`UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington D. C. 20549

                                    FORM 10-Q

(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.

                  For the quarterly period ended March 31, 2004


( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from __________ to __________.



                       Commission File Number: 333-100099

                                 HydroFlo, Inc.
               (Exact name of registrant as specified in charter)

        North Carolina                                     56-2171767
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


                      3721 Junction Blvd. Raleigh, NC 27603
                    (Address of principal executive offices)

                                 (919) 772-9925
              (Registrant's Telephone Number, Including Area Code)


Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.

                                 YES (X) NO ( )

State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 13, 2004.

                                   24,377,912

Transitional Small Business Disclosure Format:
                                 YES ( ) NO (X)




                                       1




                                 HydroFlo, Inc.


                               INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

        Balance Sheet as of March 31, 2004................................. 4

        Statements of Operations for the period March 4, 2004 through
        March 31, 2004, the period January 1, 2004 through March 3, 2004,
        the period July 1, 2003 through March 3, 2004 and the three and
        nine months ended March 31, 2003................................... 5

        Statements of Cash Flows for the period March 4, 2004 through
        March 31, 2004, the period July 1, 2003 through March 31, 2004
        and the nine months ended March 31, 2003........................... 6

        Notes to Financial Statements...................................... 7

        Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations (including cautionary statement)......... 12

Item 3. Controls and Procedures                                            16

PART II.OTHER INFORMATION

Item 1. Legal Proceedings................................................. 18
Item 2. Changes in Securities............................................. 18
Item 3. Defaults Upon Senior Securities................................... 18
Item 4. Submission of Matters to a Vote of Securities Holders............. 18
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................. 19

Signatures                                                                  19




                                       2




                                     PART I


        In this Quarterly Report, the "Company", "we", "us" and "our" refer to
HydroFlo, Inc. and our wholly owned subsidiary unless the context otherwise
requires.

        Different accounting principles are used in the preparation of financial
statements of a business development company under the Investment Company Act of
1940 and, as a result, the financial results for periods ending before March 4,
2004 are not comparable to the period commencing on March 4, 2004 and are not
expected to be representative of our financial results in the future.

                           FORWARD-LOOKING STATEMENTS

        This Form 10-Q, press releases and certain information provided
periodically in writing or orally by our officers or our agents contain
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended; Section 21E of the Securities
Exchange Act of 1934; and the Private Securities Litigation Reform Act of 1995.
The words "may", "would", "could", "will", "expect", "estimate", "anticipate",
"believe", "intend", "plan", "goal", and similar expressions and variations
thereof are intended to specifically identify forward-looking statements. These
statements appear in a number of places in this Form 10-Q and include all
statements that are not statements of historical fact regarding the intent,
belief or current expectations of us, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources; (ii)
our financing opportunities and plans; (iii) trends affecting our future
financial condition or results of operations; (iv) our growth strategy and
operating strategy; and (v) the declaration and payment of dividends.

        Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception, and
have experienced and continue to experience negative operating margins and
negative cash flows from operations (see Note A to the financial statements);
(ii) any material inability of us to successfully internally develop our
products; (iii) any adverse effect or limitations caused by Governmental
regulations; (iv) any adverse effect on our cash flow or on our ability to
obtain acceptable financing in connection with our growth plans; (v) any
increased competition in our business; (vi) any inability of us to successfully
conduct our business in new markets; and (vii) other risks including those
identified in our filings with the Securities and Exchange Commission. We
undertake no obligation to publicly update or revise the forward looking
statements made in this Form 10-Q to reflect events or circumstances after the
date of this Form 10-Q or to reflect the occurrence of unanticipated events.




                                       3




                                 HydroFlo, Inc.

