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**UNITED STATES
                       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 June 30, 2003

[ ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934

                        Commission File Number 333-107106

                                 **Hydroflo, Inc.**
                 (Name of small business issuer in its charter)

         **North Carolina                                     56-2171767**
(State or other jurisdiction of                          (I.R.S. employer
 incorporation or organization)                       identification number)

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

(Address of principal place of business or intended principal place of business)

                  Registrant's telephone number: **919-772-9925**

Securities Registered Pursuant to Section 12(b) of the Act: NONE

      Title of each class            Name of each exchange on which registered

Securities Registered Pursuant to Section 12(g) of the Act:

                                     COMMON
                                (Title of class)

                                (Title of class)

                                        1

Check whether the issuer (1) filed all reports required to be filed by Section
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. [X] Yes [ ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained 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]

The issuer's revenues for its most recent fiscal year were $244,243.

As of the date of this filing, the Company's Common Stock is not trading on a
national exchange however is trading on the OTCBB under the symbol "HYRF."

The number of shares outstanding of each of the issuer's classes of common
equity, as of September 1, 2003 was 15,973,550.

                       **DOCUMENTS INCORPORATED BY REFERENCE**

If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

                                       2

**FORWARD LOOKING STATEMENTS**

         This Annual Report contains forward-looking statements about our
business, financial condition and prospects that reflect our 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 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 products and services, our ability to expand its 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 Report, words such as, "believes,"
"expects," "intends," "plans," "anticipates," "estimates" and similar
expressions are intended to identify and qualify forward-looking statements,
although there may be certain forward-looking statements not accompanied by such
expressions. However, the forward-looking statements contained herein are not
covered by the safe harbors created by Section 21E of the Securities Exchange
Act of 1934.

**PART I

ITEM 1. BUSINESS.

BUSINESS DEVELOPMENT**

We were incorporated in North Carolina on December 30, 1999. We operate a
website at http://www.hydroflo.cc.

Since our inception we have devoted our activities to the following:

o        Raising capital;
o        Developing and patenting our products;
o        Securing manufacturers for the products we sell;
o        Developing an independent sales force and markets for the products and
         services we offer; and
o        Marketing and selling our technology to the sewage treatment industry.

HydroFlo is developing its business to be an international provider of
wastewater treatment solutions for industrial and governmental entity customers.
HydroFlo designs, builds, and installs aeration equipment used for pre-treatment
of wastewater. We also provide a full range of related services to companies and
municipalities to treat their wastewater at the treatment plant by the use of
the energy efficient aeration systems in treatment lagoons.

Using our patented HydroFlo Pressure Line Up Stream or PLUS pre-treatment
system, customers begin the treatment process at their pumping stations, prior
to the wastewater reaching a treatment plant.

The cost to the customer of integrating the HydroFlo PLUS technologies are
offset with cost savings in other areas. The cost of chemical treatment for the
purposes of odor control is generally more than that of the HydroFlo system as
the customer is required to install a metering system for installation of the
chemicals, and a chemical storage tank. The units often cost close to the same
amount as the cost of the HydroFlo PLUS system. In addition to the chemical
equipment costs, chemicals must be purchased on an ongoing basis. Other benefits
related to the pre-treatment of wastewater including improved aeration, reduced
toxicity and corrosivity, and improved efficiency of the overall treatment
systems.

                                       3

In certain cases where the PLUS systems are used in a majority of the lift
stations for a municipality, the efficiency of the treatment plant will be
improved considerably because the primary treatment method -aeration- is being
performed prior to the wastewater entering the plant, presenting a viable
alternative to expansion of the facilities and saving capital expenditures. This
will allow us to present our HydroFlo PLUS technology to municipalities as a
lower-cost alternative to building new wastewater treatment facilities or
expanding existing installations.

**PRINCIPAL PRODUCTS & SERVICES**HydroFlo PLUS system: Aeration system for sewage treatment in pipes prior to
reaching treatment facilities

In the United States and other countries, the sewage from homes and commercial
operations is collected and conveyed through extensive underground networks of
interconnected piping, which delivers the sewage to the treatment facility.
Because of the expansiveness and topography of these systems, sewage flows
cannot always be conveyed by gravity alone. As a result, pumping stations are
typically installed in the systems to lift the flow over high elevations and on
to the treatment facility.

Because pumping stations to move the sewage and wastewater through a grid of
piping structures already exist, with the addition of our PLUS system at the
pump, those piping structures can be used to begin the treatment process prior
to the sewage reaching the treatment plant. The addition of our pre-treatment
unit at the pumping station does not require additional pumping power costs.

The PLUS system is a new approach to odor control and preconditioning of the
wastewater in the collection and conveyance system. The PLUS system is able to
do with oxygen what has been done in the past with chemicals that require
treatment for removal at the wastewater treatment facility. Oxygen in the form
of microbubbles generated by the HydroFlo PLUS system is introduced directly
into the pipes at the pumping station at which point they are pumped by the
primary pumps directly into the main pipes. This has never been accomplished
before primarily due to the size of the bubbles. Bubbles larger than the 1-10
micron size bubbles that HydroFlo systems produce cause destruction of the
equipment. HydroFlo bubbles are so small that they are able to pass through the
pump without this damage. The purpose of the process is to create an aerobic or
oxygenated environment in order for the bacteria to utilize the organics as a
food source in the decay and treatment process.

By using the HydroFlo's patented technology, a municipality or other user can
have its wastewater converted from non-oxygenated or anaerobic state to an
oxygenated or aerobic state. This has the following benefits:

o        By having the wastewater converted to an aerobic condition, odor will
         be limited because production of odor-causing hydrogen sulfide is found
         in anaerobic conditions eliminated by the use of our technology.

                                       4

o        Organic material will also be reduced since the microorganisms depend
         on oxygen to break down the waste.  This results in the reduction in
         sludge at the municipal treatment plant.  The amount of the reduction
         in organic matter is dependent on the amount of treatment provided at
         the pumping station, which can be varied to meet the needs of the user.
         The treatment activity is further enhanced because typical temperatures
         in the underground sewer pipeline system are stabilized and not
         affected by outside temperatures as occurs at the treatment plant, thus
         resulting in more efficient treatment than if oxygen was not introduced
         by our system.

As a result, the capacity of a sewage treatment plant can increase without a
major capital investment and with reduced operational costs.

We have completed all product design and have also completed operational testing
confirming the system operates as intended over time. We have received
non-cancelable purchase orders or contracts for these products or have completed
sales transactions, as follows:

Emory Wilson [1]

---------------------------------------- --------------------------------------------------------------------------
Name of Product [2]                      PLUS 250-20 System
---------------------------------------- --------------------------------------------------------------------------
Date of Purchase Order                   3/24/03
---------------------------------------- --------------------------------------------------------------------------
Date negotiations for purchase order     November 2002
began
---------------------------------------- --------------------------------------------------------------------------
Purchase order negotiated by             Jim Gill, employed as Product Development Specialist by HydroFlo
---------------------------------------- --------------------------------------------------------------------------
Anticipated date product will be         Completed and in stock
completed
---------------------------------------- --------------------------------------------------------------------------
Date product was delivered               July 2, 2003
---------------------------------------- --------------------------------------------------------------------------
Total Payments Due                       $68,735, which amount is net of commission
---------------------------------------- --------------------------------------------------------------------------
Anticipated Date for receipt of          On or before September 30, 2003 [3]
payments by HydroFlo
---------------------------------------- --------------------------------------------------------------------------

[1]  Emory Wilson is one of our 18 current distributors. Other than our agreement
concerning product distribution, Emory Wilson is not affiliated with us or any
of our officers or directors.

[2]  We are the manufacturer of this product.

[3]  Based upon representations of the distributor.

                                       5

Valley Water Technologies [1]

---------------------------------------- --------------------------------------------------------------------------
Name of Product [2]                      Two PLUS 250-20 Systems
---------------------------------------- --------------------------------------------------------------------------
Date of Purchase Order                   4/7/03
---------------------------------------- --------------------------------------------------------------------------
Date negotiations for purchase order     May 2002
began
---------------------------------------- --------------------------------------------------------------------------
Purchase order negotiated by             Steven Hausman for our distributor Valley Water Technologies; Tom Barbee
                                         for HydroFlo
---------------------------------------- --------------------------------------------------------------------------
Anticipated date product will be         Currently in operation at ConAgra Facility [3]
completed
---------------------------------------- --------------------------------------------------------------------------
Anticipated date product will be         Currently in operation at ConAgra Facility [3]
delivered
---------------------------------------- --------------------------------------------------------------------------
Total Payments Due                       $55,760.00, the full amount due net of commissions
---------------------------------------- --------------------------------------------------------------------------
Date of receipt of payments by HydroFlo  Payment in the amount of $55,760.00, the full amount due net of
                                         commissions to
                                         our distributor Valley Water Technologies, Inc., was received from
                                         Valley Water
                                         Technologies, Inc. on May 13, 2003 and has been deposited into our
                                         account. [4]
---------------------------------------- --------------------------------------------------------------------------

[1]  Valley Water Technologies is one of our 18 current distributors. Other than
our oral understanding concerning product distribution, Valley Water
Technologies is not affiliated with us or any of our officers or directors.

[2]  We are the manufacturer of this product.

[3]  ConAgra is not affiliated with us or any of our officers or directors or
Valley Water Technologies or any of their officers or directors.

[4]  As noted below, our standard commission is 10%, however we may pay an
additional commission based upon the facts and circumstances of any particular
order. In this situation, we negotiated a commission of 20% with our distributor
due to their efforts with this customer.

We have left a unit in place in Raleigh NC approximately three miles from our
headquarters to use for demonstrations to potential customers. The city is not
paying us for the use of this unit. They have advised us they currently do not
have sufficient budgeted funds to purchase the unit, although they have no
objection to our leaving the unit in place.

HydroFlo ATS system:  Aeration basin aeration system

The application of oxygen to a wastewater aeration basin in order to accelerate
the decomposition of organics and the purification of water has been performed
mechanically for hundreds of years. The application of the ATS system to
aeration basins is a new and energy efficient means of applying oxygen to
wastewater for purification purposes but the application itself is standardized
in the industry.

The HydroFlo ATS System TM uses pumps and pressure tanks to operate as a
high-pressure gas dissolution system and produces a micro-bubble in a size that
is 1000-4000 times smaller than the closest competitor giving a very high
dissolution rate of oxygen to water. This means rise rates for bubbles generated
by the ATS System TM is extremely slow giving extended time for the oxygen in
the bubbles to come in contact with the water and higher standard oxygen
transfer efficiencies. In addition, the ATS Systems TM allow for the use of
either ambient air or enhanced gases such as pure oxygen to effect a greater
transfer rate of oxygen and to minimize the electrical and mechanical costs. The
ATS System TM includes no porous membranes to plug or foul. Use of the ATS
System TM with its mixing abilities gives the result of no stratification in the
pond. This eliminates varying layers of oxygen levels in a basin or pond, called
stratification, and allows for faster, more effective wastewater treatment.

