10-K 1 hydroflo10k2004.htm ANNUAL REPORT


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 2005

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________ to _____________

                       Commission file number: 000-50355

                                 HydroFlo, Inc.
               (Exact Name of Registrant Specified in Its Charter)

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


                       2501 Reliance Ave., Apex, NC 27539
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number (919) 772-9925

       Securities registered under Section 12(b) of the Exchange Act: NONE

         Securities registered under Section 12(g) of the Exchange Act:

                       $0.01 PAR VALUE COMMON VOTING STOCK
                                (Title of class)

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-K
or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12B-2) Yes |_| No |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

            State issuer's revenues for its most recent fiscal year.
                                       $0
                       ___________________________________

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $7,721,200 at December 31,
2005, based on the closing sale price of $.22 per share for the common stock on
such date on the OTCBB.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 41,706,761 Issued common shares as of
September 1, 2005.

              DOCUMENTS INCORPORATED BY REFERENCE - NOT APPLICABLE.

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




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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

As a business development company, we provide long-term debt and equity
investment capital to support the expansion of companies in a variety of
industries. We generally invest in illiquid securities through privately
negotiated transactions. We generally invest in private small to middle market
companies. Our investment and lending activity is generally focused in private
finance.

Our investment portfolio consists primarily of equity investments in companies,
which may or may not constitute a controlling equity interest. At June 30, 2005,
our investment portfolio totaled $25,153,200 at fair value. Our investment
objective is to achieve current income and capital gains.

CORPORATE HISTORY

(a) Business Development.

HydroFlo, Inc. ("the Company") was incorporated in North Carolina on December
30, 1999. We operate a website at http://www.hydroflo.us. The Company began
trading on the OTC Bulletin Board on May 23, 2003. Effective March 4, 2004, the
Company converted to a Business Development Company under the Investment Company
Act of 1940.

SUBSIDIARIES, THEIR PRODUCTS, SERVICES, AND MARKETS

The Company had four subsidiaries at the end of the reporting fiscal year:

1.) HydroFlo Water Treatment, Inc.

HydroFlo Water Treatment, Inc. is a provider of wastewater treatment solutions
for industrial and governmental entity customers. They design, build, and
install aeration equipment used for pre-treatment of wastewater. They 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 (PLUS) pre-treatment system,
customers begin the treatment process at their pumping stations prior to the
wastewater reaching a treatment plant.

2.) Metals & Arsenic Removal Technology, Inc.

On August 4, 2004 the Company acquired Arsenic Removal Technology, Inc, a
company holding the arsenic removal technology rights developed by the
University of Wyoming. This portfolio company was purchased using 2,823,529
shares of restricted common stock of the Company, valued at approximately
$480,000 based on the fair market value of the shares issued on that date. We
hold 100% of the stock in this company and plan to develop and market the
technology throughout the world. After purchase, the company was re-incorporated
in North Carolina with a change of name to Metals & Arsenic Removal Technology,
Inc.

3.) Safety Scan Technology, Inc.

On December 20, 2004 the company acquired 100% of Safety Scan Technology, Inc.,
a company holding the rights to a patented process known as Swept Frequency
Acoustic Interferometry (SFAI) that is a non-invasive measurement technique that
uses high frequency sound waves to determine the properties of fluids in sealed
containers. The company was acquired by issuing 3,485,000 shares of restricted
common stock of the Company valued at approximately $697,000.

4) Ultra Choice Water, Inc.

On April 12, 2005 Hydroflo, Inc. established a 100% owned portfolio company,
Ultra Choice Water, Inc., for the purpose of providing water coolers without




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bottles and other water delivery products for offices and individual consumers.
This company will provide water treatment systems to commercial and residential
customers for a monthly fee or direct sale. Ultra Choice Water, Inc. will use
water purification media supplied by Metals and Arsenic Removal Technology, Inc.
(MARTI), another portfolio company of Hydroflo, Inc.

DISTRIBUTION METHOD OF THE PRODUCTS AND SERVICES

HydroFlo Water Treatment sells their products and services through a combination
of direct sales and sales through manufacturer's representatives. The
distribution is directed to both the private sector, such as industrial food
processing plants, and the governmental sector, both domestic and foreign.

Metals & Arsenic Removal Technology sells their products and services through a
combination of direct sales and sales through manufacturer's representatives.
Sales are also planned through an online web-based purchase platform in
development as of year end. Distribution is directed to both consumers and
industrial/municipal installations.

As of year end, the products of Safety Scan Technology, Inc. are still in
development, and Ultra Choice Water, Inc. has not yet commenced product sales.

COMPETITIVE BUSINESS CONDITIONS

The wastewater treatment and water filtration industries are increasingly
competitive with 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 and water filtration firms. In addition,
many of our competitors offer less effective but similar services at less cost
than us and have the financial resources to create more attractive pricing.

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. This patent provides the company the protection for the
addition of air or oxygen to wastewater in the pipeline system for the purpose
of wastewater pre-treatment.

RESEARCH AND DEVELOPMENT

The Company currently has no research and development group. Periodically, we
make refinements to our products on a line production basis.

NUMBER OF EMPLOYEES

As of the close of the reporting period, the Company had 2 employees, HydroFlo
Water Treatment had 4 employees, Metals & Arsenic Technology, Inc. had 3
employees, and Safety Scan Technology, Inc. had 1 employee.

RECENT DEVELOPMENTS

On July 15, 2005, the Company formed a portfolio company, Advanced Water
Recycle, Inc., to combine resources from each of the Company's current portfolio
companies to provide customers with water recycling and reuse. On September 13,
2005, the Company received a second subpoena from the SEC regarding a
non-public, fact-finding inquiry into activities of other entities not managed
by HydroFlo, Inc. The company has complied with the subpoena.

REGULATION OF A BUSINESS DEVELOPMENT COMPANY

A business development company is defined and regulated by the 1940 Act. A
business development company must be organized in the United States for the
purpose of investing in or lending to primarily private companies and making
managerial assistance available to them. A business development company may use
capital provided by public shareholders and from other sources to invest in




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long-term, private investments in businesses. A business development company
provides shareholders the ability to retain the liquidity of a publicly traded
stock, while sharing in the possible benefits, if any, of investing in primarily
privately owned companies.

As a business development company, we may not acquire any asset other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represent at least 70% of the value of our total assets.

The principal categories of qualifying assets relevant to our business are:

        o Securities purchased in transactions not involving any public offering,
the issuer of which is an eligible portfolio company;

        o Securities received in exchange for or distributed with respect to
securities described in the bullet above or pursuant to the exercise of options,
warrants or rights relating to such securities; and

        o Cash, cash items, government securities or high quality debt securities
(within the meaning of the 1940 Act), maturing in one year or less from the time
of investment.

An eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly owned
by a business development company), and that:

        o does not have a class of securities registered on an exchange or a class
of securities with respect to which a broker may extend margin credit;

        o is actively controlled by the business development company and has an
affiliate of a business development company on its board of directors; or

        o meets such other criteria as may be established by the SEC.

Control under the 1940 Act is presumed to exist where a business development
company beneficially owns more than 25% of the outstanding voting securities of
the portfolio company.

To include certain securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities significant managerial assistance such as
providing significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company or making
loans to a portfolio company. We offer to provide managerial assistance to each
of our portfolio companies.

As a business development company, we are entitled to issue senior securities in
the form of stock or senior securities representing indebtedness, including debt
securities and preferred stock, as long as each class of senior security has an
asset coverage of at least 200% immediately after each such issuance.

We may also be prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior approval of our board
of directors who are not interested persons and, in some cases, prior approval
by the SEC.

We are periodically examined by the SEC for compliance with the 1940 Act. As of
the date of this filing we have not been examined by the SEC and have not been
notified of a pending examination.

As with other companies regulated by the 1940 Act, a business development
company must adhere to certain substantive regulatory requirements. A majority
of our directors must be persons who are not interested persons, as that term is
defined in the 1940 Act. Additionally, we are required to provide and maintain a
bond issued by a reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a business development company, we are
prohibited from protecting any director or officer against any liability to the
Company or our shareholders arising from willful malfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's office.

We maintain a code of ethics that establishes procedures for personal investment
and restricts certain transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in securities that may be
purchased or held by us.




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As a business development company under the 1940 Act, we are entitled to provide
loans to our employees in connection with the exercise of options. However, as a
result of provisions of the Sarbanes-Oxley Act of 2002, we are prohibited from
making new loans to, or materially modifying existing loans with, our executive
officers in the future.

