company expects to be completely
current in its financial reporting prior to the issuance of an initial decision
on this matter. The Company has also provided to the SEC evidence of the
existence of extraordinary circumstances related to its former outside auditing
firms resulting in Phlo not being able to maintain timely financial filings.

Finally, the Company can make no assurances with respect to the outcome of this
matter.

In addition to the claims referred to above, there are other lawsuits in which
the Company is involved, but is unable to predict the outcome. In the opinion of
management, based on currently available facts, and the aggregate liability
currently provided for within the accompanying financial statements, the
ultimate resolution of such matters will not have a material adverse effect on
the Company's consolidated results of operations or financial position.

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

No matters were submitted to a vote of the holders of the Company's common stock
during its fiscal year ended March 31, 2005.

                                     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, 2004, to March 31, 2005, 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, 2005 and 2004.

<PAGE>

--------------------------------------------------------------------------------
                                  Common Stock
--------------------------------------------------------------------------------
                     Year Ended 3/31/05                 Year Ended 3/31/04
--------------------------------------------------------------------------------
Quarter             High             Low                High            Low
--------------------------------------------------------------------------------
First Quarter      $0.20            $0.07               $0.045          $0.01
--------------------------------------------------------------------------------
Second Quarter     $0.15            $0.07               $0.065          $0.015
--------------------------------------------------------------------------------
Third Quarter      $0.09            $0.02               $0.027          $0.006
--------------------------------------------------------------------------------
Fourth Quarter     $0.04            $0.02               $0.095          $0.008
--------------------------------------------------------------------------------

On March 31, 2005, the closing price of the Common Stock as reported on the Pink
Sheets was $0.03. As of March 31, 2005, the Company had approximately 1,500
beneficial holders of record of its shares of Common Stock.

During the fiscal year ended March 31, 2005, the Company raised $650,973 in a
private placement, and issued 5,000,000 shares of common stock in exchange for
services, each in reliance on various exemptions available under the Securities
Act.

Item 6.

PHLO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

--------------------------------------------------------------------------------

SAFE HARBOR STATEMENT

The Company has made, and may continue to make, various forward-looking
statements with respect to its financial position, business strategy, and plans
and objectives of management. Such forward-looking statements are identified by
the use of forward-looking phrases such as "anticipates", "intends", "expects",
"plans", "believe", "estimates", or words or phrases of similar import. These
forward-looking statements are subject to numerous assumptions, risks, and
uncertainties, and the statements looking forward beyond 2005 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,
2005 and results of operations for the years ended March 31, 2005 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 no revenue for the fiscal year ended March 31, 2005, as compared
to revenue of $784,896 for the fiscal year ended March 31, 2004. The selling,
general and administrative expenses for the fiscal year ended March 31, 2005
decreased to $1,414,209 from $3,304,419 for the fiscal year ended March 31,
2004. The Company's net loss decreased to $2,815,000 from $2,893,137 for the
Company's prior fiscal year. However, during the fiscal year, the Company
conducted increased activities related to its technological base (research and
development costs incurred increased from $300,000 for the fiscal year ended
March 31, 2004 to $528,132 for the fiscal year ended March 31, 2005) and focused
its efforts on developing its marketing plan and establishing key marketing
relationships with respect to its AQUIS(TM) Rapid Response Rehydration
beverages.

<PAGE>

There was no cost of sales for the year ended March 31, 2004, as the revenue
generated during that year resulted from the receipt of product distribution
rights fees rather than from product sales.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an amendment
of ARB No. 43, Chapter 4". This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This Statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this Statement will have any
immediate material impact on the Company.

In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152). This Statement amends FASB Statement No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement
also amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. with earlier application encouraged. The Company does not anticipate that
the implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.

On December 16, 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" (" SFAS 153"). This statement amends APB Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Under SFAS 153, if a nonmonetary exchange of
similar productive assets meets a commercial-substance criterion and fair value
is determinable, the transaction must be accounted for at fair value resulting
in recognition of any gain or loss. SFAS 153 is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005. The Company does
not anticipate that the implementation of this standard will have a material
impact on its financial position, results of operations or cash flows.

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

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also

<PAGE>

requires that retrospective  application of a change in accounting  principle be
limited to the direct  effects of the  change.  Indirect  effects of a change in
accounting  principle,  such as a  change  in  non-discretionary  profit-sharing
payments resulting from an accounting change, should be recognized in the period
of the accounting change.  SFAS 154 also requires that a change in depreciation,
amortization,  or  depletion  method  for  long-lived,  non-financial  assets be
accounted  for as a change  in  accounting  estimate  effected  by a  change  in
accounting  principle.   SFAS  154  is  effective  for  accounting  changes  and
corrections  of errors made in fiscal years  beginning  after December 15, 2005.
Early  adoption is permitted for  accounting  changes and  corrections of errors
made in fiscal years  beginning  after the date this  Statement  is issued.  The
Company does not expect the  adoption of this SFAS to have a material  impact on
its consolidated financial position, results of operations or cash flows.


LIQUIDITY AND CAPITAL RESOURCES

During the fiscal year ended March 31, 2005, the Company's working capital
deficit increased by $868,235 to $4,100,460. In addition, the Company's
Stockholders' Deficiency increased from $3,613,191 to $4,461,781.

During the fiscal year ended March 31, 2005, 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 its expanded
distribution base, the prospects for national and global distribution of its
products and joint venture activities with major international entities, the
existence now of three product lines 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, 2005 Form 10-KSB, that the Company
has incurred operating losses in the last two years and that the Company is
dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.

CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

For revenue from product sales, the Company recognizes revenue in accordance
with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
superceded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated

<PAGE>

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

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation-Transition
and Disclosure-an amendment of SFAS 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock options
is measured as the excess, if any, of the fair market value of the Company's
stock at the date of the grant over the exercise price of the related option.
The Company has adopted the annual disclosure provisions of SFAS No. 148 in its
financial reports for the years ended March 31, 2005 and 2004. The Company has
no awards of stock-based employee compensation outstanding at March 31, 2005.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact, if any, that this statement will have on Company's
consolidated financial statements.

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.