                                       6

We have completed design, on-site testing and installation of this product. We
have received a non-cancelable contract for this product, as follows:

Happy Cloud Ranch [1]

---------------------------------------- -------------------------------------------------------------------
Name of Product [2]                      Three Pond Aeration and mixing systems
---------------------------------------- -------------------------------------------------------------------
Date of Purchase Order                   2/24/03
---------------------------------------- -------------------------------------------------------------------
Date negotiations for purchase order     12/15/02
began
---------------------------------------- -------------------------------------------------------------------
Purchase order negotiated by             Tom Barbee
---------------------------------------- -------------------------------------------------------------------
Date products delivered                  June 2003
---------------------------------------- -------------------------------------------------------------------
Total Payments Due                       $99,443
---------------------------------------- -------------------------------------------------------------------
Payments received as of September 1,     $90,000
2003
---------------------------------------- -------------------------------------------------------------------
Anticipated date of receipt of final     Remaining payment of $9,443 anticipated to be received on or
payment by HydroFlo                      before September 30, 2003.  [3]
---------------------------------------- -------------------------------------------------------------------

[1]  Happy Cloud Ranch is not affiliated with us or any of our officers or
directors.

[2]  We are the manufacturer of this product.

[3]  Based upon representations of the customer.

Demonstrations for this product have been completed for the Federal Emergency
Management Agency, or FEMA, in Berryville, VA. We have submitted a proposal for
approximately $22,000 to FEMA but we understand funding is not currently
available for purchase. A follow-on demonstration is pending for Kimberly Clark
in Wisconsin. Technical problems related to freezing weather and the inadvertent
shut-down of other aeration units which were not ours, and not problems
associated with our unit, during our initial test with Kimberly Clark in
December 2002 resulted in a request by Kimberly Clark for a retest later this
year, although no date has been set. No proposal has been submitted to Kimberly
Clark. Neither FEMA nor Kimberly Clark expressed any dissatisfaction with our
units.

This product can be delivered notwithstanding the cancellation of our royalty
agreement with Aquatex Group Industrie S.A. or Agisa as we can build a
comparable system with parts that are commercially available from alternative
sources. See "Risk Factors." Our manufacture of these comparable systems will
not be in conflict with any proprietary rights of Aquatex Group Industrie S.A.
as it uses no protected physical components or technology of the Agisa system,
as follows:

------------------------------------------ --------------------------------------- ----------------------------------------
                                           Agisa System                            HydroFlo System
------------------------------------------ --------------------------------------- ----------------------------------------
Principal Physical Technology Components   Cylindrical pipe with inner piping to   High pressure vessels
                                           allow for simple mixing under
                                           approximately one atmosphere or less
                                           of pressure
------------------------------------------ --------------------------------------- ----------------------------------------
                                           N/A                                     Gas Introduction systems
------------------------------------------ --------------------------------------- ----------------------------------------
                                           N/A                                     High pressure pumps and controls
------------------------------------------ --------------------------------------- ----------------------------------------
                                           N/A                                     Mixing system
------------------------------------------ --------------------------------------- ----------------------------------------
Difference between Agisa system and        Agisa system operates as low pressure   HydroFlo system operates as high
HydroFlo system components                 static mixer using pipe                 pressure gas dissolution system with
                                                                                   vessels, high pressure pumps and
                                                                                   complex external mixing to enhance
                                                                                   oxygen transfer efficiencies
------------------------------------------ --------------------------------------- ----------------------------------------
Reason for non-infringement on Agisa                                               None of the physical elements in the
patent for the component                                                           HydroFlo system use or are in conflict
                                                                                   with the proprietary pipe or simple
                                                                                   mixing technology of Agisa system
------------------------------------------ --------------------------------------- ----------------------------------------

                                        7

There are the following number of manufacturers available for the following
principal components in our system:

High Pressure Vessels - 12
Gas Introduction systems - 3
High pressure pumps and controls - 12
Mixing system - 4

We had been working to develop our technology for approximately one year prior
to the termination of the Agisa contract. Nothing in the Agisa contract
prohibited us from developing competing technology. When we were satisfied that
our technology was ready for commercial sale, we terminated our agreement with
Agisa. Thus, we were able to contract to deliver our technology shortly after
the termination of our contract with Agisa. By terminating the agreement, we
avoided incurring on-going royalty payments.

Manufacturing

We manufacture our PLUS and ATS systems. For the PLUS system, the raw materials
consisting of various parts used in our manufacturing process are acquired from
one of three available suppliers. We have from three to 12 suppliers of the raw
materials consisting of various parts used in the manufacturing process of our
ATS system, as described above. Except as set forth below, we have no contracts
or other arrangements with these suppliers.

All parts suppliers are qualified by us and are required to sign and conform to
secrecy agreements, non-competition agreements, and must meet all our
specifications. All parts acquired from these suppliers must meet specifications
established by American Society of Mechanical Engineers which list the design,
materials, fabrication and testing requirements for the amount of pressure used
in our products. Typical lead time for manufacturing the HydroFlo PLUS and ATS
systems is 6-8 weeks.

We maintain a minimal inventory of parts in order to respond to emergency
scenarios or unusual delivery demands.

Our main parts supplier for both systems, TriWeld, Inc., which is not affiliated
with us, has accounted for 90% on a dollar value basis of the parts used by us
in manufacturing our products to date.

                                       8

We do have a strategic alliance agreement with this parts supplier; however the
agreement only obligates the parts supplier to use its best efforts to provide
us parts within times quoted after receiving a purchase order from us. In
addition, during the one year term of the agreement, which commenced October 1,
2002, the supplier agreed that it shall not, directly or indirectly, offer,
market, sell or otherwise deal in any parts substantially similar in design or
usage to our parts. The agreement may be terminated on 30 days notice with an
opportunity to cure. Should this supplier cease to supply us parts in the
future, our revenues may decline if we are unable to quickly locate alternative
parts suppliers who do not charge us more for comparable parts.

Accordingly, we continue to seek additional parts suppliers for both systems, as
follows: We have interviewed and received quotations on units from two
additional parts suppliers from whom we can obtain our parts, R-V Industries of
Honey Brook, PA and Edwards, Inc. of Spring Hope, NC. No commitments or purchase
arrangements with these suppliers have been negotiated.

*Royalty Agreement*

On April 1, 2000, we entered into a licensing agreement with Aquatex Group
Industrie S.A. , also known as Agisa, for the right to manufacture and sell
basin aeration technology and related equipment. The agreement was terminated by
mutual agreement on December 20, 2002. The financial statements reflect a
current liability of $22,500 under this agreement. The Company does not
anticipate that it will have to pay this liability.

Marketing

Marketing activities are performed by HydroFlo employees with the title of
Product Development Specialists or PDSs. Two Product Development Specialists
currently work for HydroFlo and cover the east coast of the US. PDSs have
engineering and technical backgrounds and are responsible for working with
Manufacturer's Representatives located throughout the United States. The PDSs
are compensated by a salary of $60,000 per year with an additional commission of
1% of sales from future representatives managed by them.

HydroFlo also provides products nationwide and abroad in Slovenia, Croatia,
Bosnia, Herzegovina, Germany, Macedonia by way of a network of manufacturer's
representatives. Each of the manufacturer's representatives maintains a number
of salespeople working with end-users of HydroFlo's products.

A sales representative company receives 10% of a total sale when a customer
purchases or signs a service agreement for our system. Several of our
representatives do sell competing aeration equipment but do not sell anything
competing with the HydroFlo PLUS system. Revenue from sales made by these sales
representatives has been minimal to date. These relationships can be terminated
by either party at any time upon 30 days advance notice.

Each of the 18 manufacturer's representatives except Valley Water Technologies,
our original distributor with whom we have an oral understanding, has written
contracts with us. Our standard commission is 10%, however we may pay an
additional commission based upon the facts and circumstances of any particular
order. The representatives were selected based on a number of factors such as
whether or not they currently serve the water and wastewater treatment markets
with synergistic services and/or equipment, the type of equipment that they were
currently providing, the geographic territory that the salespeople were
covering, and the gross sales revenue that they were accomplishing. A typical
candidate manufacturer's representative may specialize in either municipal or
private industrial markets, have additional product lines that are components of
water and wastewater treatment, and be active with regard to regional and
national trade shows.

                                       9

Advertising is conducted by participation in trade shows with independent
representatives.

We will continue our marketing efforts, but focus them on areas where we
believe, based upon prior sales presentations and demonstrations, that there is
the greatest possibility for sales, including North Carolina, South Carolina,
Virginia, Maryland, Delaware, New Jersey, Pennsylvania, California, Oregon,
Washington, Arkansas and Florida.

The Sales Process

The typical sales process to end-users will vary depending on the region,
whether or not the end-user is a private or public customer, and what stage of
development we are in within a geographic region. Generally municipal end-users
will require a longer sales cycle due to the municipal budgeting and approval
process being on an annual cycle. Private end-users may react more quickly to
our technology and have the funds more readily available for product
acquisition.

There are regional factors such as climate, water reuse requirements, leisure
and resort locations, and relatively flat topography that may make the HydroFlo
PLUS system more quickly accepted. If odors are detected at resort locations,
the business is impacted. Relatively flat topography found at the various coasts
of the US require that pump stations be used to transport waste. Pump stations
are typically anaerobic and generate hydrogen sulfide gas that is emitted to the
atmosphere at pump locations, air relief valves and at the point that the force
mains discharge to sewers. In northern climates, odors and corrosion are
generated year round. Most outdoor activity that puts the public in contact with
odors emanating from sewer mains occurs during the warmer months.

The third major external effect on HydroFlo's sales process is whether or not we
currently have a unit installed within the region to rely on as a reference
site. We have a more difficult time introducing the first system within a
region. Once the system is in place and other end-users are able to see how the
units are operating and how the units may benefit their processes, we find the
sales process to be easier.

To accelerate the use by end-users, we have designed and built mobile units to
demonstrate the HydroFlo Systems at the end-user's sites as well as to confirm
our sizing models. A second step to shorten the sales cycle has been to offer a
contingent sale. Contingent sales are defined as an offering to perform a full
size trial at a candidate site for a limited period of time. If at the end of a
relatively short, predefined time period the process is operating within a
previously defined set of parameters, then a purchase order is issued based on a
previously agreed to price. A third step to shorten the sales cycle has been to
offer the units on a lease, lease/service agreement basis. The lease,
lease/service agreement is designed to offer the client the option to acquire
the HydroFlo System as an incremental portion of their existing operating costs
rather than as a capital costs. Typically capital equipment requires a lengthy
budgeting and approval period.