We may not change the nature of our business so as to cease to be, or withdraw
our election as, a business development company unless authorized by vote of a
"majority of the outstanding voting securities," as defined in the 1940 Act, of
our shares. A majority of the outstanding voting securities of a company is
defined under the 1940 Act as the lesser of: (i) 67% or more of such company's
shares present at a meeting if more than 50% of the outstanding shares of such
company are present and represented by proxy or (ii) more than 50% of the
outstanding shares of such company. Since we made our business development
company election, we have not made any substantial change in the nature of our
business.

REGULATED INVESTMENT COMPANY STATUS

We are currently taxed as an ordinary corporation under Subchapter C of the
Internal Revenue Code. We intend to elect to be treated as a "regulated
investment company" or "RIC" under Subchapter M of the Internal Revenue Code
with the filing of our federal corporate income tax return for June 30, 2005,
which election would be effective as of July 1, 2004. As a RIC, we generally
will not have to pay corporate taxes on any income we distribute to our
stockholders as dividends, which will allow us to reduce or eliminate our
corporate-level tax liability.

Taxation as a Regulated Investment Company

If we: qualify as an RIC, and distribute each year to stockholders at least 90%
of our "investment company taxable income" (which is defined in the Internal
Revenue Code generally as ordinary income plus net short-term capital gains in
excess of net long-term capital losses), and 90% of any ordinary pre-RIC
built-in gains we recognize between July 1, 2004 and June 30, 2014, less our
taxes due on those gains (collectively, the "90% distribution requirement"), we
will be entitled to deduct, and therefore will not be subject to U.S. federal
income tax on, the portion of our income we distribute to stockholders other
than any built-in gain recognized between July 1, 2004 and June 30, 2014. We
will be subject to U.S. federal income tax at the regular corporate rate on any
income not distributed (or deemed distributed) to our stockholders. We will be
subject to a 4% nondeductible U.S. federal excise tax to the extent we do not
distribute (actually or on a deemed basis) in a timely manner 98% of our
ordinary income for each calendar year, 98% of our capital gain net income for
the one-year period ending October 31 in that calendar year, and any income
realized but not distributed in prior calendar years. We generally will endeavor
in each taxable year to avoid any U.S. federal excise taxes on our earnings

In order to qualify as an RIC for federal income tax purposes, we must, among
other things: at all times during each taxable year; continue to qualify as a
business development company under the 1940 Act derive in each taxable year at
least 90% of our gross income from dividends, interest, payments with respect to
certain securities, loans, gains from the sale of stock or other securities, or
other income derived with respect to our business of investing in such stock or
securities (known as the "90% Income Test"); and diversify our holdings so that
at the end of each quarter of the taxable year, at least 50% of the value of our
assets consists of cash, cash items, U.S. government securities, securities of
other RICs, and other securities if such other securities of any one issuer do
not represent more than 5% of the value of our assets or more than 10% of the
outstanding voting securities of the issuer, and no more than 25% of the value
of our assets is invested in the securities, other than U.S. government
securities or securities of other RICs, of one issuer or of two or more issuers
that are controlled, as determined under applicable Internal Revenue Code rules,
by us and are engaged in the same or similar or related trades or businesses
(known as the "Diversification Tests").

In the case of certain venture capital investment companies, the 5% of assets
and 10% of voting power diversification requirements are significantly altered.
The purpose for these special rules is to permit certain investment companies to
provide most of the capital needed to finance a particular development
corporation. To qualify for this exception, the RIC must be certified by the
Securities and Exchange Commission as a management company or business
development company described inss.851(a)(1) that is principally engaged in
furnishing capital to development corporations which, in turn, are principally
engaged in the development or exploitation of inventions, technological
improvements, new processes or products, or products not previously generally
available.

If the company qualifies as a venture capital RIC, then for purposes of the 50%
assets test the company may count the stock or securities of an issuer, whether
or not the company holds more than 10% of the issuer's outstanding voting
securities. Moreover, the 5% of value limitation is modified so that the RIC may
hold an issuer's securities of which the basis (rather than value), when added
to the basis of previously acquired securities of that issuer, does not exceed
5% of the value of the RIC's total assets as of the date of the latest
acquisition of securities of that issuer.




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We may be required to recognize taxable income in circumstances in which we do
not receive cash. For example, if we hold debt obligations that are treated
under applicable tax rules as having original issue discount, we must include in
income each year a portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing such income is
received by us in the same taxable year. We also may have to include in income
other amounts that we have not yet received in cash, such as payment-in-kind
interest and deferred loan origination fees that are paid after origination of
the loan or are paid in non-cash compensation such as warrants or stock.
Additionally, we will have to include in income amounts previously deducted with
respect to certain restricted stock granted to our employees, if such stock is
forfeited. Because any original issue discount or other amounts accrued will be
included in our investment company taxable income for the year of accrual, we
may be required to make a distribution to our stockholders in the amount of that
non-cash income in order to satisfy the 90% Distribution Requirement, even
though we will not have received any cash representing such income.

If we fail to satisfy the 90% Distribution Requirement or otherwise fail to
qualify as an RIC in any taxable year, we will be subject to tax in that year on
all of our taxable income, regardless of whether we make any distributions to
our stockholders. In that case, all of our income will be subject to
corporate-level tax, reducing the amount available to be distributed to our
stockholders, and all of our distributions to our stockholders will be
characterized as ordinary dividends (to the extent of our current and
accumulated earnings and profits). Such dividends generally will be subject to
tax to non-corporate U.S. Stockholders (as defined below) at a maximum rate of
15 percent.

Treatment of Pre-Conversion Built-in Gain

As of July 1, 2004, we held substantial assets (including intangible assets not
reflected on the balance sheet, such as goodwill) with built-in gain (i.e., with
a fair market value in excess of tax basis). Under a special tax rule that
applies to corporations that convert from taxation under Subchapter C of the
Internal Revenue Code to taxation as an RIC, we are required to pay corporate
level tax on the amount of any net built-in gains we recognize within ten years
after the effective date of our election to be treated as an RIC. Any such
corporate level tax will be payable at the time those gains are recognized
(which, generally, will be the years in which we sell or dispose of the built-in
gain assets in a taxable transaction). Based on the assets we currently
anticipate selling within the ten-year period beginning July 1, 2004 and ending
June 30, 2014, we do not expect that we will have to pay a built-in gain tax.
The amount of this tax will vary depending on the assets that are actually sold
by us in this ten-year period and applicable tax rates. Under Treasury
Regulations, recognized built-in gains (or losses) will generally retain their
character as capital gain or ordinary income (or capital or ordinary losses).
Recognized built-in gains that are ordinary in character will be included in our
investment company taxable income, and we must distribute to our stockholders at
least 90% of any such built-in gains recognized within the ten-year period, net
of the corporate taxes paid by us on the built-in gains. Any such amount
distributed will be taxable to stockholders as ordinary income.

Recognized built-in gains within the ten-year period, net of taxes, that are
capital gains will be distributed or deemed distributed to our stockholders. Any
such amount distributed or deemed distributed will be taxable to stockholders as
a capital gain.

Taxation of U.S. Stockholders

For purposes of the following discussion, a "U.S. Stockholder" is a stockholder
who is for U.S. federal income tax purposes (i) an individual who is a citizen
or resident of the United States, (ii) a corporation (or other entity treated as
a corporation for U.S. federal income tax purposes) created or organized in or
under the laws of the United States, any State or the District of Columbia or
otherwise treated or taxed as a United States corporation for U.S. federal
income tax purposes, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust, or (v) a certain
electing trust. If a partnership holds shares, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. Partners of partnerships holding shares should consult their
tax advisor as to whether they are Non-U.S. Stockholders and with respect to the
purchase, ownership and disposition of our common stock.

Distributions by us generally will be taxable to U.S. Stockholders as ordinary
income or capital gains. Distributions of our "investment company taxable
income" (which is, generally, our ordinary income plus realized net short-term
capital gains in excess of realized net long-term capital losses) will be
taxable as ordinary income to U.S. Stockholders to the extent of our current or
accumulated earnings and profits, whether paid in cash or reinvested in




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additional common stock. Under new legislation, ordinary dividends that consist
of dividends we have received from qualifying corporations will be taxed to
non-corporate U.S. Stockholders at a maximum rate of 15 percent. Dividends
distributed by us generally will not be eligible for this lower rate of
taxation.