<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549



                              FINANCIAL STATEMENTS

                             MARCH 31, 2005 AND 2004



                         FORMING A PART OF ANNUAL REPORT
                 PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934


                                PHLO CORPORATION


<PAGE>

                                PHLO CORPORATION

                          Index to Financial Statements




<TABLE>
<CAPTION>

                                                                                    Page
<S>                                                                                 <C>
Report of Independent Registered Certified Public Accounting Firm                   F-3

Consolidated Balance Sheet at March 31, 2005                                        F-4

Consolidated  Statements  of Losses for the years  ended March 31, 2005 and 2004    F-5

Consolidated  Statements  of Deficiency  in  Stockholders'  Equity for the years
ended March 31, 2005 and 2004                                                       F-6 - F-7

Consolidated  Statements  of Cash Flows for the years  ended  March 31, 2005 and
2004                                                                                F-8 - F-9

Notes to Consolidated Financial Statements                                          F-10 - F-25
</TABLE>

<PAGE>

                    RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
                          CERTIFIED PUBLIC ACCOUNTANTS

        REPORT OF INDEPENDENT REGISTERED 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, 2005, 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, 2005. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audit.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at March 31, 2005 and the results of its operations and its cash flows for each
of the two years in the period ended March 31, 2005 in conformity with
accounting principles generally accepted in the United States of America.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
B, the Company has suffered recurring losses from operations and the Company is
experiencing difficulty in generating sufficient cash flow to meet it
obligations and sustain its operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The accompanying statements do not include
any adjustments that might result from the outcome of this uncertainty.



                                 /s/RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
                                 -------------------------------------------
                                 Russell Bedford Stefanou Mirchandani LLP
                                 Certified Public Accountants


McLean, Virginia
October 31, 2005







                                       F-3

<PAGE>

                         PHLO CORPORATION AND AFFILIATES

                           CONSOLIDATED BALANCE SHEET

                                 March 31, 2005

                                     ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS
<S>                                                                                  <C>
Inventory                                                                            $     75,041
                                                                                     ------------

   Total Current Assets                                                                    75,041

PROPERTY AND EQUIPMENT, Net (Note C)                                                        9,908

DEPOSITS                                                                                   12,771
                                                                                     ------------

      TOTAL ASSETS                                                                   $     97,720
                                                                                     ============

               LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY


CURRENT LIABILITIES
 Accounts payable                                                                    $  1,283,314
 Accrued liabilities (Note E)                                                        $  2,617,029
 Notes payable, current portion (Note G)                                                  242,500
 Revolving credit line (Note F)                                                            32,658
                                                                                     ------------
       Total Current Liabilities                                                        4,175,501

NOTES PAYABLE, LONG-TERM (Note G)                                                         384,000
                                                                                     ------------
       TOTAL LIABILITIES                                                                4,559,501

COMMITMENTS AND CONTINGENCIES (Note M)                                                       --

DEFICIENCY IN STOCKHOLDERS' EQUITY (Note H) Preferred stock, 15,000,000
   authorized:
     Series A convertible stock, $0.0001 par value, 500,000 Shares
       authorized, issued and outstanding (liquidation preference $100,000)                    50
     Series B non-convertible stock, none issued and outstanding                             --
     Series C convertible stock, $0.0001 par value, 3,000,000 shares
       authorized, 1,302,304 shares outstanding (liquidation preference $13,023)              130
     Series C Convertible stock, 15,298 shares subscribed                                       1
   Common stock, $0.0001 par value, 250,000,000 shares authorized,
     226,771,033 shares issued and outstanding                                             22,677
   Common stock, $0.0001 par value, 16,968,018 shares subscribed                            1,697
   Additional paid-in capital                                                          13,265,318
   Accumulated deficit                                                                (17,751,654)
                                                                                     ------------
       TOTAL DEFICIENCY IN STOCKHOLDERS' EQUITY                                        (4,461,781)
                                                                                     ------------
       TOTAL LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY                      $     97,720
                                                                                     ============
</TABLE>

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

                                       F-4

<PAGE>

                        PHLO CORPORATION AND AFFILIATES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                   FOR THE YEARS ENDED MARCH 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                      2005            2004
                                                  -----------     -----------
<S>                                               <C>                <C>
REVENUES, net                                     $        --        $     784,896
COST OF SALES, net                                         --                 --
                                                  -------------      -------------
       GROSS PROFIT                                        --              784,896

SELLING, GENERAL AND ADMINISTRATIVE
 EXPENSES
  General and administrative                          1,414,209          3,304,419
  Research and development                              528,132            300,000
                                                  -------------      -------------
       LOSS FROM OPERATIONS                          (1,942,341)        (2,819,523)
                                                  -------------      -------------
OTHER INCOME (EXPENSE)
 Finance cost                                          (804,052)              --
 Interest expense, net                                  (68,607)           (73,614)
                                                  -------------      -------------
       TOTAL OTHER EXPENSE                             (872,659)           (73,614)
 Provision for income taxes                                --                 --
                                                  -------------      -------------
       NET LOSS                                   $  (2,815,000)     $  (2,893,137)
                                                  =============      =============

Weighted Average Number of Shares Outstanding
  (Basic and Diluted)                               223,663,102        124,771,025
                                                  =============      =============

Net Loss Per Share (Basic and Diluted)            $       (0.01)     $       (0.02)
                                                  =============      =============
</TABLE>




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

                                       F-5

<PAGE>

                         PHLO CORPORATION AND AFFILIATES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

                   FOR THE YEARS ENDED MARCH 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                      Series A             Series B          Preferred C Stock
                                                   Preferred Stock      Preferred Stock         Subscribed
                                                   Shares     Amount   Shares     Amount      Shares     Amount
                                                   -------   -------   ------     ------      -------    ------
<S>                                                <C>       <C>                               <C>       <C>
Balance March 31, 2003                             500,000   $   50                 --         15,298    $    1

Amortization of unearned compensation                            --                 --                       --

Issuance of common stock for cash                                --                 --                       --

Issuance of shares to fulfill existing
agreements                                                       --                 --                       --

Issuance of  common stock for services                           --                 --                       --

Issuance of common stock to officers                             --                 --                       --

Common stock subscription                                        --                 --                       --

Repayment of line of credit                                      --                 --                       --

Net loss                                                         --                 --                       --
                                                   -------   -------   ------     ------      -------    ------
Balance March 31,2004                              500,000       50       --        --         15,298         1

Conversion of preferred C to
common stock                                                     --                 --                       --

Issuance of common stock for cash                                --                 --                       --