Customers

Our customers are primarily local municipalities or industries that are required
to treat wastewater. Systems, equipment, and services can be provided by way of
an all-inclusive service contract. These service contracts include the
provision, installation, and maintenance of the HydroFlo systems and related
equipment. No revenue transactions to date have included a maintenance
component. This allows customers operating within a budget process to obtain the
system for lower up-front costs, thereby allowing them the opportunity to
procure our equipment and services and stay within their operating budgets.

                                       10

We also intend to sell directly to Original Equipment Manufacturers or OEM's. In
addition to marketing to end-users through manufacturer's representatives,
HydroFlo will sell directly to OEM's. The purpose of selling directly to OEM's,
besides the obvious advantage of increased sales, is to distribute our product
in significantly higher volumes as an integral component of an OEM's wastewater
treatment system. OEM's targeted by HydroFlo include oxygen generator
manufacturers, packaged wastewater treatment plant manufacturers, pump
manufacturers, liquid and wastewater mixing equipment manufacturers, and lift
station manufacturers. We have no existing contracts or commitments with OEM's
at this time. However, should we obtain such contracts or commitments, our
contracts with our representative groups specifically allow for HydroFlo to
include its aeration equipment into OEM's processes as long as the HydroFlo
components are not sold separately to end users.

Warranty and Insurance

We warrant our systems against defects in quality and our manufacturers will
stand behind their work. We have not had returns since we have had few sales but
the units we have placed for demonstrations and trials for more than 1 1⁄2 years
have not had problems that would constitute a warranty issue. We have a business
owners insurance policy which includes $2,000,000 products /completed operations
liability coverage.

Intellectual Property

US Patent # 6,284,138 "Method and arrangement for introduction of sewage
pre-treatment upstream of sewage treatment facility" was issued to HydroFlo in
September, 2001.

HydroFlo filed for Trademark Protection for Logo and Service marks for the
HydroFlo logo with the wave and for the HydroFlo logo with the wave and the
words HydroFlo, Inc. on August 10, 2002.

Research and Development

During our fiscal years end June 30, 2002 and June 30, 2003, respectively, we
spent $15,658 and $5,988 on research and development.

We expect to spend $90,000 on research and development during fiscal year 2004
on the following, assuming funds are available:

o        Formal Certification of Standard Oxygen Transfer Efficiency - this
         certification will consist of engineering testing by a recognized
         independent professional in the water aeration industry.
o        Best Available Technology Certification - this certification will
         require trials being conducted by an independent testing agency for
         government agencies, such as the Environmental Protection Agency.
o        Design of ancillary equipment - process enhancements to our products in
         areas such as electrical control panels and unit housing.

We anticipate this research and development will be funded through internal cash
flow. None of our research and development is sponsored by customers.

                                       11

COMPETITION

The wastewater treatment industry is increasingly competitive with hundreds of
competitors using various technologies. We expect competition to become
increasingly intensified in the future. Therefore, competition is rapidly
evolving and there are no assurances that we can keep pace with the intense
competition in this market.

Many of our competitors have significantly greater brand recognition, customer
bases, operating histories and financial and other resources. In addition, many
companies have expanded the size of their operations by acquiring other
complimentary companies to form advantageous strategic alliances. We compete
with other wastewater treatment firms. In addition, many of our competitors
offer the less effective but similar services at less cost than us and have the
financial resources to create more attractive pricing.

Our primary competitors are:

o        Vivendi Environment
o        U.S Filter
o        Davis Products Company
o        Aqua Aerobics Systems, Inc.

These competitors have the following advantages over the services that we now
offer:

o        A larger sales force;
o        Greater brand recognition
o        Greater access to capital; and
o        A longer corporate history.

Because we do not offer an exclusive set of services and products, we will
encounter difficulties in distinguishing our services and products from others.
The system we bring to market has not been introduced previously. Engineering
professionals are generally cautious about recommending new products to the
market if not familiar with them. We have therefore been installing trial units
for proof of the validity of the technology.

HydroFlo PLUS Systems

The only mechanical competitors for the HydroFlo PLUS system are passive systems
manufactured by Biocube and Calgon. Both of these systems rely on contaminated
air being drawn through either activated Carbon or a biofilter for odor control
and neither of these systems treat the cause of odors or corrosion, namely
anerobic production of hydrogen sulfide. A typical capital cost for a large
biocube system is on the order of $300 per standard cubic foot per minute.
Operating costs are similar to the HydroFlo Plus System.

Competition in the area of odor control through control of the bacteria that
generate hydrogen sulfide include the following:

*Bioxide* - A highly nitrated product added to the wastewater in the wet well of
lift stations. The purpose of the introduction of this compound is to control
the odor at the lift station and in the pipeline transporting the wastewater to
the treatment plant. This product is distributed and manufactured by Davis
Products, which is a subsidiary of U.S. Filter, a subsidiary of Vivendi
Environment. Vivendi is a large company dealing in many facets of the wastewater
equipment business.

                                       12

Disadvantages of using Bioxide include:

o        the costs to install a storage and metering system to inject Bioxide
         into the water,
o        the ongoing cost of the chemicals that need to be added on a consistent
         basis,
o        as more bioxide is used in a system than can be absorbed into the
         wastewater the remaining nitrates must be removed by the use of
         aeration in the lagoon at the treatment plant,
o        the use of bioxide does nothing to decrease corrosion in the pipeline
         system, and
o        inconsistent results from the use of Bioxide due to critical
         inconsistencies with the wastewater stream.

Competitive advantages for using the PLUS system from HydroFlo instead of
Bioxide are that:

o        the cost of the purchase and installation of the HydroFlo PLUS system
         is often not much more than the cost of the storage and metering
         equipment required for the Bioxide use,
o        no chemicals are required to be used for the success of the PLUS system
         and the cost of the system is usually less than one year's use of
         Bioxide chemicals,
o        the use or air or oxygen in the pipeline conditions the wastewater to
         an aerobic state  similar to that at the treatment plant, and
o        the elimination of toxic and corrosive hydrogen sulfide reduces the
         loading at the wastewater treatment facility and reduces corrosivity in
         the pipeline.

*Odophos* - An iron sulfate product added to the wastewater in the wet well of
lift stations to control the odor at the lift station and in the pipeline
transporting the wastewater to the treatment plant. This product is distributed
and manufactured by a company named Davis Products, which is a subsidiary of
U.S. Filter, which is a subsidiary of Vivendi Environment. Disadvantages of
using Odophos include:

o        the requirement to install a storage and metering system to inject
         Odophos into the water,
o        the ongoing cost of the chemicals that need to be added on a consistent
         basis,
o        as with any chemical usage there is a propensity to add an excess of
         chemicals, which require later removal, in order to avoid continuous
         adjustment at the lift station, and
o        the use of Odophos does little to decrease corrosion in the pipeline
         system

Competitive advantages for using the PLUS system from HydroFlo instead of
Odophos are that:

o        the cost of the purchase and installation of the HydroFlo PLUS system
         is often not much more than the cost of the storage and metering
         equipment required for the odophos use,
o        no chemicals are required to be used for the success of the PLUS system
         and the cost of the system is usually less than one year use of odophos
         chemicals,
o        the use of air or oxygen in the pipeline promotes the aerobic
         conditions similar to that found at the treatment plant, and
o        the use of air and oxygen in the pipeline system eliminates the
         hydrogen sulfide which is the cause of corrosivity in the pipeline.

                                       13

HydroFlo ATS Systems

Main competitive products for this category of products include the following:

*Veri-Cant Jet Aeration*

The Veri-Cant Aeration System operates primarily by the induction of air and
oxygen into a stream of pumped water. The system is effective at introducing
large bubbles into the waste stream and providing kinetic mixing but the
standard oxygen transfer efficiency is relatively low due to the size of the
bubbles and the rise rate through the pool of wastewater.

These systems are manufactured and distributed by U.S. Filter, a subsidiary of
Vivendi Environment. Competitive advantages for the HydroFlo ATS System TM
include HydroFlo's bubble size that is 1000-4000 times smaller giving a very
high dissolution rate of oxygen to water. This means rise rates for bubbles
generated by the HydroFlo ATS System TM are extremely slow giving extended time
for the oxygen in the bubbles to come in contact with the water and higher
standard oxygen transfer efficiencies. In addition, HydroFlo ATS Systems TM
allow for the use of either ambient air or enhanced gases such as pure oxygen to
effect a greater transfer rate of oxygen and the minimize the electrical and
mechanical costs.

*Membrane Diffusers*

Membrane Diffusers are generally rubber or some other man-made porous disk or
tube that is placed in the wastewater, connected to blowers, and high volumes of
air are pumped into the pool of wastewater at relatively high pressures. Primary
benefits are that the membrane diffusers allow for good mixing within the
wastewater pool while providing marginal aeration. The aeration characteristics
of membrane diffusers are superior to surface aerators in that the entire pool
is mixed and aerated instead of just the top layer. The disadvantages of
membrane diffusers are that the membranes plug and rupture. Once the membrane
has ruptured, the air bubble size become very large with transfer efficiencies
plummeting. Additional disadvantages with membrane diffusers include high heat
gain from injecting compressed heated air into the pool, high electrical costs
due to the use of inefficient high pressure blowers to get air into a pool with
high hydrostatic head, decreased operating efficiencies due to air leaks at the
connections of the air conveyance lines, high maintenance costs for the blowers,
distribution system and electrical motors, and finally decreased efficiencies
due to the fact that the entire basin is required to be taken out of service to
replace a ruptured or fouled membrane.

Membrane diffusers are made and sold by large companies such as U. S. Filter and
numerous small companies such as Aqua-Aerobics.

Competitive advantages for the HydroFlo ATS System TM include no porous
membranes to plug or foul, bubble size is 1000-4000 times smaller giving a very
high dissolution rate of oxygen to water, rise rates for bubbles generated by
the HydroFlo ATS System TM are extremely slow giving extended time for the
oxygen in the bubbles to come in contact with the water and higher standard
oxygen transfer efficiencies. In addition, the HydroFlo ATS System TM allows for
the use of either ambient air or enhanced gases such as purified oxygen streams
to allow for greater oxygen transfer efficiencies and minimized electrical and
mechanical costs.