                       BALANCE SHEET AS OF MARCH 31, 2004
                                   (unaudited)
________________________________________________________________________________

ASSETS

CURRENT ASSETS - Cash                                            $     13,881 

PROPERTY AND EQUIPMENT (net of accumulated
   depreciation of $410)                                               25,549

INVESTMENT -  Hydroflo Water Treatment, Inc.                        1,922,690 

TOTAL                                                            $  1,962,120
                                                                 =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable and accrued expenses                         $      1,944
   Note payable to related party                                       35,000 
     Total current liabilities                                         36,944

CONVERTIBLE NOTES PAYABLE - LONG TERM                                 105,000 

Total liabilities                                                     141,944 

STOCKHOLDERS' EQUITY:
   Convertible preferred stock, $.01 par value, 5,000,000
     shares authorized; 4,000,000 shares issued and outstanding,
     no liquidation value                                               4,000
   Common stock, $.01 par value, 500,000,000 shares authorized;
     16,069,550 shares issued and outstanding                         160,696
     Additional paid-in capital                                     1,830,399
    Stock subscription receivable                                      (2,958)
    Stock purchase warrants                                           147,834
     Deficit                                                         (319,795)
       Total stockholders' equity                                   1,820,176 

TOTAL                                                            $  1,962,120
                                                                 =============
________________________________________________________________________________

See notes to condensed financial statements.




                                       4




                                 HydroFlo, Inc.

                            STATEMENTS OF OPERATIONS
                                   (unaudited)

__________________________________________________________________________________________________________________________

                                                                    Prior to Becoming a
                                                               Business Development Company         
                                      For the
                                    Period March     For the                        For the       For the
                                      4, 2004        Period         For the       Three-Months  Nine-Months
                                      through      January 1,     Period July        Ended         Ended
                                      March 31,   2004 through    1, 2003 to       March 31,     March 31,
                                        2004      March 3, 2004  March 3, 2004        2003         2003

REVENUE                             $         -   $     2,600     $   109,208   $    73,981    $   126,481

COST OF GOODS SOLD                            -         8,601          39,090        10,996         17,172 

GROSS MARGIN                                  -        (6,001)         70,118        62,985        109,309 

OPERATING EXPENSES:
Employee compensation                         -        24,323         489,335       228,139        675,416
Management fee                            4,600         4,600          32,200        13,800         41,400
Research and development                      -           590           7,018           341          5,958
License fee                                   -             -               -             -         12,500
Rent                                      1,454         1,698          11,033         4,671         13,795
Marketing                                 1,000            57           2,608         3,018         19,315
Contribution                                  -             -               -             -         10,800
General and administrative              312,741       549,217         795,384        75,605        227,684 
   Total operating expenses             319,795       580,485       1,337,578       325,574      1,006,868

OPERATING LOSS                         (319,795)     (586,486)     (1,267,460)     (262,589)      (897,559)

OTHER INCOME (EXPENSE):
Interest income                               -             -             280         1,224          4,241
Interest expense                              -          (225)           (450)            -              -
Other income                                  -             -               -             -              -
Stock discount expense                        -             -         (30,218)            -              - 
   Total other income (expense)               -          (225)        (30,388)        1,224          4,241
                                    ============  ============    ============  ============   ============
NET LOSS                            $  (319,795)  $  (586,711)    $(1,297,848)  $  (261,365)   $  (893,318)
                                    ============  ============    ============  ============   ============

NET LOSS PER SHARE - Basic and
Diluted                             $     (0.02)  $     (0.04)    $     (0.08)  $     (0.02)   $     (0.06)
                                    ============  ============    ============  ============   ============

WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING -
   Basic and Diluted                 16,069,600    16,033,400      15,916,800    15,773,550     15,728,457
                                    ============  ============    ============  ============   ============
__________________________________________________________________________________________________________________________

See notes to condensed financial statements.




                                       5




                                 HydroFlo, Inc.

                            STATEMENTS OF CASH FLOWS
                                   (unaudited)
________________________________________________________________________________________________________

                                                                                Prior to Becoming a
                                                                          A Business Development Company
                                                       For the              For the
                                                    Period March         Period July             For the
                                                       4, 2004              1, 2003            Nine-Months
                                                    through March        through March           Ended
                                                      31, 2004              3, 2004          March 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                           $ (319,795)         $ (1,297,848)       $ (893,318)
  Adjustments to reconcile net loss to net cash
      provided by (used in) operating activities:
    Depreciation                                            410                15,770            15,409
    Amortization of patent costs                              -                   375               420
    Stock based Compensation                            300,000             1,033,546           431,812
    Loss on impairment of patent costs                        -                 5,949                 -
    (Increase) decrease in accounts receivable                -               (68,707)          (32,481)
    (Increase) decrease in inventory, net                     -               (21,133)            6,297
    Decrease (increase) in prepaid expenses                   -                75,064            (2,421)
    Increase in accounts payable and accrued
     expenses - related parties                               -                32,953                 -
    Increase in accounts payable and accrued expenses     1,527                96,999            62,218 
  NET CASH (USED IN) OPERATING ACTIVITIES               (17,858)             (127,032)         (412,064)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in Hydroflo Water Treatment, Inc.          (38,793)                    -                 -
  Purchases of property and equipment                         -                (2,688)          (72,293)
NET CASH (USED IN) INVESTING ACTIVITIES                 (38,793)               (2,688)          (72,293)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuances of common stock, net of transaction expenses      -                55,535           471,000
  Stock subscription receipts                                 -                 4,000           140,300
  Proceeds from convertible notes payable                50,000                55,000                 -
  Proceeds from related party borrowing                  20,000                15,000                 - 
NET CASH PROVIDED BY FINANCING ACTIVITIES                70,000               129,535           611,300 