Collateral shares issued with debt

Issuance of shares in settlement of
accrued expenses                                                 --                 --                       --

Issuance of shares to officers

Issuance of common stock for services                            --                 --                       --

Warrants issued for services

Warrants issued for financing activity                           --                 --                       --

Repayment of line of credit                                      --                 --                       --

Net loss                                                         --                 --                       --
                                                   -------   -------   ------     ------      -------    ------
Balance March 31,2005                              500,000   $   50      --         --         15,298    $    1
                                                   =======   =======   ======     ======      =======    ======
</TABLE>

<TABLE>
<CAPTION>
                                                           Series C                 Common Stock
                                                        Preferred Stock              Subscribed
                                                       Shares      Amount        Shares       Amount
                                                      ---------   ---------     ----------    ---------
<S>                                                   <C>         <C>           <C>           <C>
Balance March 31, 2003                                1,333,304   $     133     13,334,295    $   1,333

Amortization of unearned compensation                                    --             --           --

Issuance of common stock for cash                                        --             --           --

Issuance of shares to fulfill existing
agreements                                                               --             --           --

Issuance of  common stock for services                                   --             --           --

Issuance of common stock to officers                                     --             --           --

Common stock subscription                                                --         (938,761)       (94)

Repayment of line of credit                                              --             --           --

Net loss                                                                 --             --           --
                                                      ---------   ---------     ----------    ---------
Balance March 31,2004                                 1,333,304         133     12,395,534        1,239

Conversion of preferred C to
common stock                                            (31,000)         (3)

Issuance of common stock for cash                                        --      3,790,665          379

Collateral shares issued with debt

Issuance of shares in settlement of
accrued expenses                                                         --                          --

Issuance of shares to officers                                                     781,819           79

Issuance of common stock for services                                    --

Warrants issued for services

Warrants issued for financing activity                                   --                          --

Repayment of line of credit                                              --

Net loss                                                                 --                          --
                                                      ---------   ---------     ----------    ---------
Balance March 31,2005                                 1,302,304   $     130     16,968,018    $   1,697
                                                      =========   =========     ==========    =========
</TABLE>


The accompanying notes are an integral part of these consolidated financial

                                  Statements.

                                       F-6

<PAGE>



                         PHLO CORPORATION AND AFFILIATES

    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT - (Continued)

                   FOR THE YEARS ENDED MARCH 31, 2005 AND 2004


<TABLE>
<CAPTION>
                                                    Common Stock            Unearned
                                                Shares         Amount     Compensation
                                            ------------   ------------   ------------
<S>                                           <C>          <C>            <C>
Balance March 31, 2003                        83,743,180   $      8,373   $    (83,498)

Amortization of unearned compensation                              --           83,498

Issuance of common stock for cash             29,250,000          2,925           --

Issuance of shares to fulfill existing
agreements                                    45,460,000          4,546           --

Issuance of common stock for services          8,125,000            813           --

Issuance of stock to officers                 27,611,668          2.761           --

Common stock subscription                        938,761             94           --

Repayment of line of credit                                        --             --

Net loss                                                           --             --
                                            ------------   ------------   ------------

Balance March 31,2004                        195,128,609         19,512           --

Conversion of preferred C to common stock      3,100,000            310           --

Issuance of common stock for cash              6,000,000            600           --

Collateral shares issued with debt             5,500,000            550           --

Issuance of shares in settlement of
    accrued expenses                           3,500,000            350           --

Issuance of shares to officers                 8,542,424            855           --

Issuance of common stock for services          5,000,000            500           --

Warrants issued for services                        --             --             --

Warrants issued for financing activity                             --

Repayment of line of credit                                        --             --

Net loss                                                           --             --
                                            ------------   ------------   ------------

Balance March 31,2005                        226,771,033   $     22,677   $       --
                                            ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>
                                                  Paid-In       Accumulated
                                                  Capital         Deficit           Total
                                               ------------    ------------    ------------
<S>                                            <C>             <C>             <C>
Balance March 31, 2003                         $  9,159,969    $(12,043,517)   $ (2,957,157)

Amortization of unearned compensation                  --              --            83,498

Issuance of common stock for cash                   587,457            --           590,382

Issuance of shares to fulfill existing
agreements                                           (4,546)           --              --

Issuance of common stock for services               166,668            --           167,501

Issuance of stock to officers                     1,299,889            --         1,302,650

Common stock subscription                              --              --              --

Repayment of line of credit                          93,072            --            93,072

Net loss                                               --        (2,893,138)     (2,893,137)
                                               ------------    ------------    ------------

Balance March 31,2004                            11,302,528     (14,936,654)     (3,613,191)

Conversion of preferred C to common stock              (307)           --              --

Issuance of common stock for cash                   649,994            --           650,973

Collateral shares issued with debt                     (550)           --              --

Issuance of shares in settlement of
    accrued expenses                                195,650            --           196,000

Issuance of shares to officers                      422,006            --           422,940

Issuance of common stock for services               149,500            --           150,000

Warrants issued for services                          3,738            --             3,738

Warrants issued for financing activity              287,104                         287,104

Repayment of line of credit                         255,655            --           255,655

Net loss                                               --        (2,815,000)     (2,815,000)
                                               ------------    ------------    ------------

Balance March 31,2005                          $ 13,265,318    $(17,751,654)   $ (4,461,781)
                                               ============    ============    ============
</TABLE>

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

                                       F-7
<PAGE>

                         PHLO CORPORATION AND AFFILIATES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                   FOR THE YEARS ENDED MARCH 31, 2005 AND 2004

<TABLE>
<CAPTION>
                                                                                   2005           2004
                                                                                -----------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                             <C>            <C>
 Net loss                                                                       $(2,815,000)   $(2,893,137)

  Adjustments to reconcile net loss to net cash used in operating activities:

    Stock-based compensation - amortization of
       deferred compensation (Note I)                                                  --           83,498
    Common stock reimbursement to officers (Note H)                                 422,940      1,302,650
    Common stock issued in exchange for other
       Financing expense (Note H)                                                    84,409           --
    Common stock for services (Note H)                                              150,000        167,500
    Warrant issued for services (Note H)                                              3,738           --
    Warrant issued for financing expense (Note H)                                   287,104           --
    Depreciation and amortization (Note C)                                            2,826          1,014
    Write off and allowance for inventories                                            --          517,153
Changes in operating assets and liabilities
    Prepaid expenses                                                                400,000       (400,000)
    Inventory                                                                       (75,041)      (346,023)
    Security deposit                                                                (12,771)          --
    Accounts payable                                                                248,324        395,408
    Accrued expenses and taxes                                                      417,889        635,116
    Deferred revenue                                                                   --          (12,028)
                                                                                -----------    -----------
       NET CASH USED IN OPERATING ACTIVITIES                                       (885,582)      (548,849)
                                                                                -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of equipment                                                               (9,700)        (2,627)
                                                                                -----------    -----------
       NET CASH USED IN INVESTING ACTIVITIES                                         (9,700)        (2,627)
                                                                                -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from revolving note payable                                               175,000           --
 Proceeds from issuance of equity securities (Note H)                               650,973        590,382
                                                                                -----------    -----------
       NET CASH PROVIDED BY FINANCING ACTIVITIES                                    825,973        590,382

       NET INCREASE (DECREASE) IN CASH                                              (69,309)        38,906
CASH - Beginning                                                                     69,309         30,403
                                                                                -----------    -----------
CASH - Ending                                                                   $      --      $    69,309
                                                                                ===========    ===========
</TABLE>

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

                                       F-8

<PAGE>

                        PHLO CORPORATION AND AFFILIATES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

                   For the Years Ended March 31, 2005 and 2004

-----------------------------------------------------------------------------


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

                                                        2005            2004
                                                      --------        -------
Cash paid for interest                                $  --           $  --
                                                      --------        -------
Cash paid for income taxes                            $  --           $  --
                                                      ========        =======

Non-cash and financing activities:

During the fiscal years ended March 31, 2005 and 2004, the sale of Common Stock
pledged as collateral for the repayment of advances pursuant to the credit
facility reduced the outstanding principal balance by $155,387 and $93,072,
respectively. Additionally, the Company issued shares of stock in reduction of
$211,859 of accrued interest and accrued liabilities during the fiscal year
ended March 31, 2005.








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


                                       F-9
<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004


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 sells its products to distributors, which offer the
products for sale in high volume chain stores, such as supermarkets and drug and
convenience stores. Additionally, the Company develops liquids with patented or
patent-pending payloads for the U.S. Military, agencies of the United Nations,
and humanitarian organizations.

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

CASH EQUIVALENTS

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

USE OF ESTIMATES

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

INVENTORIES

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

Components of inventories as of March 31, 2005 are as follows:

         Raw materials                                  $    37,209
         Work in progress                                    14,856
         Finished goods                                      22,976
                                                        -----------
                                                        $    75,041
                                                        ===========
ADVERTISING EXPENSE

Advertising costs are expensed as incurred. Advertising costs of $32,173 and
$8,555 were expensed during the years ended March 31, 2005 and 2004,
respectively.

                                       F-10

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

PROPERTY AND EQUIPMENT

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

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

REVENUE RECOGNITION

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

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

RESEARCH AND DEVELOPMENT

The Company accounts for research and development costs in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs."
Under SFAS 2, all research and development costs must be charged to expense as
incurred. Accordingly, internal research and development costs are expensed as
incurred. Third-party research and developments costs are expensed when the
contracted work has been performed or as milestone results have been achieved.
Company-sponsored research and development costs related to both present and
future products are expensed in the period incurred. During the years ended
March 31, 2005 and 2004, $528,132 and $300,000, respectively, in research and
development costs were incurred by the Company.



                                       F-11

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INCOME TAXES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and short-term borrowings, as reflected in
the balance sheets, approximate fair value because of the short-term maturity of
these instruments.

LONG-LIVED ASSETS

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

STOCK-BASED COMPENSATION

In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation-Transition
and Disclosure - an amendment of SFAS 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense for stock options
is measured as the excess, if any, of the fair market value of the Company's
stock at the date of the grant over the exercise price of the related option.
The Company has adopted the annual disclosure provisions of SFAS No. 148 in its
financial reports for the years ended March 31, 2005 and 2004. The Company has
no awards of stock-based employee compensation outstanding at March 31, 2005.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar

                                     F-12

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

STOCK-BASED COMPENSATION (Continued)

to the approach described in Statement 123. However, Statement 123R requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro-forma
disclosure is no longer an alternative. On April 14, 2005, the SEC amended the
effective date of the provisions of this statement. The effect of this amendment
by the SEC is that the Company will have to comply with Statement 123R and use
the Fair Value based method of accounting no later than the first quarter of
2006. Management has not determined whether the adoption of this statement may
have a material impact on the Company's consolidated financial statements if the
Company issues stock-based employee compensation awards.

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,
2005 and 2004, 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, 2005 and 2004, 153,121,594 potential shares and 154,563,260
potential shares, respectively, were excluded from the shares used to calculate
diluted earnings per share as their inclusion would reduce net loss per share.

LIQUIDITY

As reflected in the accompanying financial statements, the Company incurred net
losses of $2,815,000 and $2,893,137 for the years ended March 31, 2005 and 2004,
respectively, and has an accumulated deficit of $17,751,654 as of March 31,
2005. In addition, the Company's current liabilities exceeded its current assets
by $4,100,460 as of March 31, 2005.

COMPREHENSIVE INCOME (LOSS)

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for the
reporting and displaying of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a business during a
period from transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. SFAS No. 130
requires other comprehensive income (loss) to include foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
securities. The Company does not have any items of comprehensive income in any
of the periods presented.

SEGMENT INFORMATION

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

                                     F-13

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. The
Company does not have cash or accounts receivable and allowance for doubtful
accounts at March 31, 2005.

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 November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an amendment
of ARB No. 43, Chapter 4". This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This Statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this Statement will have any
immediate material impact on the Company.

In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152). This Statement amends FASB Statement No. 66, Accounting for Sales of Real
Estate, to reference the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement
also amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005, with earlier application encouraged. The Company does not anticipate that
the implementation of this standard will have a material impact on its financial
position, results of operations or cash flows.

On December 16, 2004, the FASB published SFAS No. 123 (Revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Company will implement the revised standard in the third
quarter of fiscal year 2006. Currently, the Company accounts for its share-based
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management is assessing the implications of this revised standard, which may
materially impact the Company's results of operations in the third quarter of
fiscal year 2006 and thereafter, if Company awards stock based compensation to
employees.