                                       14

*Floating Mechanical Aerators*

These systems are manufactured and distributed by a number of companies, one of
the more prominent being Aqua-Aerobics Systems, Inc, a US company located in
Illinois. Aqua Aerobics provides many different types of wastewater treatment
equipment including floating mechanical aerators. Floating aerator advantages
include operator familiarity and the visual effect of large amounts of water
being thrown into the air. The disadvantages of this technology is that its
operating efficiencies are below the membrane diffusers, the potential for pool
stratification is great - reducing the efficiency of treatment, the operating
and maintenance costs are excessive.

Competitive advantages for the HydroFlo ATS System TM include no stratification
of the pool, 1-10 Micron bubble size gives a very high dissolution rate of
oxygen to water, rise rates for bubbles generated by the HydroFlo ATS System TM
are extremely slow giving extended time for the oxygen in the bubbles to come in
contact with the water and higher standard oxygen transfer efficiencies. The
HydroFlo ATS System TM allows for the use of either ambient air or enhanced
gases such as purified oxygen streams to allow for greater oxygen transfer
efficiencies and minimized electrical and mechanical costs as well as the fact
that all maintainable parts are located on dry land and do not require a crane
to remove, replace or maintain.

Employees

We currently have the following employees:

Full time:  5
Operations - 2
Management - 1
Sales - 2

Part time: None

**RISK FACTORS

Our poor financial condition raises substantial doubt about our ability to
continue as a going concern. We do not have sufficient resources to operate
beyond the end of the calendar year. You will be unable to determine whether we
will be able to continue in business thereafter or ever become profitable.**

As of September 1, 2003 we had $46,812 of cash on hand. As of September 1,
2003 we have remaining receivables due on known non-cancelable purchase orders
and contracts in the amount of $108,168. We will expend approximately an
additional $2,300 in cash for unpaid costs for parts we utilized in
manufacturing these products and sales commissions payable on these orders and
contracts.

Thus, on or before September 30, 2003, the latest date upon which we believe we
will receive all payments due on these purchase orders and contracts, we
anticipate receiving $105,868 in additional net cash from these purchase orders
and contracts. This assumes all customers make full and timely payments
according to revised payment agreements with these customers. We know of no
reason why this will not occur. Accordingly, given our current cash position
plus anticipated additional net cash revenues, we believe we will be able to
satisfy our operating cash requirements through January 1, 2004.

                                       15

Finally, if we do not generate any additional net revenues from new sales before
January 1, 2004, we will be unable to continue operations thereafter. If this
were to occur, we would most likely have to find a buyer for our business or
file for protection under bankruptcy laws. In such event we would cease our
reporting obligations and not become a shell company to be used as a vehicle for
a reverse acquisition. As of this date, however, we have taken no action with
respect to either of these options. We currently have no purchase orders or
contracts in place for new sales. We have no plan in place that will eliminate
this risk.

Our ability to continue as a going concern is dependent on our ability to raise
funds to implement our planned development; however we may not be able to raise
sufficient funds to do so. Our independent auditors have indicated that there is
substantial doubt about our ability to continue as a going concern over the next
twelve months. Our poor financial condition could inhibit our ability to achieve
our business plan. Because we are currently operating at a substantial loss with
no operating history and very limited revenues, an investor cannot determine if
we will ever become profitable.

**We have a limited operating history; because our planned growth is contingent
upon receiving additional funding, you will be unable to evaluate whether our
business will be successful.**

Our business development is contingent upon raising debt or equity funding. We
have no sources of funding identified. You must consider the risks,
difficulties, delays and expenses frequently encountered by development stage
companies in our business, which have little or no operating history, including
whether we will be able to overcome the following challenges:

o        Our ability to generate sufficient cash flow or raise necessary capital
         to operate for the next 12 months or thereafter
o        Advertising and marketing costs that may exceed our current estimates
o        Unanticipated development expenses
o        Our ability to generate sufficient revenues to offset the substantial
         costs of operating our business

Because significant up-front expenses, including advertising, sales, and other
expenses are required to develop our business, we anticipate that we will incur
losses until revenues are sufficient to cover our operating costs. Future losses
are likely before our operations become profitable. As a result of our lack of
operating history, you will have no basis upon which to accurately forecast our:

o        Total assets, liabilities, and equity
o        Total revenues
o        Gross and operating margins
o        Labor costs

Accordingly, the proposed business plans described in this prospectus may not
either materialize or prove successful and we may never be profitable. Also, you
have no basis upon which to judge our ability to develop our business and you
will be unable to forecast our future growth.

**Because our wastewater treatment system has not been accepted as a recognized
form of wastewater treatment, we face significant barriers to acceptance of our
services.**

                                       16

Our business involves the use of aeration wastewater treatment equipment. The
use of equipment such as ours is a relatively new form of wastewater treatment.
Traditionally, these services are provided through other treatment
methodologies, such as chemicals or other aeration methods. Accordingly, we face
significant barriers to overcome the consumer preferences of traditionally used
treatment programs for the type of wastewater treatment products and services
that we offer.

**Independent sales representatives may not be successful in selling our
wastewater treatment products and services, causing our revenues to be reduced.**

We have written agreements with 17 and an oral arrangement with one additional
independent sales representative companies that promote or advertise our
products and services on our behalf. A sales representative company receives 10%
of a total sale when a customer purchases or signs a service agreement for our
system, although we may pay a greater percentage based upon the facts and
circumstances of a particular order. Several of our representatives sell
competing aeration equipment but do not sell anything competing with the
HydroFlo PLUS system. These relationships can be terminated by either party at
any time upon 30 days advance notice.

**For the fiscal year-end June 30, 2003, our business has come from only four
customers. If we fail to develop a wide customer base, our revenues will be
reduced.**

For the fiscal year-end June 30, 2003, the following were our only four
customers, with sales in the following amounts:

o        Federal Emergency Management Agency:  $500
o        Valley Water Technologies:  $137,300
o        Kimberly Clark:  $7,000
o        Happy Cloud Ranch: $99,443

Except for our distributors Valley Water Technologies, who rented and ultimately
sold a unit to ConAgra, we do not have any long-term contracts, commitments or
arrangements with them. Except for our distributors Valley Water Technologies
and Emory Wilson, none of these customers is affiliated with us. In addition,
none of these customers is affiliated with our officers, directors or promoters.
As the Valley Water Technologies revenues represented rental income which will
now cease with ConAgra's purchase of the rental units, the on-going revenue from
Valley Water Technologies related to these units will cease. Should these
customers cease to rent, buy or use our products or services in the future, our
revenues may significantly decline.

**To date, most of the raw materials consisting of parts used in our manufacturing
process of the products we sell has come from one supplier; if we are unable to
continue to purchase our parts from this supplier, our revenues could be
reduced.**

Our main parts supplier for both systems, TriWeld, Inc., which is not affiliated
with us, has accounted for 90% on a dollar value basis of the parts used by us
in manufacturing our products to date. We do have a strategic alliance agreement
with this supplier; however the agreement only obligates the supplier to use its
best efforts to produce parts within times quoted after receiving a purchase
order from us. Should this supplier cease to supply us parts in the future, our
revenues may decline if we are unable to quickly locate alternative suppliers
who do not charge us more for comparable parts.

                                       17

**Because we terminated our license agreement with Aquatex Group Industries S.A.,
we will not have their basin aeration technology and related equipment to sell,
which could reduce future revenues.**

On December 20, 2002, we terminated our license agreement with Aquatex Group
Industries S.A. to sell their basin aeration technology and related equipment.
Accordingly, we will not have their basin aeration technology and related
equipment to sell, which could reduce future revenues.

**Because we face intense competition from larger and better-established companies
that have more resources than we do, we may be unable to develop our business
plan or increase our revenues.**

The market for our wastewater treatment products and services is intensely
competitive and highly fragmented. Many of these competitors may have longer
operating histories, greater financial, technical and marketing resources, and
enjoy existing name recognition and customer bases. New competitors may emerge
and rapidly acquire significant market share. In addition, new technologies
likely will increase the competitive pressures we face. Competitors may be able
to respond more quickly to technological change, competitive pressures, or
changes in consumer demand. As a result of their advantages, our competitors may
be able to limit or curtail our ability to compete successfully.

**Mr. Dennis Mast, our CEO, can exert control over matters requiring stockholder
approval.**

Mr. Dennis Mast, our CEO beneficially owns approximately 85.6% of our
outstanding common stock. He will be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors and
the approval of significant corporate transactions. This concentration of
ownership may also have the effect of delaying, deterring or preventing a change
in control and may make some transactions more difficult or impossible without
the support of Mr. Mast.

**Our management decisions are made by our CEO Dennis Mast and president Tom
Barbee; if we lose their services, our revenues may be reduced.**

The success of our business is dependent upon the expertise of our CEO Dennis
Mast and president Tom Barbee. Because they are currently essential to our
operations, you must rely on their management decisions. We have not obtained
any key man life insurance relating to our them. If we lose their services, we
may not be able to hire and retain another CEO or president with comparable
experience. Mr. Mast's services are provided under an agreement with his
affiliate, Free Harbor, LLC. Mr. Barbee has a written memorandum of employment
with us. Both agreements are terminable at will by either party without notice.
As a result, the loss of services of CEO Dennis Mast and president Tom Barbee
could reduce our revenues.

                                       18

**Sales of our common stock under Rule 144 could reduce the price of our stock.**

As of June 30, 2003, there are 2,311,050 shares of our common stock held by
non-affiliates and 13,500,000 Shares of our common stock held by affiliates that
Rule 144 of the Securities Act of 1933 defines as restricted securities. No
shares have been sold pursuant to Rule 144 of the Securities Act of 1933. As of
November 3, 2003, all shares held by affiliates will be eligible for resale
under 144. In general, under Rule 144 as currently in effect, any of our
affiliates and any person or persons whose sales are aggregated who has
beneficially owned his or her restricted shares for at least one year, may be
entitled to sell in the open market within any three-month period a number of
shares of common stock that does not exceed 1% of the then outstanding shares of
our common stock. Trading volume in the common stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also affected by limitations
on manner of sale, notice requirements, and availability of current public
information about us. Non-affiliates who have held their restricted shares for
two years may be entitled to sell their shares under Rule 144 without regard to
any of the above limitations, provided they have not been affiliates for the
three months preceding such sale. As a result of the provisions of Rule 144,
1,702,550 of the restricted securities held by non-affiliates and all 13,500,000
of the restricted securities held by affiliates are available for sale in a
public market as of September 1, 2003 and the remaining 608,500 restricted
securities held by non affiliates will become available for sale in a public
market no later than November 3, 2003. The availability for sale of substantial
amounts of common stock under Rule 144 could reduce prevailing market prices for
our securities.