NET (DECREASE) INCREASE IN CASH                          13,349                  (185)          126,943

CASH AT BEGINNING OF PERIOD                                 532                   717            58,876 

CASH AT END OF PERIOD                                $   13,881          $        532        $  185,819
                                                     ===========         =============       ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:

Income taxes paid                                    $        -          $          -        $        -
                                                     ===========         =============       ===========
Interest paid                                        $        -          $          -        $        -
                                                     ===========         =============       ===========
________________________________________________________________________________________________________

See notes to condensed financial statements.




                                       6




                                 HydroFlo, Inc.

                          NOTES TO FINANCIAL STATEMENTS
                                   (Unaudited)
________________________________________________________________________________

Note A - Organization and Description of the Business

Organization and Liquidity

HydroFlo, Inc. ("we", "us", "our") was incorporated in North Carolina on
December 30, 1999, to design and distribute aeration and oxygen mixing equipment
specifically designed for municipalities and industry requiring improved
dissolved oxygen in water.

From inception to June 30, 2002, we focused primarily on developing and
patenting this new technology for the sewage treatment industry. Beginning July
1, 2002, we emerged from the development stage and focused on marketing and
selling our technology to this industry.

Effective March 4, 2004, the Company became a diversified internally managed,
closed-end investment company that elected to be treated as a business
development company ("BDC") under the Investment Company Act of 1940, as
amended. We intend to focus on providing financing and advisory services to
companies throughout the United States in the sewage treatment and other related
industry sectors.

Liquidity

We have recognized net losses and negative operating cash flow since our
inception. For the nine months ended March 31, 2004, we and HWTI had combined
net losses of approximately $1,678,000 and we have a combined net working
capital deficit of approximately $55,000. Cash used in operations during the
nine months ended March 31, 2004 approximated $145,000 and an additional $2,688
was used in acquiring additional property and equipment and for patent related
costs. Until such time that we can generate sustained profitable operations, we
will require additional funding to further develop, market and distribute our
products.

While we believe we will be successful in raising additional capital, there are
no assurances that we will be successful in obtaining capital or that such
financing will be on terms favorable or acceptable to us and that we will be
able to achieve profitable operations over the long term.

The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should we be unable to
continue as a going concern.

Basis of Presentation

Our accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and the instructions to Form 10-Q and Rule
10-1 and Article 6 of Regulation S-X of the Securities and Exchange Commission
(the "SEC"). Accordingly, these financial statements do not include all of the




                                       7




footnotes required by accounting principles generally accepted in the United
States of America. In our opinion, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation have been
included.

Beginning March 4, 2004, the accompanying financial statements reflect the
separate accounts of HydroFlo, Inc., and the related results of operations. In
accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and
Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments in which the Company has a controlling interest.

Prior to March 4, 2004, the accompanying financial statements included the
general accounts of the company and its now wholly owned operating subsidiary,
Hydroflo Water Treatment, Inc. ("HWTI")

The nature of the Company's operations and its reported financial position,
results of operations and its cash flows are dissimilar for the periods prior to
and subsequent to its becoming a business development company. As such operating
results for the various periods presented are not necessarily indicative of the
results that may be expected for the year ended June 30, 2004. The accompanying
financial statements and the notes thereto should be read in conjunction with
the condensed notes included herein and included in our audited financial
statements as of June 30, 2003 and for the years ended June 30, 2003 and 2002
contained in our Form 10-KSB.