                                     F-14

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

On December 16, 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" (" SFAS 153"). This statement amends APB Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Under SFAS 153, if a nonmonetary exchange of
similar productive assets meets a commercial-substance criterion and fair value
is determinable, the transaction must be accounted for at fair value resulting
in recognition of any gain or loss. SFAS 153 is effective for non-monetary
transactions in fiscal periods that begin after June 15, 2005. The Company does
not anticipate that the implementation of this standard will have a material
impact on its financial position, results of operations or cash flows.

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

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

NOTE B - GOING CONCERN MATTERS

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company had a net loss of $2,815,000 for
the fiscal year ended March 31, 2005. As of March 31, 2005, the Company's
current liabilities exceeded its current assets by $4,100,460. 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 its prospects for national
and global distribution of its products and joint venture activities with major
international entities, the existence now of three product lines


                                     F-15

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE B - GOING CONCERN MATTERS (Continued)

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, 2005:

         Furniture, fixtures and equipment                    $ 48,444
         Less: Accumulated depreciation                        (38,536)
                                                              ----------
             Net                                              $  9,908
                                                              =========

Depreciation expense for the years ended March 31, 2005 and 2004 was $2,826 and
$1,014,respectively.

NOTE D - OTHER ASSETS

In the fiscal year ended March 31, 2004, the Company entered into an agreement
with a company which is providing services to the Company related to the
enhancement of the Company's biotechnologies, including the supervision of
further research and development, protocols, and testing pertaining to the
enhancement and protection of the intellectual property related thereto and the
commercialization, production, marketing and distribution of the products
containing such biotechnologies. In conjunction therewith, the Company made
payments thereto of $400,000 during the year ended March 31, 2004 and $575,550
during the year ended March 31, 2005, to be used for the activities set forth
above. The Company had accounted for the payment as a prepaid expense at March
31, 2004. During the fiscal year ended March 31, 2005, all of the funds advanced
had been expended. 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, 2005 are as follows:

  Accrued payroll, payroll taxes and
          penalties                               $   879,722
  Accrued expenses                                  1,466,139
  Accrued interest                                    271,168
                                                  -----------
  Total                                           $ 2,617,029
                                                  ===========

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
<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE F - REVOLVING CREDIT FACILITY - NOTES PAYABLE

In June, 2002, the Company closed a revolving credit facility with a one-year
term which provides for advances of up to a maximum principal amount of
$250,000, at the option of the lender, at an interest rate of 10% per annum,
with each advance payable within 30 days. At March 31, 2004, the outstanding
principal balance under the facility was $48,045. Two additional advances were
made during the fiscal year ended March 31, 2005, one in June 2004, in the
amount of $100,000, and one in January 2005, in the amount of $40,000. Repayment
of advances under the facility are secured by the Company's assets and are
guaranteed by two officers of the Company. In connection with securing the
repayment of the two advances under this facility made during the fiscal year,
the Company issued a total of 5,500,000 shares of Common Stock. In connection
with the June 2004 advance, the Company granted to the Lender the option, after
the expiration of a period of one year from such advance, to take title to
1,785,715 shares (or any portion thereof) of such stock collateral. Also in June
2004, the Company issued 3,500,000 shares of Common Stock in exchange for the
conversion by the Lender of $46,000 of accrued interest and the waiver of the
$150,000 financing fee owed in connection with a prior advance. In connection
with the January 2005 advance, the Company granted to the Lender the option,
after the expiration of a period of one year from such advance, to take title to
1,212,121 shares (or any portion thereof) of such stock collateral.

The Company did not repay the advances by the maturity date. As a result
thereof, the lender has exercised its rights provided by the loan documents to
sell shares of stock that were previously issued and pledged as collateral for
the repayment of advances pursuant to the credit facility. During the fiscal
year, 4,981,000 shares of Common Stock pledged as collateral, valued at
$255,655, were used to pay down $155,387 of debt and $15,859 of related accrued
interest. Other financing expense of $84,409 was charged to operations in
connection with this transaction. As of March 31, 2005, the sale of collateral
has reduced the outstanding principal to $32,658. Subsequent to March 31, 2005,
additional advances were made (see Note N - Subsequent Events).

NOTE G - LONG-TERM DEBT

Long-term debt as of March 31, 2005 consists of the following:
<TABLE>
<CAPTION>
<S>                                                                                   <C>
  Note payable with interest rate of 15% per annum. The note matured on May,
  2003. The holder had agreed to extend the maturity date of the note to
  June 30, 2006.                                                                      $80,000

  Note payable with interest at a rate of 10%. The note matured on December 31,
  2000, when principal and unpaid interest were due. In consideration of this
  loan and two prior bridge loans, the Company agreed to issue shares of the
  Company's common and convertible preferred stock to the holder representing
  approximately 200,000 shares of common stock on a fully converted basis. The
  holder had agreed to extend the maturity date of the note to June 30, 2006.
                                                                                      104,000

  Note 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.                                                   17,500

  Note payable with interest accruing at a rate of 10%. Principal and interest
  were due in February 2001. In conjunction with this financing, the Company
  issued a warrant to purchase 200,000 shares of common stock at a exercise
  price of $0.50 per share. The holder agreed to extend the maturity date of the
  note to June 30, 2006.                                                              100,000
</TABLE>


                                      F-17

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE G - LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
  (Continued)
<S>                                                                                 <C>
  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 a exercise
  price of $0.50 per share. The Company, at its option, may pay the Note in
  common stock or equivalent. The Company has notified the holder that it has
  elected to pay the principal and interest due under the note by the issuance
  of 136,612 shares of common stock.                                                  150,000

  Note payable with interest accruing at a rate of 10% per annum. Principal and
  interest were due in June 2001. In conjunction with this financing, a warrant
  to purchase 50,000 shares of common stock at an exercise price of $0.50 per
  share is issuable to this holder. The note holder has agreed to extend the
  maturity date of the note to June 30, 2006 and in connection therewith, the
  Company has agreed to issue (but has not yet issued) a warrant to purchase
  25,000 shares of common stock at an exercise price of $0.50 per share.               50,000

  Note payable in the original principal amount of $100,000, with an interest
  rate of 10% per annum. Principal and interest were due in July 2001. $50,000
  of the loan was repaid in May, 2001. In conjunction with this financing, a
  warrant to purchase 100,000 shares of common stock at an exercise price of
  $0.50 per share is issuable to the holder. An additional warrant to purchase
  12,500 shares of the Common Stock at the same exercise price is issuable as a
  result of the Company's exercising its option to extend to October 2001 the
  maturity date of the note with respect to $50,000 of principal and all of the
  interest payable pursuant to the note. The holder had agreed to extend the
  maturity date of the note to June 30, 2006.                                          50,000