**We are authorized to issue preferred stock which, if issued, may reduce the
market price of the common stock.**

Our directors are authorized by our articles of incorporation to issue shares of
preferred stock without the consent of our shareholders. Our preferred stock, if
issued, may rank senior to common stock with respect to payment of dividends and
amounts received by shareholders upon liquidation, dissolution or winding up.
Our directors will set such preferences. The issuance of such preferred shares
and the preferences given the preferred shares, do not need the approval of our
shareholders. The existence of rights, which are senior to common stock, may
reduce the price of our common shares. We do not have any plans to issue any
shares of preferred stock at this time.

**Certain North Carolina corporation law provisions could prevent a potential
takeover of us that could adversely affect the market price of our common stock
or deprive you of a premium over the market price.**

We are incorporated in the State of North Carolina. Certain provisions of North
Carolina corporation law could adversely affect the market price of our common
stock. Because North Carolina corporation law requires board approval of a
transaction involving a change in our control; it would be more difficult for
someone to acquire control of us. North Carolina corporate law also discourages
proxy contests making it more difficult for you and other shareholders to elect
directors other than the candidates nominated by our board of directors. Neither
our articles nor our by-laws contain any similar provisions.

**ITEM 2. DESCRIPTION OF PROPERTY**

Our offices are located at 3721 Junction Blvd., Raleigh, NC 27603. Our telephone
number is 919-772-9925.

Office space of 1,600 square feet is rented for $1,454 per month from Gary and
Theresa Schlotterer. We are now on a month-to-month lease. Our offices are in
good condition and are sufficient to conduct our operations.

                                       19

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

**ITEM 3. LEGAL PROCEEDINGS**

We are not currently involved in any legal proceedings nor do we have knowledge
of any threatened litigation.

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

We did not submit any matters to a vote of security holders during our fiscal
year ending June 30, 2003.

                                     **PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS****Market information**

Our stock became quoted on the over the counter bulletin board under the symbol
"HYRF" on June 9, 2003. There were no trades in the quarter ended June 30, 2003.

Options, Warrants, Convertible Securities*Options*

We granted options to purchase shares of common stock in conjunction with an
employment agreement with Mr. Barbee entered into during fiscal 2001. The
options vest over one year from the date of each grant and expire five years
after the grant date. All options issued to date have an exercise price of $0.22
per share. The weighted average fair value of the options is $1.82 and $1.77 per
share for options granted during fiscal 2003 and 2002, respectively. The
weighted average remaining contractual lives of granted options are
approximately 4 years. The summary of stock option activity is shown below:

o        Options granted during fiscal 2003 - 337,500 @ $0.22
o        Outstanding at June 30, 2003 - 1,012,500  @ $0.22
o        Options exercisable at June 30, 2003 - 675,000

o        Options granted during fiscal 2002 - 337,500 @ $0.22
o        Outstanding at June 30, 2002 - 675,000 @ $0.22
o        Options exercisable at June 30, 2002 - 337,500 @ $0.22

None of these options has been exercised.

                                       20

*Common Stock Warrants*

Since inception, warrants to purchase 1,012,500 shares of common stock have been
granted to non-management stockholders. The warrants are exercisable at $.22 per
share for a five-year period beginning upon full satisfaction of the
shareholders' stock subscriptions. Of these warrants, 506,250 were cancelled due
to cancellation of a stock subscription agreement in fiscal year 2002. As of
June 30, 2003, no warrants have been exercised although all remaining warrants
are now exercisable.

Holders

As of June 30, 2003, there were 15,811,050 shares of common stock issued and
outstanding held by 57 shareholders of record.

Dividends

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

**ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**Forward Looking Statements

Some of the statements contained in this Form 10-KSB that are not historical
facts are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Form 10-KSB, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can
be given regarding the achievement of future results, as actual results may
differ materially as a result of the risks we face, and actual events may differ
from the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:

o        Our ability to maintain, attract and integrate internal management,
         technical information and management information systems;
o        Our ability to generate customer demand for our services;
o        The intensity of competition; and
o        General economic conditions.

All written and oral forward-looking statements made in connection with this
Form 10-KSB that are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.

                                       21

Overview

HydroFlo, Inc. is a development stage enterprise, 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.

Our aggregate sales for fiscal year 2003 total $244,243, versus revenues of
$5,001 for the previous year. Our revenues consisted of the rental and sale of
two units to a major food processing company in the Pacific Northwest, the paid
trial of our system on-site at a paper-processing mill in Wisconsin, and the
paid trial of our system on-site at a FEMA facility in Virginia, and the
purchase of an aeration system for an aquaculture application in Southern
California. In fiscal year 2003, we generated a negative operating cash flow of
$547,798 and had a net working capital surplus of $187,230 at June 30, 2003.

Critical Accounting Policies and New Accounting Pronouncements

Revenue Recognition

Revenue in the accompanying statements of operations consists of direct sales or
leases to customers and paid demonstrations of the Company's 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.

Accounting for Guarantees

In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate FIN 45 will
have a material effect on its financial statements.

                                       22

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company does
not believe FIN 46 will have a material effect on its financial statements.

Revenue Recognition

In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. The Company has not determined the effect of adoption of
EITF 00-21 on its financial statements or the method of adoption it will use.

Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." The statement is effective for fiscal
years ending after December 15, 2002. SFAS No. 148 amends certain provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Specifically, SFAS No.
148 states that companies adopting SFAS No. 123 should account for this change
on a prospective basis. SFAS No. 148 requires companies that adopt SFAS No. 123
to do so on a retroactive basis. The Company does not believe that this
statement will have any impact on them as they have not adopted, nor do they
plan to adopt, the fair value-based method of accounting for employee stock
compensation prescribed by SFAS No. 123.

                                       23

At June 30, 2003, the Company has a stock-based employee compensation plan,
which is described more fully in Note G to the financial statements. The Company
accounts for that plan under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees,"and related
interpretations. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123:

                                              2003          2002
                                        -------------- ---------------
Net loss, as reported                      $1,153,876        $924,504
Increased compensation expense                 11,646          25,269
Pro forma net loss                         $1,165,522        $949,773
                                        ============== ===============
Pro forma loss per share                        $0.07           $0.06
                                        ============== ===============

Because the SFAS No. 123 method of accounting has not been applied to options
granted, the resulting pro forma compensation cost may not be representative of
that to be expected in future years. The Company used the Black-Scholes Option
Pricing Model to estimate the fair value of stock options granted in fiscal 2003
and 2002 with the following assumptions:

                                                            2003      2002
                                                           -------  -------
Expected dividend yield                                     0.00%     0.00%
Risk-free interest rates                                    2.76%     6.05%
                                                           =======  =======
Results of Operations - FY2003 vs. FY2002

Employee compensation increased by $301,683 or 49.8% to $907,755 for the period
ended June 30, 2003 from $606,072 for the period ended June 30, 2002. This
increase was caused by the hiring of additional personnel, and the issuance of
stock options to Mr. Barbee during 2003 with an exercise price below the market
value of the underlying common stock.

Management fees (related-party) increased by $2,000 or 3.8% to $55,200 for the
period ended June 30, 2003 compared to $53,200 for the period ended June 30,
2002.

Research and development costs decreased by $9,670 or 61.8% to $5,988 for the
period ended June 30, 2003 from $15,658 for the period ended June 30, 2002. This
decrease was the result of a shift in management focus to sales and marketing
rather than research and development of products.

Consulting costs decreased by $31,394 to $0 for the period ended June 30, 2003
from $31,394 for the period ended June 30, 2002. This decrease was due to not
using an employment consultant to assist in finding personnel for hiring.

License Fees decreased by $7,500 or 37.5 % to $12,500 for the period ended June
30, 2003 from $20,000 for the period ended June 30, 2002. This decrease was due
to the termination of the licensing agreement for the aeration basin technology.

Rent costs increased by $7,286 or 63.9% to $18,684 for the period ended June 30,
2003 from $11,398 for the period ended June 30, 2002. This increase was caused
by the expansion of office space due to increased personnel.

Marketing costs decreased by $1,694 or 8.0% to $19,483 for the period ended June
30, 2003 from $21,177 for the period ended June 30, 2002. This was caused by a
decrease in trade show expenses.

Contributions decreased by $9,000 or 45.5% to $10,800 for the period ended June
30, 2003 compared to $19,800 for the period ended June 30, 2002. Contributions
have been halted until profitability is achieved.

                                       24

General and administrative costs increased by $185,664 or 126.8% to $332,114 for
the period ended June 30, 2003 from $146,450 for the period ended June 30, 2002.
This increase was primarily caused by offering expenses as well as our providing
increased sales and marketing support, commissions paid for sales generated,
literature and training to our representatives.

Liquidity and Capital Resources

For the fiscal year ended June 30, 2003, we had a net loss of $1,153,876, a net
working capital surplus of $187,230, and a net shareholder's equity of $148,136.
Net cash used in operating activities for the period from July 1, 2002 to June
30, 2003 was $547,798, and an additional $66,005 was used in acquiring
additional property and equipment and for patent related costs. The cash used in
operations was primarily due to officers' compensation, management fees and
other costs associated with generating sales and revenue for the company.

As of September 1, 2003 we had $46,812 of cash on hand. As of September 1,
2003 we have remaining receivables due on known non-cancelable purchase orders
and contracts in the amount of $108,168. We will expend approximately an
additional $2,300 in cash for unpaid costs for parts we utilized in
manufacturing these products and sales commissions payable on these orders and
contracts.

Thus, on or before September 30, 2003, the latest date upon which we believe we
will receive all payments due on these purchase orders and contracts, we
anticipate receiving $105,868 in additional net cash from these purchase orders
and contracts. This assumes all customers make full and timely payments
according to revised payment agreements with these customers. We know of no
reason why this will not occur. Accordingly, given our current cash position
plus anticipated additional net cash revenues, we believe we will be able to
satisfy our operating cash requirements through January 1, 2004.

Finally, if we do not generate any additional net revenues from new sales before
January 1, 2004, we will be unable to continue operations thereafter. If this
were to occur, we would most likely have to find a buyer for our business or
file for protection under bankruptcy laws. In such event we would cease our
reporting obligations and not become a shell company to be used as a vehicle for
a reverse acquisition. As of this date, however, we have taken no action with
respect to either of these options. We currently have no purchase orders or
contracts in place for new sales. We have no plan in place that will eliminate
this risk. Cash at June 30, 2003 amounted to $131,373, an increase of $72,497
since June 30, 2002.