Conversion to Business Development Company

The Company's results of operations for the nine months ended March 31, 2004 are
divided into three periods. The eight-month period and two-month period,
representing the period July 1, 2003 through March 3, 2004 and January 1, 2004
through March 31, 2004, reflects the Company's results prior to operating as a
business development company under the Investment Company Act of 1940, as
amended. The one-month period, representing the period March 4, 2004 through
March 31, 2004, reflects the Company's results as a business development company
under the Investment Company Act of 1940, as amended. Accounting principles used
in the preparation of the financial statements beginning March 4, 2004 are
different than those of prior periods and, therefore, the financial position and
results of operations of these periods are not directly comparable. The primary
differences in accounting principles relate to the carrying value of
investments--see corresponding sections below for further discussion.

Use of Estimates

Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statement and the reported amounts of revenues and
expenses during the reporting period. Accordingly, actual results may differ
from those estimates.

Reclassifications

Certain amounts presented in the comparative financial statements have been
reclassified to conform with the current presentation.

Earnings Per Share




                                       8




In accordance with the provisions of SFAS No. 128, "Earnings Per Share," basic
earnings per share is computed by dividing net income by the number of
weighted-average common shares outstanding during the year. Diluted earnings per
share is computed by dividing net income by the number of weighted average
common shares outstanding adjusted to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
resulting from options granted had been issued. The effect of options and
warrants outstanding were not included in the computation of diluted earnings
per share because the effect on net loss per share would have been antidilutive.

Valuation of Investments

At March 31, 2004, approximately 98% of our total assets represented investments
recorded at fair value. Value, as defined in Section 2(a)(41) of the 1940 Act,
is (i) the market price for those securities for which a market quotation is
readily available and (ii) for all other securities and assets, fair value is as
determined in good faith by the board of directors. Since there is typically no
readily ascertainable market value for the investments in our portfolio, we
value substantially all of our investments at fair value as determined in good
faith by the board of directors pursuant to a valuation policy and a consistent
valuation process. Because of the inherent uncertainty of determining the fair
value of investments that do not have a readily ascertainable market value, the
fair value of our investments determined in good faith by the board of directors
may differ significantly from the values that would have been used had a ready
market existed for the investments and the differences could be material.

There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment. Unlike banks, we are not
permitted to provide a general reserve for anticipated loan losses. Instead, we
must determine the fair value of each individual investment on a quarterly
basis. We will record unrealized depreciation on investments when we believe
that an investment has become impaired, including where collection of a loan or
realization of an equity security is doubtful. Conversely, we will record
unrealized appreciation if we believe that the underlying portfolio company has
appreciated in value and, therefore, our investment has also appreciated in
value, where appropriate.

As a business development company, we invest primarily in illiquid securities
including debt and equity securities of private companies. The structure of each
debt and equity security is specifically negotiated to enable us to protect our
investment and maximize our returns. We generally include many terms governing
interest rate, repayment terms, prepayment penalties, financial covenants,
operating covenants, ownership parameters, dilution parameters, liquidation
preferences, voting rights, and put or call rights. Our investments are
generally subject to some restrictions on resale and generally have no
established trading market. Because of the type of investments that we make and
the nature of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the examination of, among
other things, the underlying investment performance, financial condition and
market changing events that impact valuation.

Note B - Convertible Notes Payable

During the quarter ended March 31, 2004 we issued and currently have outstanding
convertible notes aggregating $105,000. The notes carry a premium of 8% of the
principal amount, and entitled each of the note holders to an additional premium
of one share of common stock for each $1 loaned to the Company. The notes are




                                       9




convertible into common shares at a rate of $.70 per share price on the date we
receive notice of the conversion.

Note C -Shareholders' Equity

On February 25, 2004, we increased our authorized number of common shares for
issuance to 500,000,000 from 20,000,000. No adjustment was made to our par value
per share.

We have entered into an agreement with our external legal counsel, whereby said
legal counsel provides certain legal services over a two-year period beginning
once we became a public reporting issuer in exchange for 125,000 shares of our
common stock. The shares are to be granted pro-rata over those two years and
recorded as expense, valued at the fair value of the shares on the issuance
date. For the six months ended December 31, 2003, we recorded $40,455 of
expenses, included in general and administrative in the accompanying statement
of operations, for the fair market value of the stock.