Distributions of our net capital gains (which is, generally, our realized net
long-term capital gains in excess of realized net short-term capital losses)
properly designated by us as "capital gain dividends" will be taxable to a U.S.
Stockholder as long-term capital gains regardless of the U.S. Stockholder's
holding period for his or her common stock and regardless of whether paid in
cash or reinvested in additional common stock. Distributions in excess of our
current and accumulated earnings and profits first will reduce a U.S.
Stockholder's adjusted tax basis in such U.S. Stockholder's common stock and,
after the adjusted basis is reduced to zero, will constitute capital gains to
such U.S. Stockholder. Under new legislation, capital gain dividends will be
taxed to non-corporate U.S. Stockholders at a maximum rate of 15 percent.

We intend to retain some or all of our capital gains, but to designate the
retained amount as a "deemed distribution". In that case, among other
consequences, we will pay corporate-level tax on the retained amount, each U.S.
Stockholder will be required to include his or her share of the deemed
distribution in income as if it had been actually distributed to the U.S.
Stockholder, and the U.S. Stockholder will be entitled to claim a credit or
refund equal to its allocable share of the corporate-level tax we pay on the
retained capital gain. The amount of the deemed distribution net of such tax
will be added to the U.S. Stockholder's cost basis for his or her common stock.
Since we expect to pay tax on any retained capital gains at our regular
corporate capital gain tax rate, and since that rate is in excess of the maximum
rate currently payable by individuals on long-term capital gains, the amount of
tax that individual U.S. Stockholders will be treated as having paid will exceed
the tax they owe on the capital gain dividend and such excess generally may be
refunded or claimed as a credit against the U.S. Stockholder's other U.S.
federal income tax obligations. A U.S. Stockholder that is not subject to U.S.
federal income tax or otherwise required to file a U.S. federal income tax
return would be required to file a U.S. federal income tax return on the
appropriate form in order to claim a refund for the taxes we paid. In order to
utilize the deemed distribution approach, we must provide written notice to our
stockholders prior to the expiration of 60 days after the close of the relevant
tax year.

We will be subject to the alternative minimum tax ("AMT"), but any items that
are treated differently for AMT purposes must be apportioned between us and our
stockholders, and this may affect the stockholders' AMT liabilities. Although
regulations explaining the precise method of apportionment have not yet been
issued by the Internal Revenue Service, the Company intends in general to
apportion these items in the same proportion that dividends paid to each
stockholder bear to our taxable income (determined without regard to the
dividends paid deduction), unless we determine that a different method for a
particular item is warranted under the circumstances. You should consult your
own tax advisor to determine how an investment in our stock could affect your
AMT liability.

For purposes of determining (i) whether the 90% distribution requirement is
satisfied for any year and (ii) the amount of capital gains dividends paid for
that year, we may, under certain circumstances, elect to treat a dividend that
is paid during the following taxable year as if it had been paid during the
taxable year in question. If we make such an election, the U.S. Stockholder will
still be treated as receiving the dividend in the taxable year in which the
distribution is made, and any capital gain dividend will be treated as a capital
gain dividend to the U.S. Stockholder. Any dividend declared by us in October,
November, or December of any calendar year, payable to stockholders of record on
a specified date in such a month and actually paid during January of the
following year, will be treated as if it had been received by our U.S.
Stockholders on December 31 of the year in which the dividend was declared.

You should consider the tax implications of buying common stock just prior to a
distribution. Even if the price of the common stock includes the amount of the
forthcoming distribution, you will be taxed upon receipt of the distribution and
will not be entitled to offset the distribution against the tax basis in your
common stock.

You may recognize taxable gain or loss if you sell or exchange your common
stock. The amount of the gain or loss will be measured by the difference between
your adjusted tax basis in your common stock and the amount of the proceeds you
receive in exchange for such stock. Any gain or loss arising from, or, in the
case of distributions in excess of the sum of our current and accumulated
earnings and profits and your tax basis in the stock, treated as arising from,
the sale or exchange of our common stock generally will be a capital gain or
loss. This capital gain or loss normally will be treated as a long-term capital
gain or loss if you have held your common stock for more than one year.
Otherwise, it will be classified as short-term capital gain or loss. However,
any capital loss arising from the sale or exchange of common stock held for six
months or less generally will be treated as a long-term capital loss to the
extent of the amount of capital gain dividends received, or treated as deemed
distributed, with respect to such stock and, for this purpose, the special rules
of Section 852(b)(4)(C) of the Internal Revenue Code generally apply in
determining the holding period of such stock.




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On May 28, 2003, a new federal tax law was enacted that generally reduces the
maximum rate of taxation on non-corporate taxpayers for certain dividends and
net long-term capital gains (i.e., the excess of net long-term capital gains
over net short-term capital losses for a taxable year) from 20% to 15% (from May
6, 2003 through December 31, 2008). The 15% tax rate for net long-term capital
gains and dividends will generally apply to: (1)U.S. Stockholders' long-term
capital gains, if any, recognized on the disposition of our shares; (2)our
distributions designated as capital gain dividends; and (3)our distributions
consisting of dividends we have received from qualifying corporations (which we
generally do not receive). Corporate U.S. Stockholders currently are subject to
U.S. federal income tax on net capital gain at the maximum 35% rate also applied
to ordinary income. Tax rates imposed by states and local jurisdictions on
capital gain and ordinary income may differ.

We will send to each of our U.S. Stockholders, as promptly as possible after the
end of each calendar year, a notice detailing, on a per share and per
distribution basis, the amounts includible in such U.S. Stockholder's taxable
income for such year as ordinary income (including the portion, if any, taxable
at the lower effective rate applicable to dividends consisting of dividends we
have received) and as long-term capital gain. In addition, the U.S. federal tax
status of each year's distributions generally will be reported to the Internal
Revenue Service. Distributions may also be subject to additional state, local,
and foreign taxes depending on a U.S. Stockholder's particular situation.
Dividends distributed by us generally will not be eligible for the
dividends-received deduction.

Backup withholding may apply to taxable distributions on the common stock with
respect to certain non-corporate U.S. Stockholders. Such U.S. Stockholders
generally will be subject to backup withholding unless the U.S. Stockholder
provides its correct taxpayer identification number and certain other
information, certified under penalties of perjury, to the dividend paying agent,
or otherwise establishes an exemption from backup withholding. Any amount
withheld under backup withholding is allowed as a credit against the U.S.
Stockholder's U.S. federal income tax liability, provided the proper information
is provided to the Internal Revenue Service.

Taxation of Non-U.S. Stockholders

For purposes of the following discussion, a "Non-U.S. Stockholder" is a person
who is not a U.S. Stockholder.

Whether an investment in our common stock is appropriate for a Non-U.S.
Stockholder will depend upon that person's particular circumstances. Non-U.S.
Stockholders should consult their tax advisors before investing in our common
stock.

Distributions of our "investment company taxable income" to Non-U.S.
Stockholders (including interest income and realized net short-term capital
gains in excess of realized long-term capital losses, which generally would be
free of withholding if paid to Non-U.S. Stockholders directly) will be subject
to withholding of federal tax at a 30% rate (or lower rate provided by an
applicable treaty) to the extent of our current and accumulated earnings and
profits unless an applicable exception applies. If the distributions are
effectively connected with a U.S. trade or business of the Non-U.S. Stockholder,
and, if an income tax treaty applies, attributable to a permanent establishment
in the United States, we will not be required to withhold federal tax if the
Non-U.S. Stockholder complies with applicable certification and disclosure
requirements, although the distributions will be subject to federal income tax
at the rates applicable to U.S. persons. (Special certification requirements
apply to a Non-U.S. Stockholder that is a foreign partnership or a foreign
trust, and such entities are urged to consult their own tax advisors.)

In addition, with respect to certain distributions made to Non-U.S. stockholders
in our taxable years beginning after December 31, 2004 and before January 1,
2008, no withholding will be required and the distributions generally will not
be subject to U.S. federal income tax if (i) the distributions are properly
designated in a notice timely delivered to our stockholders as "interest-related
dividends" or "short-term capital gain dividends," (ii) the distributions are
derived from sources specified in the Code for such dividends and (iii) certain
other requirements are satisfied. Any distributions of any pre-conversion
built-in gains recognized between January 1, 2004 and December 31, 2013 (as
discussed under "--Treatment of Pre- Conversion Built-In Gain" above) that are
ordinary income will also be taxable to Non-U.S. Stockholders in the same manner
as distributions of our investment company taxable income.