                                       25

ITEM 7. FINANCIAL STATEMENTS

HydroFlo, Inc.
Table of Contents

Report of Independent Certified Public Accountants............................27

Financial Statements:

         Balance Sheets.......................................................28

         Statements of Operations.............................................29

         Statements of Changes in Shareholders' (Deficit) Equity..............30

         Statements of Cash Flows.............................................31

Notes to Financial Statements..............................................32-38

                                       26

**Report of Independent Certified Public Accountants**

To the Shareholders of HydroFlo, Inc.:

We have audited the accompanying balance sheets of HydroFlo, Inc. (a North
Carolina corporation) as of June 30, 2003 and 2002, and the related statements
of operations, changes in shareholders' (deficit) equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HydroFlo, Inc. as of June 30,
2003 and 2002, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
incurred a net loss of $1,153,876 and had negative cash flow from operations of
$547,798 during the fiscal year ended June 30, 2003. These factors, among
others, as discussed in Note A to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Raleigh, North Carolina
July 31, 2003

                                       27

**HydroFlo, Inc.

Balance Sheets - June 30, 2003 and 2002**

                                Assets                 2003           2002
                                                   ------------  ------------
Current assets:
    Cash                                           $  131,373      $  58,876
    Accounts receivable                                24,443          5,000
    Inventory                                          32,045         36,740
    Prepaid expenses                                   76,995            490
                                                  -------------  ------------
             Total current assets                     264,856        101,106
Property and equipment:
    Office furniture and equipment                     24,914         20,288
    Testing equipment                                  85,700         30,639
    Display equipment                                   6,318              0
        Less - Accumulated depreciation               (23,138)        (8,525)
                                                  -------------  ------------
              Total property and equipment             93,794         42,402
                                                  -------------  ------------
Patent costs, net                                      36,358         36,918
                                                  -------------  ------------
Deposits                                                  754            754
                                                  -------------  ------------
                                                   $  395,762     $  181,180
                                                  =============  ============

                      Liabilities and Shareholders' Equity

Current liabilities:
    Accounts payable and accrued expenses              75,877         42,584
    Accounts payable and accrued expenses -
       related parties (Note D)                         1,749        115,300
                                                  -------------  ------------
               Total current liabilities               77,626        157,884
                                                  -------------  ------------
Long term liabilities:
    Note payable - related party (Note D)             170,000              0
                                                  -------------  ------------
               Total long term liabilities            170,000              0
                                                  -------------  ------------
Commitments and contingencies (Notes C, D and I)
Shareholders' equity:
    Common stock, $0.01 par value, authorized
        20,000,000 shares, issued and outstanding
        15,811,050 shares as of June 30, 2003, and
        15,538,050 shares as of June 30, 2002         158,111        155,381
    Preferred stock, $0.01 par value, authorized
        5,000,000 shares, issued and no outstanding         0              0
    Additional paid-in-capital                      2,330,471      1,176,035
    Stock subscriptions receivable                     (6,959)      (147,259)
    Stock purchase warrants                           147,834        147,834
    Deferred compensation                             (50,062)       (31,312)
    Accumulated deficit                            (2,431,259)    (1,277,383)
                                                  -------------  ------------
                Total shareholders' equity            148,136         23,296
                                                  -------------  ------------
                                                  $   395,762     $  181,180
                                                  -------------  ------------

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

                                       28
**HydroFlo, Inc.****Statements of Operations
For the Years Ended June 30, 2003 and 2002**

                                                         2003           2002
                                                     ------------- -------------
Revenues                                              $  244,243       $  5,001
Cost of goods sold                                        40,620          5,086
Gross margin                                             203,623            (85)
                                                     ------------- -------------
Expenses:
    Officers' compensation                               907,755        606,072
    Management fee                                        55,200         53,200
    Research and development                               5,988         15,658
    Consulting                                                 0         31,394
    License fee                                           12,500         20,000
    Rent                                                  18,684         11,398
    Marketing                                             19,483         21,177
    Contribution                                          10,800         19,800
    General and administrative                           332,114        146,450
                      Operating expenses               1,362,524        925,149
                                                     ------------- -------------
Operating loss                                        (1,158,901)      (925,234)
Interest income                                            5,025            730
Net loss                                             $(1,153,876)     $(924,504)
                                                     ============= =============
Weighted average shares outstanding                   15,740,316     16,222,518
Basic and diluted loss per share                          $(0.07)        $(0.06)
                                                     ------------- -------------

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

                                       29

**HydroFlo, Inc.

Statements of Changes in Shareholders' (Deficit) Equity
For the Years Ended June 30, 2003 and 2002**

                                                               Additional    Stock       Stock
                                              Common Stock      Paid in   Subscriptions  Purchase   Deferred  Accumulated
                                           Shares     Amount    Capital     Receivable   Warrants Compensation  Deficit     Total
                                       ------------  --------- ----------- -----------  ---------- ---------- ----------- ----------
Balance, June 30, 2001                  16,406,400   $109,376   $571,657    $(642,808)   $295,667    $(3,125)  $(352,879)  $(22,112)
    Common stock issued                    416,250      2,775    552,225            0           0          0           0    555,000
    Stock subscription receipts                  0          0          0       67,349           0          0           0     67,349
    Stock subscription cancellations    (1,284,600)    (8,564)  (419,636)     428,200           0          0           0          0
    Stock options granted                        0          0    375,750            0           0   (375,750)          0          0
    Stock options vested                         0          0          0            0           0    347,563           0    347,563
    Stock purchase warrants cancelled            0          0    147,833            0    (147,833)         0           0          0
    Stock split                                  0     51,794    (51,794)           0           0          0           0          0
    Net loss                                     0          0          0            0           0          0    (924,504)  (924,504)
Balance, June 30, 2002                  15,538,050    155,381  1,176,035     (147,259)    147,834    (31,312) (1,277,383)    23,296
                                       ------------  --------- ----------- -----------  ---------- ----------  ---------- ----------
    Common stock issued                    273,000      2,730    543,270            0           0          0           0    546,000
    Stock subscription receipts                  0          0          0      140,300           0          0           0    140,300
    Stock options granted                        0          0    600,750            0           0   (600,750)          0          0
    Stock options vested                         0          0          0            0           0    582,000           0    582,000
    Common stock to be issued for
        service provided                         0          0     10,416            0           0          0           0     10,416
    Net loss                                     0          0          0            0           0          0  (1,153,876)(1,153,876)
Balance, June 30, 2003                 ------------  --------- ----------- -----------  ---------- ----------  ---------- ----------
                                        15,811,050   $158,111 $2,330,471      $(6,959)   $147,834   $(50,062) $(2,431,259) $148,136
                                       ------------  --------- ----------- -----------  ---------- ----------  ---------- ----------

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

                                       30
**HydroFlo, Inc.

Statements of Cash Flows
For the Years Ended June 30, 2003 and 2002**

                                                                            2003           2002
                                                                        -------------   -------------
Cash flows from operating activities:
    Net loss                                                             $(1,153,876)     $(924,504)
    Adjustments to reconcile net loss to net cash used in operating
        activities:
           Depreciation                                                       14,613          5,975
           Amortization of patent costs                                          560            466
           Deferred compensation amortization                                582,000        347,563
           Common stock to be issued for services provided                    10,416              0
           Increase in accounts receivable                                   (19,443)        (5,000)
           Decrease (increase) in inventory, net                               4,695        (21,564)
           Increase in prepaid expenses                                      (76,505)          (280)
           (Decrease) increase in accounts payable and accrued               (80,258)        89,196
               expenses
           Increase in note payable                                          170,000              0
                      Net cash used in operating activities                 (547,798)      (508,148)
                                                                        -------------   -------------
Cash flows from investing activities:
    Purchase of property and equipment                                       (66,005)       (39,410)
    Payments to acquire patents                                                    0        (27,137)
                      Net cash used in investing activities                  (66,005)       (66,547)
                                                                        -------------   -------------
Cash flows from financing activities:
    Issuance of common stock                                                 546,000        555,000
    Stock subscription receipts                                              140,300         67,349
                      Net cash provided by financing activities              686,300        622,349
                                                                        -------------   -------------
Net increase in cash                                                          72,497         47,654
Cash, beginning of year                                                       58,876         11,222
Cash, end of year                                                         $  131,373     $   58,876
                                                                        -------------   -------------

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

                                       31

**Note A - Summary of Significant Accounting Policies

Organization and Liquidity**

HydroFlo, Inc. (the Company) was incorporated in North Carolina on December 8,
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, the Company focused primarily on developing and
patenting this new technology for the sewage treatment industry. Beginning July
1, 2002, the Company emerged from the development stage and focused on marketing
and selling their technology to this industry.

The Company has recognized net losses and negative operating cash flow since its
inception. For the year ended June 30, 2003, the Company had a net loss of
$1,153,876 and at year-end had a net shareholder's equity of $148,136. Cash used
in operations during fiscal 2003 totaled $547,798 and an additional $66,005 was
used in acquiring additional property and equipment and for patent related
costs. The Company has funded its initial operations through the sale of common
stock, primarily to related parties. Until such time that the Company can
generate sustained profitable operations, the Company will require additional
funding to further develop, market and distribute its products.

While management believes the Company will be successful in raising additional
capital, there are no assurances that the Company will be successful in
obtaining capital or that such financing will be on terms favorable or
acceptable to the Company and that the Company 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 the Company be unable
to continue as a going concern.

**Cash and Cash Equivalents**

For purposes of the statements of cash flows, the Company considers all
investments purchased with maturities of three months or less to be cash
equivalents.

**Inventory**

Inventory, consisting primarily of production units available for sale, is
stated at the lower of cost or market.

**Property and Equipment**

Property and equipment are stated at cost. The Company's equipment and furniture
are depreciated using the straight-line method for financial reporting purposes
over five and seven year lives, respectively. Expenditures for maintenance and
repairs are charged directly to expense.

**Patent Costs**

Patent costs consist of expenditures  incurred for various patent  applications.
These costs are amortized over the life of the patent. On September 4, 2001, the
first patent was issued to the Company.  The Company  recorded  $560 and $466 of
amortization  expense  during the  fiscal  years  ended June 30,  2003 and 2002,
respectively.

                                       32

**Revenue Recognition**

Revenue in the accompanying statements of operations consists of direct sales or
leases to customers and paid demonstrations of the Company's 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.

**Research and Development Costs**

The Company expenses research and development costs as incurred.

**Advertising Expense**

The Company expenses advertising costs as incurred. Marketing expenses in the
accompanying statements of operations consist primarily of advertising expenses.

**Earnings Per Share**

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.

**Estimates**

Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management 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.

**Income Taxes**

The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences of existing differences between the
financial reporting and income tax reporting basis of assets and liabilities,
and of net operating loss carryforwards for income tax purposes.

**New Accounting Pronouncements**

Accounting for Guarantees

                                       33

In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate FIN 45 will
have a material effect on its financial statements.

Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company does not
believe FIN 46 will have a material effect on its financial statements.