We entered into an agreement with an unrelated party during July 2003 whereby
that party would act as an advisor to our Board of Directors for a period of two
years. In exchange for these services, we issued 40,000 shares of our common
stock to the party in September 2003. We recorded $17,000 of expense related to
this agreement during the six months ended December 31, 2003.

We have granted options to purchase shares of our common stock in conjunction
with an employment agreement entered into during fiscal 2001. The options vest
one year from the date of each grant. All options issued to date have an
exercise price of $0.22 per share. The weighted average fair value of the
options is $2.06 per share for options granted during fiscal 2004. The weighted
average remaining contractual lives of granted options are approximately 4
years. Stock option compensation expense recorded during the nine months ended
March 31, 2004 approximated $385,000. The summary of stock option activity is
shown below:

                                                         Options        Weighted Average
                                                       Outstanding       Exercise Price

Outstanding at July 1, 2003                              1,012,500            0.22
Options granted during fiscal 2004                         337,500            0.22
Options exercised during fiscal 2004                        (3,000)           0.22 

Outstanding at March 31, 2004                            1,347,000            0.22
                                                        ===========          ======

Options exercisable at March 31, 2004                    1,009,500            0.22
                                                        ===========          ======

Series A Preferred Stock - On December 30, 1999, the Company's board of
directors authorized 5,000,000 shares of Series A Preferred Stock. On March 1,
2004, the Company issued 3,800,000 shares of Series A Preferred Stock in
consideration of a $170,000 non-interest bearing note payable, issued in June
2003, to Free Harbor LLC and 200,000 shares to Nicholas Investment Company, Inc
in consideration of services rendered.

The Series A Preferred Stock has no preference in liquidation over common stock,
is convertible into three (3) shares of common stock at the election of the




                                       10




individual holders after twelve months following the date of issuance, shall not
be entitled to receive dividends and distributions, has no voting rights, and
are entitled, as a class, to elect two members of the Board of Directors.

Note D - Commitments and Contingencies

In April 2004, we entered into a twelve month agreement with one of our
directors which provides a $1,500 per month director fee.

NOTE E - Investment in HWTI and Related Condensed Notes

We have a 100% ownership interest in HWTI. Summarized financial information and
condensed footnotes for this investee as of and for the full nine months ended
March 31, 2004 is as follows:

Unaudited                                             2004

Total assets                                      $    230,682
                                                  =============

Total liabilities                                 $    177,082
Stockholder's Equity                                    53,600 

Total liabilities and Stockholder's Equity        $    230,682
                                                  =============

Revenues                                          $    110,708
Expenses                                             1,469,168 
Net Loss                                          $ (1,358,460)
                                                  =============

Revenue Recognition

Revenue in the accompanying statements of operations consists of direct sales or
leases to customers and paid demonstrations of our product. Sales are recognized
when products are shipped to the customers, with provisions for discounts and
rebates to customers and returns and other adjustments, if any, provided for in
the period the related sales are recorded. No amounts have been recorded for
such provisions during the periods presented. Rental income is recognized over
the period the related equipment is provided to the customer.

Other Related Party Transactions

At March 31, 2004, we had amounts payable of $41,900 due to Free Harbor LLC for
management services. One of our directors is the managing partner of Free Harbor
LLC. Expenses incurred under this arrangement totaled $13,800 and $41,400 for
the three and nine months ended March 31, 2004. Fees are not payable by us until
we have reached profitability on a cash basis.

Commitments and Contingencies

In connection with the management agreement with Free Harbor LLC (discussed in
Note E), we have agreed to pay Free Harbor LLC 10% of pretax profits as long as
the management agreement is in effect. Additionally, in connection with one
employment agreement, we have agreed to pay that employee 5% of pretax profits
so long as he remains an employee ours.




                                       11




Item 2. Management's Discussion and Plan of Operation

Forward-Looking Statements

This Quarterly Report contains forward-looking statements about HydroFlo, Inc.'s
business, financial condition and prospects that reflect management's
assumptions and beliefs based on information currently available. We can give no
assurance that the expectations indicated by such forward-looking statements
will be realized. If any of our management's assumptions should prove incorrect,
or if any of the risks and uncertainties underlying such expectations should
materialize, HydroFlo's actual results may differ materially from those
indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct
bearing on operating results include, but are not limited to, acceptance of our
services, our ability to expand our customer base, managements' ability to raise
capital in the future, the retention of key employees and changes in the
regulation of our industry.