  In 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.                                40,000

  Note payable in the original principal amount of $35,000, with an interest
  rate of 12% per annum. Principal and interest are due in February, 2006.             35,000
                                                                                -------------
  Total                                                                           $   626,500
  Less: current portion                                                             ( 242,500)
                                                                                -------------
  Long-term portion                                                               $   384,000
                                                                                =============
</TABLE>

Aggregate maturities of long-term debt as of March 31, 2005 are as follows:

         Fiscal Year                Amount
         2006                               $242,500
         2007                               $384,000
                                            --------
                                            $626,500
                                            ========

                                      F-18

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE H - CAPITAL STOCK

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

                      SERIES A CONVERTIBLE PREFERRED STOCK

At March 31, 2005, the Company has 500,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") issued and outstanding. The Series A
Preferred holders are entitled to one vote per share on all matters presented to
the stockholders with certain exceptions as defined in the Certificate of
Designation. In addition, the Series A Preferred is convertible into one share
of common stock.

                    SERIES B NON-CONVERTIBLE PREFERRED STOCK

At March 31, 2005, 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, 2005, 1,302,304 shares of Series C Preferred Stock were issued
and outstanding and 15,298 shares were subscribed in connection with a stock
exchange transaction conducted by Phlo Corporation and the shareholders of a
privately held beverage company. Each holder of the Series C Preferred Stock has
the right to cast one vote for each share of Common Stock into which his or its
Series C Preferred Stock is convertible. No dividends are currently payable with
respect to Series C Preferred Stock. The holders of Series C Preferred Stock
have a liquidation preference of $0.01 per shares plus all accrued but unpaid
dividends, if any. Holders of the Series C Preferred Stock have no redemption
rights. Each share of Series C Preferred Stock initially is convertible into 100
shares of Common Stock without the payment of any additional consideration at
any time after September 30, 2001. However, the conversion rate is subject to
adjustment in the case of certain corporate transactions or events (not related
to the market price of the Common Stock).

                                  COMMON STOCK

During the year ended March 31, 2004, the Company issued an aggregate of 938,761
shares of Common Stock subscribed in prior years.

During the year ended March 31, 2004, in consideration of $590,382, the Company
issued an aggregate of 29,250,000 shares of Common Stock. Additionally, the
Company issued 27,611,667 shares of Common Stock to officers of the Company in
connection with such financing 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 $1,302,650.

During the year ended March 31, 2004, the Company issued 8,125,000 shares of
Common Stock in exchange for services and 45,460,000 shares of Common Stock to
fulfill its obligations pursuant to existing agreements.

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

                                     F-19

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE H - CAPITAL STOCK (Continued)

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

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

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

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

NOTE I - STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

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

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

WARRANTS

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

                                     F-20

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE I - STOCK OPTIONS AND WARRANTS (Continued)

<TABLE>
<CAPTION>
                              Warrants Outstanding                              Warrants Exercisable
                              --------------------                              --------------------
                                         Weighted Average        Weighed                       Weighted
     Exercise            Number        Remaining Contractual     Average         Number        Average
      Prices          Outstanding          Life (Years)       Exercise Price  Exercisable   Exercise Price
      ------          -----------          ------------       --------------  -----------   --------------
<S> <C>                   <C>                   <C>               <C>            <C>            <C>
    $   0.0001            879,559               0.81              $0.0001        879,559        $.0001
          0.01          9,606,682               1.30                 0.01      9,606,682          0.01
     0.02-0.09         10,750,000               3.75                 0.05      1,350,000          0.03
     0.10-0.50          2,104,953               0.95                 0.35      2,104,953          0.35
          2.00             50,000               0.04                 2.00         50,000          2.00
                       ----------              -----              -------     ----------        ------
                       23,391,194               2.37              $  0.06     13,991,194        $ 0.07
                       ==========              =====              =======     ==========        =======
</TABLE>

Transactions involving warrants are summarized as follows:

                                               Weighted
                                                Average
                                  Number of      Price
                                  Warrants     Per Share
                                -----------    ---------
Outstanding at March 31, 2003    40,126,106    $   0.04
                                ===========    ========
   Granted                        2,500,000        0.03
   Exercised                           --          --
   Cancelled or expired         (21,863,246)       0.01
                                -----------    --------
Outstanding at March 31, 2004    20,762,860    $   0.07
                                ===========    ========
   Granted                        3,650,000        0.08
   Exercised                           --          --
   Cancelled or expired          (1,021,666)       0.17
                                -----------    --------
Outstanding at March 31, 2005    23,391,194    $   0.06
                                ===========    ========

The Company granted 100,000 compensatory warrants to a non-employee during the
year ended March 31, 2005. The warrants were valued at $3,738 using the Black
Scholes method at the date of grant of the options based on the following
assumptions: (1) risk free interest rate of 3.5%; (2) dividend yield of 0%; (3)
volatility factor of the expected market price of our common stock of 210%; and
(4) an expected life of the warrant of 3 years. The Company did not grant any
compensatory warrants to non-employees during the year ended March 31, 2004.

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

During the year ended March 31, 2005, in consideration of $650,973, the Company
agreed to issue an aggregate of 9,790,665 shares of Common Stock, 6,000,000 of
which had been issued at March 31, 2005 (Note H), and agreed to issue warrants
to purchase 250,000 shares of Common Stock at an exercise price of $0.02 per
shares. These warrants are non-compensatory.

Amortization of deferred compensation for previously granted warrants issued in
exchange for prepaid services fees amounted to $83,498 for the year ended March
31, 2004, with none during the year ended March 31, 2005.

                                     F-21

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

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, 2005, the Company has available for federal income tax purposes a
net operating loss carryforward of approximately $10,427,000, expiring through
the year 2025, that may be used to offset future taxable income. The Company has
provided a valuation reserve against the full amount of the net operating loss
benefit, since in the opinion of management based upon the earnings history of
the Company, it is more likely than not that the benefits will not be realized.

Components of deferred tax assets as of March 31, 2005 are as follows:

                Non current:
                Net operating loss carryforward    $ 3,649,000
                Valuation allowance                 (3,649,000)
                                                   -----------
                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.