Revenue Recognition

In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables."The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. The Company has not determined the effect of adoption of EITF 00-21 on
its financial statements or the method of adoption it will use.

Stock Based Compensation

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure. "The statement is effective for fiscal
years ending after December 15, 2002. SFAS No. 148 amends certain provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Specifically, SFAS No.
148 states that companies adopting SFAS No. 123 should account for this change
on a prospective basis. SFAS No. 148 requires companies that adopt SFAS No. 123
to do so on a retroactive basis. The Company does not believe that this
statement will have any impact on them as they have not adopted, nor do they
plan to adopt, the fair value-based method of accounting for employee stock
compensation prescribed by SFAS No. 123.

                                       34

At June 30, 2003, the Company has a stock-based employee compensation plan,
which is described more fully in Note G. The Company accounts for that plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123:

                                           2003           2002
                                       -------------  -------------
Net loss, as reported                  $1,153,876       $924,504
Increased compensation expense             11,646         25,269
Pro forma net loss                     $1,165,522       $949,773
                                       =============  =============
Pro forma loss per share                    $0.07          $0.06
                                       =============  =============

Because the SFAS No. 123 method of accounting has not been applied to options
granted, the resulting pro forma compensation cost may not be representative of
that to be expected in future years. The Company used the Black-Scholes Option
Pricing Model to estimate the fair value of stock options granted in fiscal 2003
and 2002 with the following assumptions:

                                                2003      2002
                                               ------    ------
Expected dividend yield                         0.00%     0.00%
Risk-free interest rates                        2.76%     6.05%
                                               ======    ====

**Note B - Royalty Agreement**

On April 1, 2000, the Company entered into a five-year licensing agreement with
a supplier for the right to manufacture and sell the supplier's technology. The
Company canceled this agreement in December 2002. A balance of $22,500 is
included in accounts payable and accrued expenses at June 30, 2003 under the
terms of this agreement. Royalty expense under the licensing agreement was
$12,500 and $20,000 for the years ended June 30, 2003 and 2002, respectively.

**Note C - Lease Commitments**

The Company has a lease for office facilities in Raleigh, North Carolina, with
one month remaining under a non-cancelable agreement. Minimum payments under
noncancelable operating leases are $1,454 for the year ending June 30, 2004.
Lease expense under noncancelable operating facility leases was $17,448 and
$11,398 for the fiscal years ended June 30, 2003, and June 30, 2002,
respectively. Subsequent to yearend, the Company's facility lease expired and
the Company is now on month-to-month lease terms.

**Note D - Related-party Transactions**

Effective December 30, 1999, 13,500,000 shares of the Company's common stock
were acquired by Capital Access, Inc. in exchange for a stock subscription of
$30,000. The subscription balance at June 30, 2003 and 2002 was $6,959. A
director of the Company is a significant stockholder of Capital Access.

                                       35

At June 30, 2003, and June 30, 2002, the Company had amounts payable of $170,500
and $115,300, respectively, due to Free Harbor LLC for management services. A
director of the Company is the managing partner of Free Harbor LLC. Expenses
incurred under this arrangement totaled $55,200 and $53,200, respectively, for
the years ended June 30, 2003 and 2002. As of June 30, 2003, $170,000 of the
payable balance due has been transferred to a non-interest bearing note payable
with payments of $5,000 per month beginning October 1, 2004, and continuing
until paid in full. Future management fees are not payable by the Company until
profitability is reached on a cash basis by the Company.

At June 30, 2003, the Company also had an accounts payable balance of $1,249,
due to a director of the Company for expenses incurred by that director.

**Note E - Shareholders' Equity**

The Company announced a three-for-two stock split effective July 8, 2002, with
the issuance of 5,179,344 shares of common stock and the transfer of $51,794
from additional paid-in capital to the common stock account. All share amounts
in the accompanying financial statements reflect the stock split.

The Company has entered into stock subscriptions on several of their funding
commitments whereby the Company issues stock in exchange for the investors'
promise to fund their aggregate purchase price of the stock over a period of two
years without interest. As of June 30, 2003 and 2002, the subscriptions totaled
$6,959 and $147,259, respectively. The Company had stock subscription receipts
of $140,300 and $67,349 during fiscal 2003 and 2002, respectively, and cancelled
stock subscriptions of $428,200 during fiscal 2002.

The Company has entered into an agreement with its external legal counsel,
whereby said legal counsel provides certain legal services over a two-year
period beginning once the Company became a public reporting issuer in exchange
for 125,000 shares of the Company's 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. As of June 30, 2003, the Company has
recorded $10,416 of expenses, included in general and administrative in the
accompanying statement of operations, for stock that is to be issued to the
legal counsel. As the stock had not been issued prior to June 30, 2003, the
Company recorded the $10,416 as Additional Paid In Capital in the accompanying
balance sheet.

The Company entered into an agreement with an unrelated party during June 2003
whereby that party would assist the Company in re-writing and editing the
Company's business plan during the period from July 2003 to December 2003. In
exchange for these services, the Company issued 37,500 shares of its common
stock to the unrelated party in June 2003. Such amounts have been recorded as
prepaid expenses in the accompanying balance sheet.

**Note F - Common Stock Warrants**

As an incentive to purchase the Company's stock, certain shareholders have been
granted stock purchase warrants. Since inception, warrants to purchase 1,012,500
shares have been granted. The warrants are exercisable at $.22 per share for a
five-year period beginning upon full satisfaction of the shareholders' stock
subscriptions. Due to the cancellation of some stock subscriptions during fiscal
2002, 506,250 of these stock purchase warrants were also cancelled. The Company
has allocated the total amount received from the shareholders to common stock
and stock purchase warrants based on the relative fair values of each component.
The Company has reserved these shares for issuance. As of June 30, 2003, no
warrants have been exercised although all outstanding warrants are exercisable.

                                       36

                                                                  Weighted
                                                                  Average
                                                  Warrants        Exercise
                                                 Outstanding       Price
                                                ------------    ------------
Outstanding at July 1, 2001                      1,012,500            0.22
                                                ============
Warrants granted during fiscal 2002                      0            0.22
Warrants cancelled during fiscal 2002             (506,250)           0.22
                                                ------------
Outstanding at June 30, 2002 and 2003              506,250            0.22
                                                ============
Warrants exercisable at June 30, 2003              506,250            0.22
                                                ------------    ------------

**Note G - Common Stock Options**

The Company has granted options to purchase shares of 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 $1.82 and $1.77 per share for options granted during fiscal 2003
and 2002, respectively. The weighted average remaining contractual lives of
granted options are approximately 4 years. The summary of stock option activity
is shown below:

                                                                Weighted
                                                                 Average
                                                Options         Exercise
                                              Outstanding         Price
                                              ------------    ------------
Outstanding at July 1, 2001                       337,500         $0.22
Options granted during fiscal 2002                337,500          0.22
                                              ------------
Outstanding at June 30, 2002                      675,000          0.22
Options granted during fiscal 2003                337,500          0.22
                                              ------------
Outstanding at June 30, 2003                    1,012,500          0.22
                                              ============
Options exercisable at June 30, 2002              675,000          0.22
                                              ------------    ------------
**Note H - Income Taxes**

A deferred income tax asset arises for the amount of income tax benefits
available in future periods from the income tax net operating loss
carryforwards. In addition, a deferred income tax asset or liability is
established for the amount of income tax benefits or liabilities from the
assumed effect of temporary differences. A valuation allowance is established to
adjust the deferred income tax asset to its estimated net realizable value. The
following table reflects the deferred income tax asset and its related valuation
allowance and deferred income tax liabilities as of June 30, 2003 and 2002:

                                                                                        2003         2002
                                                                                     -----------  ----------
Deferred income tax assets related to net operating loss carryforwards for
    income tax reporting purposes                                                     $474,335     $332,101
Deferred income tax assets related to stock options                                    371,598      147,237
Deferred income tax assets related to other temporary differences                       94,559       12,723
Deferred income tax liability related to book and tax depreciation differences          (5,489)      (1,487)
Less - Valuation allowance                                                            (935,003)    (490,574)
Net deferred income tax asset                                                        -----------  -----------
                                                                                      $      0     $      0
                                                                                     ===========  ===========

                                       37

As of June 30, 2003, the Company has available approximately $1,230,000 of
federal and state net operating loss carryforwards. The carryforwards will
expire periodically beginning in 2015. The criteria for recording a deferred
income tax asset is whether the asset "more likely than not" will be realized.
Due to the uncertainty about the Company's ability to generate future taxable
income, a valuation allowance as of June 30, 2003 and 2002, has been recorded to
offset the full amount of the Company's net deferred income tax assets.

**Note I - Customer Concentrations**

One customer comprised 100% of the accounts receivable balance at June 30, 2003
and 40.7% of revenues for the year then ended. Another customer made up
approximately 56.2% of revenues for the year ended June 30, 2003. A third
customer accounted for 80.0% of the accounts receivable balance at June 30, 2002
and 80.0% of revenues for the year then ended. A fourth customer accounted for
20.0% of the accounts receivable balance at June 30, 2002 and 20.0% of revenues
for the year then ended.

**Note J - Commitments and Contingencies**

In connection with the management agreement with Free Harbor LLC (discussed in
Note D), the Company has 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, the Company has agreed to pay that employee 5% of
pretax profits so long as he remains an employee of the Company.

**Note K - Subsequent Event**

On July 8, 2003, the Company entered into an agreement with an advisor to the
Board of Directors whereby they will obtain services during the period from July
2003 to June 2005 from that advisor in exchange for 40,000 shares of the
Company's common stock.

                                       38
**ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE**

None--Not Applicable

                                    **PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**

The board of directors elects our executive officers annually. A majority vote
of the directors who are in office is required to fill vacancies. Each director
shall be elected for the term of three years, and until his successor is elected
and qualified, or until his earlier resignation or removal. Our directors and
executive officers are as follows:

----------------------------------- ---------- ---------------------------------
Name                                Age        Position
----------------------------------- ---------- ---------------------------------
Dennis L. Mast                      43         Chairman / CEO
----------------------------------- ---------- ---------------------------------
Thomas F. Barbee                    53         Director / President
----------------------------------- ---------- ---------------------------------

Mr. Dennis Mast, Chairman and Chief Executive Officer, founded the company in
December 1999. From 1998 to date, he has been the principal of Capital Access, a
leasing company. From 1999 to date, he has been the principal of Free Harbor
LLC, a management company. From April 1998 to December 1999, Mr. Mast developed
the technology and completed the patent applications for the technology and
processes now being marketed by us. From October 1997 through March 1998, Mr.
Mast served as the Administrative Manager of a sub-grade utility construction
company Pollution Technology, Inc. whose parent company had filed for bankruptcy
and completed the close out of the company. From May 1988 through January 1997,
Mr. Mast served as the President and Chief Executive Officer of an environmental
engineering company Environmental Aspecs, Inc. involved in the cleanup of
hazardous wastes. After his departure from his position at Environmental Aspecs,
Inc. in January 1997, the company filed for Chapter 11 reorganization in 1998.
He was not a participant in the filing. Related civil litigation with a lending
institution was resolved without the finding of any liability on the part of Mr.
Mast. In 1997, Mr. Mast was granted certifications from the North Carolina
Licensing Board for General Contractors for "Highway Construction" and "Public
Utility - Water & Sewer Construction".