There may be other risks and circumstances that management may be unable to
predict. When used in this Quarterly Report, words such as, "believes,"
"expects," "intends," "plans," "anticipates," "estimates" and similar
expressions are intended to identify forward-looking statements, as defined in
Section 21E of the Securities Exchange Act of 1934, although there may be
certain forward-looking statements not accompanied by such expressions.

The safe harbors of forward-looking statements provided by Section 21E of the
Exchange Act are unavailable to issuers of penny stock. As we issued securities
at a price below $5.00 per share, our shares are considered penny stock and such
safe harbors set forth under the Reform Act are unavailable to us.

Overview

HydroFlo, Inc., incorporated in North Carolina on December 30, 1999, to design
and distribute aeration and oxygen mixing equipment specifically designed for
municipalities and industry requiring improved dissolved oxygen in water. Since
inception, we have focused primarily on developing and patenting this new
technology for the sewage treatment industry. During the current year, we
continue to focus on marketing and selling our technology and related products
and services to this industry.

Effective March 3, 2004, we created a new wholly owned subsidiary, Hydroflo
Water Treatment, Inc. ("HWTI"), and converted to a Business Development Company
("BDC") under the Investment Company Act of 1940. Upon completion of this
conversion, we became an internally managed, diversified, closed-end investment
company.

Conversion to Business Development Company

The Company's results of operations for the nine months ended March 31, 2004 are
divided into three periods. The eight-month period and two-month period,
representing the period July 1, 2003 through March 3, 2004 and January 1, 2004
through March 31, 2004, reflects the Company's results prior to operating as a
business development company under the Investment Company Act of 1940, as
amended. The one-month period, representing the period March 4, 2004 through




                                       12




March 31, 2004, reflects the Company's results as a business development company
under the Investment Company Act of 1940, as amended. Accounting principles used
in the preparation of the financial statements beginning March 4, 2004 are
different than those of prior periods and, therefore, the results of operations
of these periods are not directly comparable.

Portfolio Composition

Our primary business is lending to and investing in businesses, with
subordinated debt and equity-based investments, including warrants and equity
appreciation rights. We currently invest in one Company, HWTI, the total
portfolio value of this investment in non-publicly traded securities was
$1,922,690 million at fair value at March 31, 2004.

Results of Operations - For the one month period March 4, 2004 through March 31,
2004 after BDC Conversion

Because we have only operated as a BDC for the one month, we generated no
revenues. We incurred $319,795 in expenses. $300,000 of these expenses were the
result of stock issued in connection with certain consulting related to the
conversion to a BDC. The remaining $19,795 were related to employee and support
expenses related to the operation of the BDC.

Results of Operations - Prior to BDC Conversion

Due to the Company's change of status and becoming a business development
company under the Investment Company Act of 1940, as amended, the following
financial reporting is not directly comparable to previous quarterly filings.

Two months ended March 3, 2004 vs. three months ended March 31, 2003

Our revenues for the two-month period ending March 3, 2004 total $2,600, versus
revenues of $73,981 for the three-month period the previous year. Sales were for
the rental of a unit to Tyson Foods for use in Arkansas.

Employee compensation decreased to $24,323 for the period ended March 3, 2004
from $228,139 for the period ended March 31, 2003.

Management fees (related-party) remained stable monthly at $9,200 for the period
ended March 3, 2004 compared to $13,800 for the period ended March 31, 2003.

Research and development costs increased to $590 for the period ended March 3,
2004 from $341 for the period ended March 31,2003. This increase was due to the
continuing development of additional technology and products for use in
industrial applications.

Rent costs decreased to $1,698 for the period ended March 3, 2004 from $4,671
for the period ended March 31, 2003.

Marketing costs decreased to $57 for the period ended March 3, 2004 from $3,018
for the period ended March 31, 2003.




                                       13




General and administrative costs increased to $549,217 for the period ended
March 3, 2004 from $75,605 for the period ended March 31, 2003.

As a result of the forgoing, our net loss increased to $586,711 for the
two-month period ended March 3, 2004 compared to $271,365 for the three-month
period in 2003.