Actual or deemed distributions of our net capital gains to a Non-U.S.
Stockholder (including any distributions of any pre-conversion built-in gains
recognized between January 1, 2004 and December 31, 2013 that are capital
gains), and gains realized by a Non-U.S. Stockholder upon the sale or redemption
of our common stock, will not be subject to U.S. federal income tax unless the
distributions or gains, as the case may be, are effectively connected with a
U.S. trade or business of the Non-U.S. Stockholder and, if an income tax treaty
applies, are attributable to a permanent establishment maintained by the
Non-U.S. Stockholder in the United States, or, in the case of an individual, the
Non-U.S. Stockholder was present in the U.S. for 183 days or more during the
taxable year and certain other conditions are met.




                                       8




If we distribute our net capital gains in the form of deemed rather than actual
distributions (which we currently intend to do), a Non-U.S. Stockholder will be
entitled to a U.S. federal income tax credit or tax refund equal to the
stockholder's allocable share of the corporate-level tax we pay on the capital
gains deemed to have been distributed; however, in order to obtain the refund,
the Non-U.S. Stockholder must obtain a U.S. taxpayer identification number and
file a U.S. federal income tax return even if the Non-U.S. Stockholder would not
otherwise be required to obtain a U.S. taxpayer identification number or file a
U.S. federal income tax return. For a corporate Non-U.S. Stockholder,
distributions (both actual and deemed), and gains realized upon the sale or
redemption of our common stock that are effectively connected to a U.S. trade or
business may, under certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate (or at a lower rate if provided for by an applicable
treaty). Accordingly, investment in our stock may not be appropriate for a
Non-U.S. Stockholder.

A Non-U.S. Stockholder who is a nonresident alien individual, and who is
otherwise subject to withholding of U.S. federal income tax, may be subject to
information reporting and backup withholding of U.S. federal income tax on
dividends unless the Non-U.S. Stockholder provides us or the dividend paying
agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise
meets documentary evidence requirements for establishing that it is a Non-U.S.
Stockholder or the Non-U.S. Stockholder otherwise establishes an exemption from
backup withholding.

Non-U.S. Stockholders should consult their own tax advisors with respect to the
U.S. federal income tax and withholding tax, and state, local, and foreign tax,
consequences of an investment in our common stock.

RISK FACTORS

INVESTING IN HYDROFLO INVOLVES A NUMBER OF SIGNIFICANT RISKS RELATING TO OUR
BUSINESS AND INVESTMENT OBJECTIVE. AS A RESULT, THERE CAN BE NO ASSURANCE THAT
WE WILL ACHIEVE OUR INVESTMENT OBJECTIVE. IN ADDITION TO THE RISK FACTORS
DESCRIBED BELOW, OTHER FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE:

        o GLOBAL ECONOMIC DOWNTURNS, COUPLED WITH WAR OR THE THREAT OF WAR;

        o RISK ASSOCIATED WITH POSSIBLE DISRUPTION IN OUR OPERATIONS DUE TO
          TERRORISM;

        o FUTURE REGULATORY ACTIONS AND CONDITIONS IN OUR OPERATING AREAS;
          AND

        o OTHER RISKS AND UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO
          TIME IN OUR PUBLIC ANNOUNCEMENTS AND SEC FILINGS.

INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK. Our portfolio
consists of primarily investments in private companies. Investments in private
businesses involve a high degree of business and financial risk, which can
result in substantial losses and accordingly should be considered speculative.
There is generally no publicly available information about the companies in
which we invest, and we rely significantly on the diligence of our employees and
agents to obtain information in connection with our investment decisions. In
addition, some smaller businesses have narrower product lines and market shares
than their competition, and may be more vulnerable to customer preferences,
market conditions or economic downturns, which may adversely affect the return
on, or the recovery of, our investment in such businesses.

OUR PORTFOLIO OF INVESTMENTS IS ILLIQUID. We generally acquire our investments
directly from the issuer in privately negotiated transactions. The majority of
the investments in our portfolio may be subject to restrictions on resale or
otherwise have no established trading market. We typically exit our investments
when the portfolio company has a liquidity event such as a sale,
recapitalization, or initial public offering of the company. The illiquidity of
our investments may adversely affect our ability to dispose of debt and equity
securities at times when it may be otherwise advantageous for us to liquidate
such investments. In addition, if we were forced to immediately liquidate some
or all of the investments in the portfolio, the proceeds of such liquidation
would be significantly less than the current value of such investments.

Substantially all of our portfolio investments are recorded at fair value as
determined in good faith by our board of directors or as determined by a
business valuation expert and, as a result, there is uncertainty regarding the
value of our portfolio investments. At June 30, 2005, approximately 99.7% of our
total assets represented portfolio investments recorded at fair value. Pursuant
to the requirements of the 1940 Act, we value substantially all of our
investments at fair value as determined in good faith by our board of directors
on a quarterly basis and use a valuation expert for year-end. Since there is
typically no readily ascertainable market value for the investments in our




                                       9




portfolio, our board of directors determines in good faith the fair value of
these investments pursuant to a valuation policy and a consistently applied
valuation process. For June 30, 2005 and June 30, 2004, we used an independent
valuation specialist to assist us in our good faith estimate of the fair value
of our investments.

There is no single standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while employing a
consistently applied valuation process for the types of investments we make.
Unlike banks, we are not permitted to provide a general reserve for anticipated
loan losses; we are instead required by the 1940 Act to specifically value each
individual investment on a quarterly basis, and record unrealized depreciation
for an investment that we believe has become impaired, including where
collection of a loan or realization of an equity security is doubtful, or when
the enterprise value of the company does not currently support the cost of our
debt or equity investment. Conversely, we will record unrealized appreciation if
we believe that the underlying portfolio company has appreciated in value and,
therefore, our equity security has also appreciated in value. Without a readily
ascertainable market value and because of the inherent uncertainty of valuation,
the fair value of our investments determined in good faith by the board of
directors may differ significantly from the values that would have been used had
a ready market existed for the investments, and the differences could be
material.

We adjust quarterly the valuation of our portfolio to reflect the board of
directors' determination of the fair value of each investment in our portfolio.
Any changes in estimated fair value are recorded in our statement of operations
as "Net unrealized gains
(losses)."

ECONOMIC RECESSIONS OR DOWNTURNS COULD IMPAIR OUR PORTFOLIO COMPANIES AND HARM
OUR OPERATING RESULTS. Many of the companies in which we have made or will make
investments may be susceptible to economic slowdowns or recessions. An economic
slowdown may affect the ability of a company to engage in a liquidity event. Our
non-performing assets are likely to increase and the value of our portfolio is
likely to decrease during these periods. These conditions could lead to
financial losses in our portfolio and a decrease in our revenues, net income,
and assets.

Our business of making private equity investments and positioning them for
liquidity events also may be affected by current and future market conditions.
The absence of an active senior lending environment may slow the amount of
private equity investment activity generally. As a result, the pace of our
investment activity may slow. In addition, significant changes in the capital
markets could have an effect on the valuations of private companies and on the
potential for liquidity events involving such companies. This could affect the
amount and timing of gains realized on our investments.

OUR PRIVATE FINANCE INVESTMENTS MAY NOT PRODUCE CURRENT RETURNS OR CAPITAL
GAINS. Private finance investments are typically structured as debt securities
with a relatively high fixed rate of interest and with equity features such as
conversion rights, warrants, or options. As a result, private finance
investments are generally structured to generate interest income from the time
they are made and may also produce a realized gain from an accompanying equity
feature. We cannot be sure that our portfolio will generate a current return or
capital gains.

WE MAY BORROW MONEY WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS
INVESTED AND MAY INCREASE THE RISK OF INVESTING IN US. Borrowings, also known as
leverage, magnify the potential for gain or loss on amounts invested and,
therefore, increase the risks associated with investing in our securities. We
can borrow from and issue senior debt securities to banks, insurance companies,
and other lenders. Lenders of these senior securities would have fixed dollar
claims on our assets that are superior to the claims of our common shareholders.
If the value of our assets increases, then leveraging would cause the net asset
value attributable to our common stock to increase more sharply than it would
have had we not leveraged. Conversely, if the value of our assets decreases,
leveraging would cause net asset value to decline more sharply than it otherwise
would have had we not leveraged. Similarly, any increase in our income in excess
of interest payable on the borrowed funds would cause our net income to increase
more than it would without the leverage, while any decrease in our income would
cause net income to decline more sharply than it would have had we not borrowed.