NOTE K - BUSINESS CONCENTRATION

The Company purchased 58.6% of its raw materials from one supplier for the year
ended March 31, 2004.

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 $384,000 at
March 31, 2005 and 2004. (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, 2005, were
$340,000. The Company's obligations for the subsequent fiscal year are expected
to be $87,000.

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.

                                     F-22

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE M - COMMITMENTS AND CONTINGENCIES (Continued)

LITIGATION

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

(b) During the fiscal year, litigation was commenced against the Company based
on the liability of one of its affiliates. The Company vigorously defended the
action, but, also during the fiscal year, a judge turned over $105,652 of the
Company to the creditor. The Company's counsel believed that the judge exceeded
his authority under law in ruling against the Company on a procedural basis
prior to a decision through trial on the merits. The Company has filed a
complaint against the judge for his actions and intends to seek disciplinary
action against the creditor's lawyers.

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

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

The Company disputes all allegations made by the Division of Enforcement (except
for the fact that Phlo did not timely make certain periodic filings) and is
vigorously defending the SEC action. The Company expects to be completely
current in its financial reporting prior to the issuance of an initial decision
on this matter. The Company has also provided to the SEC evidence of the
existence of extraordinary circumstances related to its former outside auditing
firms resulting in Phlo not being able to maintain timely financial filings.

Finally, the Company can make no assurances with respect to the outcome of this
matter.

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

PAYROLL TAXES

The Company has not paid payroll taxes since the third quarter of 1999 totaling
$350,824 at March 31, 2005. The Company has accrued estimated penalties and
interest of $259,652 as of March 31, 2005.

                                     F-23

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE M - COMMITMENTS AND CONTINGENCIES (Continued)

LEASE

At March 31, 2005, the Company is subleasing office space for a term ending
March 31, 2007 at a monthly rate of $8,670.75 with a fixed 4% annual increase.
Rent expense for the years ended March 31, 2005 and 2004 was $178,812 and
$120,585, respectively.

NOTE N - SUBSEQUENT EVENTS

Financing

In April, 2005, an additional advance was authorized under the Company's
revolving credit facility of up to $150,000, $130,000 of which has been advanced
as of the date of this filing. In conjunction therewith, the Company issued
13,700,000 shares of Common Stock which serve as collateral to secure repayment
of advances made to the Company under the facility and the meeting of all
obligations of the Company under the facility loan documents. Also in connection
with such advance, the Company granted to the Lender the option, after the
expiration of a period of one year from such advance, to take title to 4,600,000
shares (or any portion thereof) of such stock collateral; agreed to deliver to
the Lender, until such advance has been repaid, net proceeds received by the
Company generated by the sale of its rehydration beverage of up to $50,000; and
agreed to increase the interest rate with respect to the current advance and the
outstanding principal balance on prior advances from 10% to 12%.

Equity

In April 2005, the Company issued 454,545 shares of Common Stock previously
subscribed.

In April 2005 in consideration for extended payment terms relating to a Company
obligation, the Company agreed to extend the expiration date of a warrant
granted the recipient from March 2005 to 2007. Additionally, the numbers of
shares of the Company's common stock purchasable pursuant to the warrant were
increased from 200,000 shares to 750,000 shares and a decrease in the warrant
exercise price from $0.05 to $0.03.

In the quarter ending June 30, 2005, in connection with a financing and in
consideration of guarantees and supplying of shares of stock as collateral in
connection with financings, the Company issued 6,852,055 shares of Common Stock
to officers of the Company.

In May and June, 2005, in consideration of $67,500, the Company agreed to issue
7,500,000 shares of Common Stock, all of which have been issued to date.

In May, 2005, 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 and previously subscribed warrants to
purchase an aggregate of 250,000 shares of Common Stock at an exercise price of
$0.02 per share.

In June, 2005, the Company issued 6,060,606 shares of the Common Stock in
connection with an existing agreement.

In August, 2005, in conjunction with a settlement agreement providing for the
payment to the Company of up to $100,000, and the provision of services to the
Company, the Company issued 12,121,212 shares of Common Stock.

In August, 2005, the Company issued a warrant to purchase up to 3,000,000 shares
of Common Stock at an exercise price of $0.02 per share. However, the holder's
right to exercise the warrant is contingent upon the attainment of certain
sales-related performance goals within a specified time. To date, the warrant
may not be exercised with respect to any shares of Common Stock.

                                      F-24

<PAGE>

                         PHLO CORPORATION AND AFFILIATES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 2005 AND 2004

NOTE N - SUBSEQUENT EVENTS (Continued)

In the quarter ended September 30, 2005, in consideration of $230,500, the
Company issued 51,006,925 shares of Common Stock.

In October 2005, the Company issued 1,081,819 shares previously subscribed.

In the quarter ended December 2005, in consideration of $73,000, the Company
issued 15,303,030 shares of Common Stock and a warrant to purchase 500,000
shares of stock at an exercise price of $0.03 per share.

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
Company's common stock 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.


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

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

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

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

<PAGE>

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 Held
----                       ---         -------------
James B. Hovis              56         President & CEO, Director

Anne P. Hovis               45         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. He is a member of the Virginia State Bar.

Anne P. Hovis, Executive Vice President, General Counsel, Secretary and a
Director. Mrs. Hovis is responsible for managing the day-to-day administration
of the Company and assists Messrs. Hovis in the overall management of the
Company. She is also responsible for the legal affairs of the Company, including
intellectual property protection, compliance with FDA regulations, securities
filings, compliance with applicable laws, and negotiation of agreements with
distributors and co-packers. Mrs. Hovis also assists Mr. Hovis in the Company's
transactional activities, including financings and acquisitions. Previously,
Mrs. Hovis was an attorney with Anderson, Hibey & Blair, a

<PAGE>

Washington, D.C. based firm, where she specialized in corporate legal and
international trade policy matters. Prior to this, Mrs. Hovis was an attorney
with Lane & Mittendorf, where she participated in the firm's corporate
transactional (including stock and asset acquisitions and commercial lending
facilities) and international trade practices. Mrs. Hovis has a B.A. from New
York University and a J.D. degree from the Georgetown University Law Center.