Eight months ended March 3, 2004 vs. nine months ended March 31, 2003

Our revenues for the eight-month period ending March 3, 2004 total $109,208,
versus revenues of $126,481 for the nine-month period the previous year. Our
revenues consisted of the sale of a unit to our North Carolina Representative
for use at Greensboro, and the rental of a unit to North Carolina State
University for their testing use with animal waste, the sale of a unit to
Carolina Water Service for use at Harrisburg, North Carolina, and the rental of
a unit to Tyson Foods for use in Arkansas.

Employee compensation decreased to $489,335 for the period ended March 3, 2004
from $675,416 for the period ended March 31, 2003.

Management fees (related-party) remained stable monthly at $32,200 for the
period ended March 3, 2004 compared to $41,400 for the period ended March 31,
2003.

Research and development costs increased to $7,018 for the period ended March 3,
2004 from $5,958 for the period ended March 31, 2003. This increase was due to
development of additional technology and products for use in industrial
applications.

License Fees decreased to $0 for the period ended March 3, 2004 from $12,500 for
the period ended March 31, 2003. This decrease was due to the termination of the
licensing agreement for the aeration basin technology.

Rent costs decreased to $11,033 for the period ended March 3, 2004 from $13,795
for the period ended March 31, 2003.

Marketing costs decreased by $13,746 or 84.3% to $2,551 for the period ended
December 31, 2003 from $16,297 for the period ended December 31, 2002. This
decrease was caused by decreased marketing travel and trade show advertising
expenses.

Contributions decreased $0 for the period ended March 3, 2004 compared to
$10,800 for the period ended March 3, 2003.

General and administrative costs increased to $795,384 for the period ended
March 3, 2004 from $227,684 for the period ended March 31, 2003. This increase
was due to accounting for stock issuance.

As a result of the forgoing, our net loss increased to $1,297,848 for the
eight-month period ended March 3, 2004 compared to $893,318 for the nine-month
period in 2003.

Liquidity and Capital Resources




                                       14




Because we only just converted to a BDC on March 4, 2004 and continue to support
the financing needs of our single portfolio investee, the following discussion
is a combination of our liquidity uses and needs and those of our portfolio
investee for the entire nine months ended March 31, 2004 and in the subsequent
near term.

For the nine months ended March 31, 2004, we had a combined net loss of
approximately $1,675,000 and generated negative combined cash flow from
operating activities of $200,000. We had a net combined working capital deficit
of approximately $55,000 at March 31, 2004. The cash used in operations was
primarily due to officers' and employee compensation and other costs associated
with generating sales and revenue for the company.

As of May 15, 2004, we have $367,313 in combined cash, $260,672 in accounts
receivable and pending contracts on unit installations to be placed in service
within three months. These resources are sufficient for us to continue
operations for approximately twelve months. Subsequent to March 31, 2004, we
have received funds by use of convertible debentures in the amounts of $435,000
and will continue to raise funds using this method.

If we do not generate any additional net revenues from sales, including
collection of outstanding accounts receivable, or proceeds from the sale of
securities before May 31, 2005, we will be unable to continue operations
thereafter.

CRITICAL ACCOUNTING POLICIES

The financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions.

Valuation of Investments

At March 31, 2004, approximately 98% of our total assets represented investments
recorded at fair value. Value, as defined in Section 2(a) (41) of 1940 Act, is
(i) the market price for those securities for which a market quotation is
readily available and (ii) for all other securities and assets, fair value is as
determined in good faith by the board of directors. Since there is typically no
readily ascertainable market value for the investments in our portfolio, we
value substantially all of our investments at fair value as determined in good
faith by the board of directors pursuant to a valuation policy and a consistent
valuation process. Because of the inherent uncertainty of determining the fair
value of investments that do not have a readily ascertainable market value, the
fair value of our investments determined in good faith by the board of directors
may differ significantly from the values that would have been used had a ready
market existed for the investments, and the differences could be material.

There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment. Unlike banks, we are not
permitted to provide a general reserve for anticipated loan losses. Instead, we
must determine the fair value of each individual investment on a quarterly
basis. We will record unrealized depreciation on investments when we believe
that an investment has become impaired, including where collection of a loan or
realization of an equity security is doubtful. Conversely, we will record
unrealized appreciation if we believe that the underlying portfolio company has
appreciated in value and, therefore, our investment has also appreciated in
value, where appropriate.