CHANGES IN INTEREST RATES MAY AFFECT OUR COST OF CAPITAL AND NET INVESTMENT
INCOME. Because we can borrow money to make investments, our net investment
income before net realized and unrealized gains or losses, or net investment
income, can be dependent upon the difference between the rate at which we borrow
funds and the rate at which we invest these funds. As a result, there can be no
assurance that a significant change in market interest rates will not have a
material adverse effect on our net investment income. In periods of rising
interest rates, our cost of funds would increase, which would reduce our net
investment income. We can use a combination of long-term and short-term
borrowings and equity capital to finance our investing activities.

WE OPERATE IN A COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES. We compete for
investments with a large number of private equity funds and mezzanine funds,
investment banks and other equity and non-equity based investment funds, and




                                       10




other sources of financing, including traditional financial services companies
such as commercial banks. Some of our competitors have greater resources than we
do. Increased competition would make it more difficult for us to purchase or
originate investments at attractive prices. As a result of this competition,
sometimes we may be precluded from making otherwise attractive investments.

WE DEPEND ON KEY PERSONNEL. We depend on the continued services of our executive
officers and other key management personnel. If we were to lose any of these
officers or other management personnel, such a loss could result in
inefficiencies in our operations and lost business opportunities.

CHANGES IN THE LAW OR REGULATIONS THAT GOVERN US COULD HAVE A MATERIAL IMPACT ON
US OR OUR OPERATIONS. We are regulated by the SEC. In addition, changes in the
laws or regulations that govern business development companies, regulated
investment companies, real estate investment trusts, and small business
investment companies may significantly affect our business. Any change in the
law or regulations that govern our business could have a material impact on us
or our operations. Laws and regulations may be changed from time to time, and
the interpretations of the relevant laws and regulations also are subject to
change.

RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE PERFORMANCE. Our
operating results will fluctuate and, therefore, you should not rely on current
or historical period results to be indicative of our performance in future
reporting periods. Factors that could cause operating results to fluctuate
include, among others, variations in the investment origination volume and fee
income earned, variation in timing of prepayments, variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to
which we encounter competition in our markets, and general economic conditions.

OUR COMMON STOCK PRICE MAY BE VOLATILE. The trading price of our common stock
may fluctuate substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many factors, some of
which are beyond our control and may not be directly related to our operating
performance. These factors include the following:

o price and volume fluctuations in the overall stock market from time to
time;

        o significant volatility in the market price and trading volume of
securities of business development companies or other financial services
companies;

        o changes in regulatory policies or tax guidelines with respect to business
development companies or regulated investment companies;

        o actual or anticipated changes in our earnings or fluctuations in our
operating results or changes in the expectations of securities analysts;

        o general economic conditions and trends;

        o loss of a major funding source; or

        o departures of key personnel.

CODE OF ETHICS, AUDIT COMMITTEE CHARTER AND INVESTMENT COMMITTEE CHARTER

The Board of Directors of the Company adopted a Code of Ethics, an Audit
Committee Charter and an Investment Committee Charter.

The Code of Ethics in general prohibits any officer, director or advisory person
(collectively, "Access Person") of the Company from acquiring any interest in
any security which the Company (i) is considering a purchase or sale thereof,
(ii) is being purchased or sold by the Company, or (iii) is being sold short by
the Company. The Access Person is required to advise the Company in writing of
his or her acquisition or sale of any such security. Hydroflo's code of ethics
is filed as an exhibit to this Form 10-K.

The primary responsibility of the Audit Committee is to oversee the Company's
financial reporting process on behalf of the Company's Board of Directors and
report the result of their activities to the Board. Such responsibilities shall
exclude but shall not be limited to, the selection, and if necessary the
replacement of the Company's independent auditors, review and discuss with such




                                       11




independent auditors and the Company's internal audit department (i) the overall
scope and plans for the audit, (ii) the adequacy and effectiveness of the
accounting and financial controls, including the Company's system to monitor and
manage business risks, and legal and ethical programs, and (iii) the results of
the annual audit, including the financial statements to be included in the
Company's annual report on Form 10-K. Hydroflo's audit committee charter is
filed as an exhibit to this Form 10-K.

The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing the Company's contemplated investments and portfolio
companies and investments on behalf of the Board and shall report the results of
their activities to the Board. Such Investment Committee shall (i) have the
ultimate authority for and responsibility to evaluate and recommend investments,
and (ii) review and discuss with management (a) the performance of portfolio
companies, (b) the diversity and risk of the Company's investment portfolio,
and, where appropriate, make recommendations respecting the role or addition of
portfolio investments and (c) all solicited and unsolicited offers to purchase
portfolio companies. Hydroflo's investment committee charter is filed as an
exhibit to this Form 10-K.


ITEM 2. DESCRIPTION OF PROPERTY

We share our offices with HydroFlo Water Treatment, Inc., Metals & Arsenic
Removal Technology, Inc., Safety Scan Technology, Inc., and Ultra Choice Water,
Inc.

At our fiscal year end, our offices were located at 3721 Junction Blvd.,
Raleigh, NC 27603. This office space of 1,600 square feet was rented for $1,350
per month from Gary and Theresa Schlotterer. As of June 30, 2005, we were on a
month-to-month lease.

Effective September 1, 2005 the company relocated its offices to 2501 Reliance
Ave., Apex, NC 27539. This office space of 4,550 square feet is rented for
$4,455.21 per month from Production Reliance, LLC. The current lease has a term
of 62 months. Our offices are in good condition and are sufficient to conduct
our operations.

We do not intend to renovate, improve, or develop properties. We are not subject
to competitive conditions for property and currently have no property to 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

Not applicable


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

Not Applicable.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded over the counter and quoted on the OTC NASDAQ
Electronic Bulletin Board under the symbol "HYRF." That symbol became effective
on May 25, 2003. The following table represents the range of the high and low
bid prices of the Company's stock for each fiscal quarter since trading began.
Such quotations represent prices between dealers and may not include markups,
markdowns, or commissions and may not necessarily represent actual transactions.

                                 Net Asset              Range of Sales Prices
                                 Value Per
  Year          Quarter          Share (1)          High         Low         Close
  2003      Third Quarter           $N/A            $2.25        $1.10       $1.70
           Fourth Quarter           N/A             1.75         0.25         0.55
  2004      First Quarter           0.11            1.50         0.35         1.25
           Second Quarter           0.09            1.25         0.10         0.10
            Third Quarter           0.09            0.30         0.08         0.18
           Fourth Quarter           0.11            0.26         0.15         0.22
  2005      First Quarter           0.12            0.36         0.20         0.24
           Second Quarter           0.12            0.38         0.17         0.20




                                       12




(1) Net asset value per share is determined as of the last day in the
relevant quarter and therefore may not reflect the net asset value per share on
the date of the high or low sales price. The net asset values shown are based on
outstanding common shares at the end of each period.

Our market has traded sporadically and is often thinly traded with large changes
in volume of shares traded on any particular day. Shareholders should consider
the possibility of the loss of the entire value of their shares.

As of June 30, 2005 the authorized capital of the company is 500,000,000 shares
of common voting stock par value $.01 per share and 5,000,000 shares of
preferred stock. As of June 30, 2005 the Company has outstanding 37,456,763
shares of common stock and 4,000,000 shares of $.001 preferred stock.

Options

We granted options to purchase shares of common stock in conjunction with an
employment agreement with Mr. Thomas 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 $0.23, $2.03, $1.82
and $1.77 per share for options granted during fiscal 2005, 2004, 2003 and 2002,
respectively. The weighted average remaining contractual lives of granted
options are approximately 3 years. The summary of stock option activity is shown
below:

        o Options granted during fiscal 2005 - 337,500 @ $0.22
        o Outstanding at June 30, 2005 - 1,684,500 @ $0.22
        o Options exercisable at June 30, 2005 - 1,344,000

        o Options granted during fiscal 2004 - 337,500 @ $0.22
        o Options exercised during fiscal 2004 - 3,000 @ $0.22
        o Outstanding at June 30, 2004 - 1,347,000 @ $0.22
        o Options exercisable at June 30, 2004 - 1,006,500

        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

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 in
2002 due to cancellation of a stock subscription agreement in fiscal year 2002.
As of June 30, 2005, no warrants have been exercised although all remaining
warrants are now exercisable. All warrants expire July 1, 2007.