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

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

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

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth the compensation paid to the executive officers
for the fiscal year ending March 31, 2005.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Compensation
------------                                                                                     Long-Term
Payouts                        Annual Compensation Awards                                         Awards
---------                   -------------------------------                                      ---------
   (a)                       (b)         (c)                    (d)        (e)         (f)          (g)        (h)
                                                               Other               Securities
                                                               Annual  Restricted    Under-                    All
Compen-                                                        Compen-   Stock       lying         L/TIP      Othe
Name and                                                       sation    Awards      Options/      Payouts
sation
Principal Position          Year         Salary      Bonus       ($)       ($)       SARa (#)       ($)        ($)
--------------------------------------------------------------------------------------------------------------------
James B. Hovis
<S>                         <C>         <C>            <C>        <C>       <C>        <C>            <C>       <C>
President and CEO           2004        $409,039      -0-        -0-       -0-        -0-            -0-       -0-
                            2005        $421,508      -0-        -0-       -0-        -0-            -0-       -0-

Anne P. Hovis               2004        $   -0-       -0-        -0-       -0-        -0-            -0-       -0-
Exec. Vice President        2005        $   -0-       -0-        -0-       -0-        -0-            -0-       -0-
General Counsel &
Secretary
</TABLE>

COMPENSATION OF DIRECTORS

The names of the directors of the Company as of March 31, 2005, 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, 2005, 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

<PAGE>

the progress and success of the Company, to closely align the interests of such
employees with the interests of stockholders of the Company by linking benefits
to stock performance and to retain the services of such employees, as well as to
attract new key employees. In furtherance of that purpose, the 1996 Plan
authorizes the grant to executives and other key employees of the Company and
its subsidiaries of stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalent rights, limited stock
appreciation rights and other stock-based awards, or any combination thereof.
The 1996 Plan is expected to provide flexibility to the Company's compensation
methods, after giving due consideration to competitive conditions and the impact
of federal tax laws.

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

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

TYPES OF AWARDS

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

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

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

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

<PAGE>

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

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

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

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

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of March 31, 2005, 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:

<PAGE>

--------------------------------------------------------------------------------
Name and Address of
Beneficial Owner (1)
                                          Percentage               Percentage(%)
                           Shares of      (%) of       Shares of    of Total
                           Common Stock   Common       Preferred    Combined
                           Owned          Stock (2)    Stock         Vote(3)
--------------------------------------------------------------------------------
James B. Hovis             56,304,462(4)     24.83%     287,347(5)     23.82%
--------------------------------------------------------------------------------
Anne P. Hovis              56,304,462(6)     24.83%     327,347(7)     24.94%
--------------------------------------------------------------------------------
Edward J. Mathias (8)       7,750,451         3.42%     490,708.33     15.49%(9)
--------------------------------------------------------------------------------
All officers and
directors as a group
(two persons)              56,304,462        24.83%     327,347        24.94%
--------------------------------------------------------------------------------

(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 226,771,033 shares of Common Stock outstanding as of March 31,
2005.

(3) Based on 226,771,033 shares of Common Stock and 1,302,304.30 shares of
Series C Preferred Stock outstanding as of March 31, 2005, and assuming a
conversion rate of 100 shares of common stock for each share of Series C
Preferred Stock. The percentages presented are based on conversion of all
outstanding shares of Series C Preferred Stock into shares of common stock and,
where applicable, the exercise of all warrants owned by the beneficial owner to
purchase common stock.

(4) Includes 49,663,857 shares as to which Mr. Hovis has the sole voting power,
6,640,605 shares as to which he shares the power to dispose with his wife, Anne
P. Hovis.

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

(6) Includes 6,640,605 shares as to which Mrs. Hovis has sole voting power and
49,663,857 shares as to which she shares the power to dispose with her husband,
James B. Hovis.

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

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

(9) Includes warrants to purchase 9,806,682 shares of common stock held by Mr.
Mathias.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

<PAGE>

ITEM 13.  EXHIBITS

(a) (2) Exhibits

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

      Item  27.   Exhibits.

      3.01*       Certificate of Incorporation of the Company.

      3.02*       Amendment of Certificate of Incorporation.

      3.03****    Certificate of Amendment of Certificate of
                  Incorporation.

      3.04*       By-Laws of the Company.

      3.05*       Form of Certificate of Designation of Series A Preferred
                  Stock.

      3.06*       Form of Certificate of Designation of Series B Preferred
                  Stock.

      4.01*       Specimen Certificate for shares of Common Stock.

      4.04*       Form of Underwriter's Unit Purchase Option.

      10.02*      1996 Stock Plan.

      10.07*      Employment Agreement by and between the Company and
                  Robert J. Sipper dated April 4, 1996.

      10.12**     Amendment No. 1 to Employment Agreement by and between
                  the Company and Robert J. Sipper dated February 3, 1997.

      10.21***    Asset Purchase Agreement by and between Company and The
                  Brooklyn Brewery Corporation dated May 18, 1998.

      10.22***    Agreement to Purchase and Market Brand Name and Recipes
                  by and between Leroux Creek Food Corporation and the
                  Company dated June 30, 1998.

      10.23****   License Agreement between X-Treem Products Corporation
                  and the Company dated December 1, 1998.

      10.24****   Security Agreement between X-Treem Products Corporation
                  and the Company dated December 1, 1998.

      10.25****   Promissory Note, dated December 1, 1998, made by the
                  Company in the amount of $100,000.

      10.26****   Letter by Company, dated December 23, 1998, exercising
                  Option.

      10.27****   Promissory Note, dated December 23, 1999, made by the
                  Company in the amount of $300,000.

      10.28****   Bill of Sale dated December 1, 1998.

<PAGE>

      31.1        Certification of President and Chief Executive Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

      32.1        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.

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

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

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth fees billed to the Company by its auditors during
the fiscal years ended March 31, 2005 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, 2005          March 31, 2004
                               --------------          --------------
       Audit Fees                   $  40,500                $ 40,500
       Audit related fees
       Tax fees                             -                       -
       All other fees                       -                       -
       Total fees                   $  40,500                $ 40,500

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. There were no management consulting services
provided in fiscal 2005 or 2004.

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

<PAGE>

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.

     (b) Reports on Form 8-K.

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

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

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 ______ day of November, 2005.

                               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                    November __, 2005
----------------------
James B. Hovis

/s/  Anne P. Hovis          Exec. Vice President, General      November __, 2005
----------------------      Counsel & Secretary
Anne P. Hovis