                                       15




As a business development company, we invest primarily in illiquid securities
including debt and equity securities of private companies. The structure of each
debt and equity security is specifically negotiated to enable us to protect our
investment and maximize our returns. We generally include many terms governing
interest rate, repayment terms, prepayment penalties, financial covenants,
operating covenants, ownership parameters, dilution parameters, liquidation
preferences, voting rights, and put or call rights. Our investments are
generally subject to some restrictions on resale and generally have no
established trading market. Because of the type of investments that we make and
the nature of our business, our valuation process requires an analysis of
various factors. Our fair value methodology includes the examination of, among
other things, the underlying investment performance, financial condition and
market changing events that impact valuation.

Item 3. Controls and Procedures

Disclosure Controls and Procedures

The Corporation maintains disclosure controls and procedures designed to ensure
that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this report, the Corporation's Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the Corporation's disclosure controls and
procedures. Based on the evaluation, which disclosed no significant deficiencies
or material weaknesses, the Corporation's Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective as of the end of the period covered by this report.

Changes in Internal Controls

There have been no changes in the Corporation's internal control over financial
reporting that occurred during the Corporation's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting. However, we intend to
continue to refine our internal controls on an ongoing basis with a view towards
continuous improvements. Grant Thornton LLP ("GT"), our previous independent
accountants, had reported to our Board of Directors certain matters involving
internal controls that GT considered to be material weaknesses under standards
established by the American Institute of Certified Public Accountants. The
identified material weaknesses related to a lack of segregation of duties within
our accounting and financial management functions and inadequate dedication of
resources to the financial review and analysis functions. Due to the size of our
organization, the early stage of our operations and significant financial
constraints, the Corporation has not been able to employ the necessary resources
for proper internal financial review and analysis.

Given the material weaknesses identified above, management devoted additional
resources to resolving questions that arose during the quarterly reporting
cycle. Significant adjustments were necessary to convert management's internal
financial records to the final reported amounts in the Form 10Q. As a result,
management is confident that its financial statements fairly present, in all
material respects, the financial condition and results of operations of the
Company.




                                       16




The material weaknesses have been discussed in detail among our Board of
Directors and GT. We have assigned high priority to the correction of these
material weaknesses, and we are committed to addressing and resolving them
fully. As the Corporation continues its growth and strives to achieve financial
stability, management intends to devote additional resources to further develop
its financial accounting, analysis and reporting functions.




                                       17




                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

  None

Item 2. Changes in Securities

  Issuance of Unregistered Securities-

  In the third quarter of 2004 we issued:

        - 4,000,000 shares of convertible preferred stock (convertible into
          12,000,000 shares of common stock) to two investors.

        -$105,000 in convertible notes payable, interest accruing at 8% per annum,
         principle and interest payable in three (3) years (convertible into
         shares of common stock at 70% of the market price of our stock at the
         date of conversion) to six investors.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances. We believed that Section 4(2) was available because:

        o None of these issuances involved underwriters, underwriting discounts
          or commissions;
        o We placed restrictive legends on all certificates issued;
        o No sales were made by general solicitation or advertising;
        o Sales were made only to accredited investors or investors who were
          sophisticated enough to evaluate the risks of the investment.

In connection with the above transactions, although some of the investors may
have also been accredited, we provided the following to all investors:

        o Access to all our books and records.
        o Access to all material contracts and documents relating to our operations.
        o The opportunity to obtain any additional information, to the extent we
          possessed such information, necessary to verify the accuracy of the
          information to which the investors were given access.

Item 3. Defaults upon Senior Securities.

  None

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

  None

Item 5. Other Information.

  None





                                       18




Item 6. Exhibits and Reports on 8K

Exhibits

        31 Certification
        32 Certification

Reports on Form 8-K

      8-K Current report, Item 6. Resignation of Director - March 1, 2004





                                   SIGNATURES

     Pursuant to the  requirements  of the  Securities and Exchange Act of 1934,
the  registrant  has duly  caused  this Report to be signed on its behalf by the
undersigned hereunto duly authorized.

                 HydroFlo, Inc.
                 (Registrant)

By: /s/ Dennis Mast
Dennis Mast
CEO, Principal Financial Officer and Principal
Accounting Officer


Date: May 24, 2004




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