Holders

As of June 30, 2005, there were 37,456,763 shares of common stock issued and
outstanding held by 94 shareholders of record.

Dividends

We do not anticipate paying 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.




                                       13




Penny Stock Considerations

Because our shares trade at less than $5.00 per share, they are "penny stocks"
as that term is generally defined in the Securities Exchange Act of 1934 to mean
equity securities with a price of less than $5.00. Our shares thus will be
subject to rules that impose sales practice and disclosure requirements on
broker-dealers who engage in certain transactions involving a penny stock.

Under the penny stock regulations, a broker-dealer selling a penny stock to
anyone other than an established customer or accredited investor must make a
special suitability determination regarding the purchaser and must receive the
purchaser's written consent to the transaction prior to the sale, unless the
broker-dealer is otherwise exempt. Generally, an individual with a net worth in
excess of $1,000,000 or annual income exceeding $100,000 individually or
$300,000 together with his or her spouse is considered an accredited investor.
In addition, under the penny stock regulations the broker-dealer is required to:

        o Deliver, prior to any transaction involving a penny stock, a disclosure
schedule prepared by the Securities and Exchange Commission relating to the
penny stock market, unless the broker-dealer or the transaction is otherwise
exempt;

        o Disclose commissions payable to the broker-dealer and our registered
representatives and current bid and offer quotations for the securities;

        o Send monthly statements disclosing recent price information pertaining to
the penny stock held in a customer's account, the account's value and
information regarding the limited market in penny stocks; and

        o Make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction, prior to conducting any penny stock transaction in the
customer's account.

Because of these regulations, broker-dealers may encounter difficulties in their
attempt to sell shares of our common stock, which may affect the ability of
selling shareholders or other holders to sell their shares in the secondary
market and have the effect of reducing the level of trading activity in the
secondary market. These additional sales practice and disclosure requirements
could impede the sale of our securities, if our securities become publicly
traded. In addition, the liquidity for our securities may be decreased, with a
corresponding decrease in the price of our securities. Our shares in all
probability will be subject to such penny stock rules and our shareholders will,
in all likelihood, find it difficult to sell their securities.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data should be read in conjunction with our "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto. As discussed in Note A to the
Financial Statements, we converted to a Business Development Company effective
March 4, 2004. The results of operations for fiscal 2004 are divided into two
periods, the "Post-Conversion as a Business Development Company" period and
"Pre-Conversion prior to becoming a Business Development Company" period.
Different accounting principles are used in the preparation of financial
statements of a business development company under the Investment Company Act of
1940 and, as a result, the financial results for periods prior to March 4, 2004
are not comparable to the period commencing on March 4, 2004 and are not
expected to be representative of our financial results in the future. In
addition, the financial results for periods prior to July 1, 2003 are not
comparable to the period commencing on July 1, 2003 and are not expected to be
representative of our financial results in the future.

                                                    For the years ended June30,

                                                    March 4,       July 1,
                                                    2004 to        2003 to
                                                    June 30,       March 3,
                                       2005           2004           2004          2003          2002         2001

Financial Position:
 Total Assets                        $25,222,549    $2,434,125  |                 $395,762      $181,180      $46,576
 Total Liabilities                     2,154,580         1,781  |                  247,626       157,884       68,688
 Net Assets / Stockholders'
     Equity (Deficit)                 23,067,969     2,432,344  |                  148,136        23,296      (22,112)
Operations:                                                     |
  Operating Revenue                            0             0  |    109,208       244,243         5,001            0
  Operating Expenses                   2,593,435       589,304  |  1,407,058     1,403,144       930,320      313,468
  Net Investment Gain                 21,477,939         2,592  |        N/A           N/A           N/A          N/A
  Net Income / (Loss)                 18,887,666      (589,656) | (1,297,848)   (1,153,876)     (924,504)    (311,277)




                                       14




Per Share Data
  Net Assets / Share
      Book Value                            0.62          0.09  |                     0.03          0.00         0.00
  Closing Market Price                      0.20          0.10  |       0.43           N/A           N/A          N/A
  Diluted Net Income/(Loss)                 0.52         (0.03) |      (0.08)        (0.07)        (0.06)       (0.02)
    Per Share


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The information contained in this section should be read in conjunction with the
Selected Financial Data and our Financial Statements and notes thereto appearing
elsewhere in this 10K. The 10K, including the Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements that involve substantial risks and uncertainties.
These forward-looking statements are not historical facts, but rather are based
on current expectations, estimates and projections about our industry, our
beliefs, and our assumptions. Words such as "anticipates", "expects", "intends",
"plans", "believes", "seeks", and "estimates" and variations of these words and
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements including
without limitation (1) any future economic downturn, which could impair our
ability to decrease our non-performing assets, (2) a contraction of available
credit and/or an inability to access the equity markets, which could impair our
investment activities, (3) the risks associated with the possible disruption in
the Company's operations due to terrorism and (4) the risks, uncertainties and
other factors we identify from time to time in our filings with the Securities
and Exchange Commission, including our Form 10-Ks, Form 10-Qs and Form 8-Ks.
Although we believe that the assumptions on which these forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and as a result, the forward-looking statements based on those
assumptions also could be incorrect. In light of these and other uncertainties,
the inclusion of a projection or forward-looking statement in this Annual Report
should not be regarded as a representation by us that our plans and objectives
will be achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Annual Report.

OVERVIEW

The following discussion should be read in conjunction with the financial
statements for the period ended June 30, 2005 included with this Form 10-K.

Effective March 4, 2004, we converted to a Business Development Company under
the Investment Company Act of 1940. Upon completion of this conversion, we
became an internally managed, diversified, closed-end investment company. Prior
to the conversion we were an operating company. Those operations were
transferred to HydroFlo Water Treatment, Inc., a wholly owned investment of
ours. HydroFlo Water Treatment, Inc. is an international provider of wastewater
pre-treatment solutions, treating wastewater for industrial and municipal
customers. HydroFlo Water Treatment designs, builds, and installs water and
wastewater treatment systems and provides a full range of related services to
companies and municipalities to treat their wastewater. Since conversion to a
Business Development Company, the company has acquired or created three
additional portfolio companies: Metals & Arsenic Removal Technology, Inc.,
Safety Scan Technology, Inc., and Ultra Choice Water, Inc.

Because of our conversion to a Business Development Company ("BDC") the results
of operations for the year ended June 30, 2004 are split between the eight-month
period from July 1, 2003 through March 3, 2004 (pre conversion) and the
four-month period from March 4, 2004 through June 30, 2004 (post conversion
which includes a one-time conversion adjustment). The principal differences
between these two reporting periods are: (1) we no longer include the operations
of our operating ("portfolio") companies in our financial statements, and (2) we
now value our ownership of the portfolio companies at fair value.

POST-CONVERSION TO A BUSINESS DEVELOPMENT CORPORATION

PORTFOLIO COMPOSITION

Our primary business is investing in businesses with equity-based investments.
The total portfolio value of investments in non-publicly traded securities was
approximately $25.1 million at fair value on June 30, 2005, and approximately $2
million at fair value on June 30, 2004.




                                       15




OPERATIONS

We generated no operating revenues during the year ended June 30, 2005 and the
period March 4, 2004 to June 30, 2004, since our earnings during these periods
are based primarily on changes in investment valuations. We incurred
approximately $2,593,000 and $589,000 in expenses during the year ended June 30
2005 and the period March 4, 2004 to June 30, 2004. For the fiscal year ended
June 30, 2005, these costs represented management fees to an entity controlled
by our CEO, rent and other cash expenses associated with operating the BDC and
seeking additional investments. During the period March 4, 2004 to June 30,
2004, approximately $497,000 of these expenses were non-cash stock based
expenses paid to consultants. The remaining $92,000 represented management fees
to an entity controlled by our CEO, rent and other cash expenses associated with
operating the BDC and seeking additional investments.

During the year ended June 30, 2005 we incurred $0 in interest expense, earned
$3,162 in interest income, and recorded an unrealized gain of $21,477,939 from
our portfolio company investments. During the period March 4, 2004 to June 30,
2004, we incurred $2,944 in interest expense and recorded an unrealized gain of
$2,592 from our portfolio company investments.