                                       39

Mr. Thomas F. Barbee, President, joined HydroFlo, Inc in August 2000 and became
a Director in July 2002. From October 1998 to June 2000, Mr. Barbee was a Senior
Vice President for Brownfields Redevelopment International, LLC, a property
development company. From May 1996 to July 1998, Mr. Barbee held the position of
Regional Business Development Manager at TRC Environmental, Inc., an
environmental consulting company. Prior to joining TRC, Mr. Barbee held senior,
officer level positions with Ecoflo, Inc., an environmental clean-up company,
YWC Southeast, Inc., an environmental consulting and engineering company, and
Handex Environmental Services, an environmental remediation company. Mr. Barbee
has also held senior level technical positions with Parsons/Engineering Science,
Inc., and environmental engineering firm, and received a Bachelor of Science
Degree from Guilford College in 1971.

Mr. W. Keith Webb resigned as a director in April 2003, orally indicating to us
that time conflicts with his existing business prevented him from devoting the
time necessary to remain one of our directors.

Directors serve for a three-year term. Our bylaws currently provide for a board
of directors comprised of a minimum of three directors. We are currently
searching for a new director to replace Mr. Webb.

Board Committees

We currently have no compensation committee or other board committee performing
equivalent functions. Currently, all members of our board of directors
participate in discussions concerning executive officer compensation.

Family Relationships

There are no family relationships among our officers or directors.

Legal Proceedings

Except as set forth above, no officer, director, or persons nominated for such
positions, promoter or significant employee has been involved in legal
proceedings that would be material to an evaluation of our management.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and executive officers, and persons who beneficially own more than 10%
of a registered class of our equity securities, to file reports of beneficial
ownership and changes in beneficial ownership of our securities with the SEC on
Forms 3 (Initial Statement of Beneficial Ownership), 4 (Statement of Changes of
Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial
Ownership of Securities). Directors, executive officers and beneficial owners
of more than 10% of our Common Stock are required by SEC regulations to furnish
us with copies of all Section 16(a) forms that they file. Based solely on review
of the copies of such forms furnished to us, we believe that for the fiscal year
ended June 30, 2003, beneficial owners complied with Section 16(a) filing
requirements applicable to them.

                                       40

**ITEM 10. EXECUTIVE COMPENSATION**Executive Compensation

The following table sets forth summary information concerning the compensation
received for services rendered to us during the fiscal years ended June 30, 2002
and 2003 respectively by our Chief Executive Officer and President.

----------------------------------- ----------------- ------------ ----------------- ---------------------
Name                                Position          Year         Salary            Dollar Value of
                                                                                     Stock-Based
                                                                                     Compensation
----------------------------------- ----------------- ------------ ----------------- ---------------------
Dennis Mast (1)                     CEO               2002         $53,200
----------------------------------- ----------------- ------------ ----------------- ---------------------
                                                      2003         $55,200
----------------------------------- ----------------- ------------ ----------------- ---------------------
Thomas Barbee (2)                   President         2002         $100,000          $347,560
----------------------------------- ----------------- ------------ ----------------- ---------------------
                                                      2003         $100,000          $582,000
----------------------------------- ----------------- ------------ ----------------- ---------------------

(1) Mr. Mast's services are provided under an agreement with his affiliate, Free
Harbor, LLC. These amounts have not yet been paid. These numbers reflect that in
June 2002, the management fee was reduced to $2,600 due to some time off and
that for the other 11 months of fiscal year 2002 and fiscal year 2003, the
management fee was $4,600 per month.

(2) Mr. Barbee has a written memorandum of employment with us.

The value of Mr. Barbee's stock-based compensation, as described more fully
below, totaled $347,560 and $582,000 during fiscal years 2002 and 2003,
respectively. Such amounts were estimated in the stock option pricing models at
each grant date.

Both agreements are terminable at will by either party without notice.

No other annual compensation, including a bonus or other form of compensation;
and no long-term compensation, including restricted stock awards, securities
underlying options, LTIP payouts, or other form of compensation, were paid to
Mr. Mast during these periods.

Compensation Agreements

At June 30, 2003, and June 30, 2002, the Company had amounts payable of $170,500
and $115,300, respectively, due to Free Harbor LLC for management services. Mr.
Mast is the managing partner of Free Harbor LLC. Expenses incurred under this
arrangement totaled $55,200 and $53,200, respectively, for the years ended
June 30, 2003 and 2002. As of June 30, 2003, $170,000 of the payable balance due
has been transferred to a non-interest bearing note payable with payments of
$5,000 per month beginning October 1, 2004, and continuing until paid in full.
Future management fees are not payable by the Company until profitability is
reached on a cash basis by the Company.

                                       41

We initially agreed to pay Mr. Barbee $86,000 per year for a four day work week
prior to 2001, increased by amendment to $100,000 per year for a five day work
week commencing in 2001. Stock options granted to him under terms of his
employment memorandum amount to 337,500 shares per year for 6 years beginning
August 2000, exercisable annually beginning August 2001 and expiring 6 years
after each annual grant at a price of $0.22 per share. Upon profitability after
deduction for all business expenses, depreciation and amortization, Barbee is
entitled to a bonus of up to 5% of our pre-tax profits after deduction for all
business expenses, depreciation and amortization annually so long as he remains
an employee of HydroFlo. So long as he remains an employee of HydroFlo, we have
agreed to grant him 337,500 options to purchase shares of common stock at $0.22
per share annually in August through 2006.

Board Compensation

Members of our Board of Directors do not receive cash compensation for their
services as Directors, although some Directors are reimbursed for reasonable
expenses incurred in attending Board or committee meetings. In the future, we
may have to consider compensating any outside directors that become members of
our board.

**ITEM 11. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS**

      -------------------------------------- --------------------------- --------------
      Name and Address                       Number of Shares of         Percentage
                                             Common Stock
      -------------------------------------- --------------------------- --------------
      Dennis L. Mast                         13,500,000                  85.4
      4418 Penrose Valley Circle
      Cary, NC 27511(1)
      -------------------------------------- --------------------------- --------------
      Milford S. Mast (2)                     1,312,500                   8.3
      466 N. Manor Road
      Elverson, PA  19520
      -------------------------------------- --------------------------- --------------
      All directors and named executive      13,500,000                  85.4
      officers as a group
      (2 persons)
      -------------------------------------- --------------------------- --------------

     (1)  Shares owned by Capital Access, of which Mr. Dennis Mast is the
          principal.
     (2)  Includes shares owned by Regional Marketing Co., of which Milford
          Mast, father of Dennis Mast, is the principal.

This table is based upon information derived from our stock records. Unless
otherwise indicated in the footnotes to this table and subject to community
property laws where applicable, it believes that each of the shareholders named
in this table has sole or shared voting and investment power with respect to the
shares indicated as beneficially owned. Applicable percentages are based upon
15,811,050 shares of common stock outstanding as of July 15, 2003.

                                       42

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

Effective December 30, 1999, 13,500,000 shares of our common stock were acquired
by Capital Access, Inc. in exchange for a stock subscription of $30,000. The
subscription balance at June 30, 2003 was $6,959. Dennis Mast is the principal
shareholder of Capital Access.

At June 30, 2003, and June 30, 2002, the Company had amounts payable of $170,500
and $115,300, respectively, due to Free Harbor LLC for management services. Mr.
Mast is the managing partner of Free Harbor LLC. Expenses incurred under this
arrangement totaled $55,200 and $53,200, respectively, for the years ended
June 30, 2003 and 2002. As of June 30, 2003, $170,000 of the payable balance due
has been transferred to a non-interest bearing note payable with payments of
$5,000 per month beginning October 1, 2004, and continuing until paid in full.
Future management fees are not payable by the Company until profitability is
reached on a cash basis by the Company.

Mr. Mast has provided personal guarantees for the office lease, for business
telephone service and for cellular telephone service.

Other than the above transactions, we have not entered into any material
transactions with any director, executive officer, and nominee for director,
beneficial owner of five percent or more of our common stock, or family members
of such persons. Also, we have not had any transactions with any promoter. We
are not a subsidiary of any company.

**ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**Exhibits

31.  Certification
32.  Certification

Reports on Form 8-K

8-K [html][text] Current report, items 5 and 7 - 2003-06-17
8-K [html][text] Current report, item 5 - 2003-06-02
8-K [html][text] Current report, items 4 and 7 - 2003-06-03
8-K [html][text] Current report, item 5 - 2003-05-19.

                                       43

**ITEM 14. CONTROLS AND PROCEDURES**

Within 90 days prior to the date of filing of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer (who also effectively serves as our
Principal Financial Officer), of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
concluded that our disclosure controls and procedures are effective for the
gathering, analyzing and disclosing the information we are required to disclose
in the reports we file under the Securities Exchange Act of 1934, within the
time periods specified in the SEC's rules and forms. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of this
evaluation.

                                   **SIGNATURES**

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf Hydroflo, Inc.

---------------------------- -------------------------- -------------------------- --------------------------
Title                        Name                       Date                       Signature
---------------------------- -------------------------- -------------------------- --------------------------
Principal Executive Officer  Dennis Mast                9/19/03                    /s/  Dennis Mast
---------------------------- -------------------------- -------------------------- --------------------------
Principal Accounting         Dennis Mast                9/19/03                    /s/  Dennis Mast
Officer
---------------------------- -------------------------- -------------------------- --------------------------
Principal Financial Officer  Dennis Mast                9/19/03                    /s/  Dennis Mast
---------------------------- -------------------------- -------------------------- --------------------------

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

---------------------------- -------------------------- -------------------------- --------------------------
SIGNATURE                    NAME                       TITLE                      DATE
---------------------------- -------------------------- -------------------------- --------------------------
/s/  Dennis Mast             Dennis Mast                Director                   9/19/03
---------------------------- -------------------------- -------------------------- --------------------------
/s/  Thomas Barbee           Thomas Barbee              Director                   9/19/03
---------------------------- -------------------------- -------------------------- --------------------------
```