As a result of the foregoing, we booked a net income of approximately
$18,887,700 during the fiscal year ended June 30, 2005, and we incurred a net
loss of approximately $590,000 for the period March 4, 2004 to June 30, 2004.

PRIOR TO CONVERTING TO A BUSINESS DEVELOPMENT CORPORATION

OPERATING INCOME

Our aggregate revenues were $109,208 for the eight-months ended March 3, 2004. This
compares with revenues of $244,243 and $5,001 for the years ended June 30, 2003
and 2002 respectively. These revenue numbers fluctuate, and are not very
comparable, due to the fact that we were just beginning to penetrate the market
place.

OPERATING EXPENSES

Employee compensation expenses were $489,335 for the eight-months ended March 3,
2004. This compares with expenses of $907,755 and $606,072 for the years ended
June 30, 2003 and 2002 respectively. On an annualized basis, we experienced a
19% decrease in compensation expense in 2004 from 2003. This decrease is the
result of a reduction in staff costs associated with lower than expected sales
during 2004.

Management fee (related-party) expenses were $32,200 for the eight-months ended
March 3, 2004. Annualized, this is comparable with expenses of $55,200 and
$55,200 for the years ended June 30, 2003 and 2002 respectively.

Research and development expenses were $7,018 for the eight-months ended March
3, 2004. This compares similarly with expenses of $5,988 and $15,658 for the
years ended June 30, 2003 and 2002 respectively

Other General and Administrative expenses were $839,415 for the eight-months
ended March 3, 2004. This compares with expenses of $393,581 and $250,219 for
the years ended June 30, 2003 and 2002 respectively. On an annualized basis, we
experienced a 220% increase in 2004 from 2003. This increase is the result of
increased marketing efforts and the use of non-cash stock based compensation.

OTHER INCOME/EXPENSES

Interest income was $0 for the eight-months ended March 3, 2004. This compares
with income of $5,025 and $730 for the years ended June 30, 2003 and 2002,
respectively. This decrease in 2004 is the result of our not having significant
amounts of cash on hand, while during 2003 we were raising cash to assist in our
business development.

NET LOSS

As a result of the foregoing, we incurred a loss of $1,297,848 for the
eight-months ended March 3, 2004 compared to losses of $1,153,876 and $924,504
for the years ended June 30, 2003 and 2002, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2005 and June 30, 2004, we had $2,557 and $406,762, respectively, in
cash and cash equivalents. Our objective is to maintain a low cash balance,
while keeping sufficient cash on hand to cover current funding requirements and
operations.




                                       16




During the three months ended September 30, 2005 we received approximately
$1,100,000 from the sale of our stock and had approximately $390,000 cash on
hand as of September 30, 2005. For the remainder of the fiscal year ending June
30, 2006, we expect our cash on hand and cash generated from operations to be
adequate to meet our cash needs, including additional advances to the companies
we invest in. Management's plans regarding continued operation include the
possibility of raising additional equity capital via the sale of stock which can
now be accomplished due to the filing as a Business Development Company.
Management believes it will be able to raise any additional capital it may need,
and in fact there are unused equity commitments in place totaling $9,775,000;
however, there can be no assurance that the Company will be successful in any
such efforts or that any such financing will be on terms favorable or acceptable
to the Company. Aggressive sales efforts in our portfolio companies will likely
increase sales of product by the subsidiaries in the coming year and may result
in less funding we need to provide to them or may even result in a cash return
on our investment.

During the year ended June 30, 2005, the Company has not engaged in:

        o Material off-balance sheet activities, including the use of
          structured finance or special purpose entities;
        o Trading activities in non-exchange traded contracts; or
        o Transactions with persons or entities that benefit from their
          non-independent relationship with the Company.

CONTRACTUAL OBLIGATIONS

Our contractual obligations as of June 30, 2005 are:

                             Payments Due by Period

                                           Less than
Contractual Obligations         Total       1 year      1-3 years    4-5 years    After 5 years

Other Obligations             $283,757     $44,552      $111,232     $117,951        $10,021


PRIVATE PORTFOLIO COMPANY INVESTMENTS

The following is a list of the private companies in which we had an investment
and the cost and fair value of such securities at June 30, 2005:

                                                                                     Approximate
     Name of Company                       Nature of its Principal Business             Cost             Fair Value


HydroFlo Water Treatment, Inc.             Waste water treatment solutions            $ 2,415,476         $ 1,415,000

Metals & Arsenic Removal
   Technology, Inc.                        Arsenic removal technology                     695,741          23,004,000


Safety Scan Technology, Inc.               High frequency scanning                        734,013             734,013


Ultra Choice Water, Inc.                   Tankless water coolers                             187                 187

Valuations for HydroFlo Water Treatment, Inc. and Metals & Arsenic Removal
Technology, Inc. were established with the assistance of an independent
valuation specialist. Valuations for Safety Scan Technology, Inc. and Ultra
Choice Water, Inc. were based on costs invested, since both companies are still
in the development stage.

RECENT DEVELOPMENTS

On July 15, 2005, the Company formed a portfolio company, Advanced Water
Recycle, Inc., to combine resources from each of the Company's current portfolio
companies to provide customers with water recycling and reuse. On September 13,




                                       17




2005, the Company received a second subpoena from the SEC regarding a
non-public, fact-finding inquiry into activities of other entities not managed
by HydroFlo, Inc. The company has complied with the subpoena.

CRITICAL ACCOUNTING POLICIES

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

VALUATION OF INVESTMENTS

At June 30, 2005, our total assets represented investments recorded at fair
value. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market
price for those securities for which a market quotation is readily available and
(ii) for all other securities and assets, fair value is as determined in good
faith by the board of directors. Since there is typically no readily
ascertainable market value for the investments in our portfolio, we value
substantially all of our investments at fair value as determined in good faith
by the board of directors pursuant to a valuation policy and a consistent
valuation process. Because of the inherent uncertainty of determining the fair
value of investments that do not have a readily ascertainable market value, the
fair value of our investments determined in good faith by the board of directors
may differ significantly from the values that would have been used had a ready
market existed for the investments, and the differences could be material.

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

As a business development company, we invest primarily in illiquid equity
securities of private companies. The structure of each equity security is
specifically negotiated to enable us to protect our investment and maximize our
returns. Our investments generally have no established trading market. Because
of the type of investments that we make and the nature of our business, our
valuation process requires an analysis of various factors. Our fair value
methodology includes the examination of, among other things, the underlying
investment performance, financial condition and market changing events that
impact valuation. For June 30, 2005 and June 30, 2004, we used an independent
valuation specialist to assist us in our good faith estimate of the fair value
of our investments.

VALUATION OF EQUITY SECURITIES

With respect to private equity securities, each investment is valued using
industry valuation benchmarks, and then the value is assigned a discount
reflecting the illiquid nature of the investment, as well as our minority,
non-control position. When an external event such as a purchase transaction,
public offering, or subsequent equity sale occurs, the pricing indicated by the
external event will be used to corroborate our private equity valuation.

NEW ACCOUNTING PRONOUNCEMENTS

We have reviewed all new accounting pronouncements issued through June 2005 and
have determined that none of them would have a material impact on our financial
position or results of operations.


ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our business activities contain elements of risk. We consider the principal
types of risk to be portfolio valuations. We consider the management of risk
essential to conducting our businesses. Accordingly, our risk management systems
and procedures are designed to identify and analyze our risks, to set
appropriate policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information systems and other
policies and programs.

As a business development company, we invest in illiquid securities including
equity securities of primarily private companies. Our investments are generally
subject to restrictions on resale and generally have no established trading
market. We value substantially all of our investments at fair value as
determined in good faith by the board of directors in accordance with our




                                       18




valuation policy. There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that judgment be applied to
the specific facts and circumstances of each portfolio investment while
employing a consistently applied valuation process for the types of investments
we make.

We determine fair value to be the amount for which an investment could be
exchanged in an orderly disposition over a reasonable period of time between
willing parties other than in a forced or liquidation sale. Our valuation policy
considers the fact that no ready market exists for substantially all of the
securities in which we invest. Our valuation policy is intended to provide a
consistent basis for determining the fair value of the portfolio. We will record
unrealized depreciation on investments when we believe that an investment has
become impaired, including where collection of a loan or realization of an
equity security is doubtful, or when the enterprise value of the company does
not currently support the cost of our debt or equity investments. Conversely, we
will record unrealized appreciation if we believe that the underlying portfolio
company has appreciated in value and, therefore, our equity security has also
appreciated in value. The value of investments in public securities is
determined using quoted market prices discounted for restrictions on resale.
Without a readily ascertainable market value and because of the inherent
uncertainty of valuation, the fair value of our investments determined in good
faith by the board of directors may differ significantly from the values that
would have been used had a ready market existed for the investments, and the
differences could be material. In addition, the illiquidity of our investments
may adversely affect our ability to dispose of debt and equity securities at
times when it may be otherwise advantageous for us to liquidate such
investments. In addition, if we were forced to immediately liquidate some or all
of the investments in the portfolio, the proceeds of such liquidation would be
significantly less than the current value of such investments.

Impact of Inflation

We do not believe that our business is materially affected by inflation, other
than the impact that inflation may have on the securities markets, the
valuations of business enterprises and the relationship of such valuations to
underlying earnings, all of which will influence the value of our investments.




                                       19




ITEM 8. FINANCIAL STATEMENTS






                                 HYDROFLO, INC.

                             Statement of Net Assets
                          as of June 30, 2005 and 2004
         and Statements of Operations for the year ended June 30, 2005,
                the periods March 4, 2004 (date of conversion to
                         a Business Development Company)
               to June 30, 2004 and July 1, 2003 to March 3, 2004,
                        and the year ended June 30, 2003
                                       and
                        Report of Independent Registered
                             Public Accounting Firm




                                       20




                                 HYDROFLO, INC.

                                TABLE OF CONTENTS
________________________________________________________________________________


                                                                        Page


Report of Independent Registered Public Accounting Firm                  22

Statements of Net Assets as of June 30, 2005 and 2004                    23

Statements of Operations for the year ended June 30, 2005, and
   the periods March 4, 2004 (date of conversion to a Business
   Development Company) to June 30, 2004 and July 1, 2003
   to March 3, 2004, and for the year ended June 30, 2003                24

Statements of Changes in Net Assets for the year ended June 30, 2005,
   and the periods March 4, 2004 (date of conversion to a Business
   Development Company) to June 30, 2004 and July 1, 2003
   to March 3, 2004, and for the year ended June 30, 2003                25

Statements of Cash Flows for the year ended June 30, 2005, and
   the periods March 4, 2004 (date of conversion to a Business
   Development Company) to June 30, 2004 and July 1, 2003
   to March 3, 2004, and for the year ended June 30, 2003                26

Schedule of Investments as of June 30, 2005                              28

Notes to Financial Statements                                            29
________________________________________________________________________________




                                       21



                     [Letterhead of Kingery & Crouse, P.A.]


Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders of HydroFlo, Inc.:

We have audited the accompanying statements of net assets of HydroFlo, Inc. (the
"Company") as of June 30, 2005 and 2004, the schedule of investments as of June
30, 2005, and the related statements of operations, changes in net assets and
cash flows for the year ended June 30, 2005 and for the periods March 4, 2004
(date of conversion to a Business Development Company, "BDC") to June 30, 2004 and July
1, 2003 to March 3, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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.

As discussed in Note A to the financial statements, investments amounting to
$25,153,200 (99.7% of total assets) at June 30, 2005 have been valued at fair
value as determined by the Board of Directors. We have reviewed the procedures
applied by the Board of Directors in valuing such investments and have inspected
underlying documentation; while in the circumstances the procedures appear to be
reasonable and the documentation appropriate, determination of fair value
involves subjective judgment which is not susceptible to substantiation by the
audit process.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30, 2005
and 2004, the fair value of the Company's investments as of June 30, 2005, and
the results of its operations and cash flows for the year ended June 30, 2005
and for the periods March 4, 2004 (date of conversion to a Business Development
Company) to June 30, 2004 and July 1, 2003 to March 3, 2004, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note A to the financial statements, accounting principles used
in the preparation of the financial statements as of and for the year ended June
30, 2005 and for the period March 4, 2004 (date of conversion to a BDC) to June
30, 2004 under the Investment Company Act of 1940 are different than those used
for prior periods and therefore such statements are not directly comparable.

/s/ Kingery & Crouse, P.A.

October 11, 2005
Tampa, FL



           2801 WEST BUSCH BOULEVARD, SUITE 200, TAMPA, FLORIDA 33618
           PHONE: 813.874.1280 | FAX: 813.874.1292 | WWW.TAMPACPA.COM




                                       22




                                 HYDROFLO, INC.


              STATEMENTS OF NET ASSETS AS OF JUNE 30, 2005 AND 2004
________________________________________________________________________________________

                                                         June 30, 2005     June 30, 2004

ASSETS


INVESTMENTS IN AND ADVANCES TO CONTROLLED
  COMPANIES (at fair value with a cost of
  $3,845,417 and $2,008,408, respectively)               $   25,153,200    $  2,011,000

CASH                                                              2,557         406,762

NOTE RECEIVABLE                                                  50,000               -

PREPAID EXPENSE                                                     855               -

PROPERTY AND EQUIPMENT (net of accumulated
  depreciation of $21,518 and $13,892, respectively)             11,482          16,363

DEPOSITS                                                          4,455               - 

TOTAL                                                    $   25,222,549    $  2,434,125
                                                         ===============   =============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued liabilities                 $       27,251    $      1,781
Due to Free Harbor, LLC (related party)                       2,102,329               -
Shareholder loan                                                 25,000               - 
Total current liabilities                                     2,154,580           1,781 

STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.001 par value,
   5,000,000 shares authorized; 4,000,000 shares
   issued and outstanding, no liquidation value                   4,000           4,000
Common stock, $.01 par value, 500,000,000 shares
   authorized; 37,456,763 and 28,277,912 shares
   issued and outstanding, respectively                         374,568         282,780
Additional paid-in capital                                    4,478,557       2,590,344
Stock subscription receivable                                  (235,000)         (2,958)
Stock purchase warrants                                         147,834         147,834
Retained Earnings / (Deficit)                                18,298,010        (589,656)
Total stockholders' equity                                   23,067,969       2,432,344 

TOTAL                                                    $   25,222,549    $  2,434,125
                                                         ===============   =============

NET ASSET VALUE PER SHARE                                $         0.62    $       0.09
                                                         ===============   =============
________________________________________________________________________________________

See notes to financial statements.




                                       23




                                 HYDROFLO, INC.


                            STATEMENTS OF OPERATIONS
__________________________________________________________________________________________________________________


                                          As a Business Development             Prior to Converting to a Business
                                                Company ("BDC")                     Development Company ("BDC")

                                            For the        For the Period       For the Period       For the
                                          Year ended      March 4, 2004 to     July 1, 2003 to     Year ended
                                         June 30, 2005     June 30, 2004        March 3, 2004     June 30, 2003


REVENUES                                  $          -     $          -     |   $     109,208     $      244,243
                                                                            |
COST OF GOODS SOLD                                   -                -     |          39,090             40,620 
                                                                            |
GROSS MARGIN                                         -                -     |          70,118            203,623 
                                                                            |
OTHER OPERATING EXPENSES:                                                   |
Employee compensation and benefits              41,647                -     |         489,335            907,755
Management fees - related party              2,186,029           18,400     |          32,200             55,200
Research and development                             -                -     |           7,018              5,988
 Other general and administrative              365,759          570,904     |         839,415            393,581 
    Total other operating expenses           2,593,435          589,304     |       1,367,968          1,362,524 
                                                                            |
LOSS FROM OPERATIONS                        (2,593,435)        (589,304)    |      (1,297,850)        (1,158,901)
                                                                            |
OTHER INCOME (EXPENSE):                                                     |
Interest income                                  3,162                -     |               -              5,025
Interest expense                                     -           (2,944)    |               -                  - 
  Total other income (expense)                   3,162           (2,944)    |               -              5,025 
                                                                            |
NET UNREALIZED GAIN ON INVESTMENTS          21,477,939            2,592     |               -                  - 
                                                                            |
NET INCOME (LOSS)                         $ 18,887,666     $   (589,656)    |   $  (1,297,850)    $   (1,153,876)
                                          =============    =============    |   ==============    ===============
                                                                            |
NET INCOME (LOSS) PER SHARE - Basic       $       0.56     $      (0.03)    |   $       (0.08)    $        (0.07)
                                          =============    =============    |   ==============    ===============
                            - Diluted     $       0.52     $      (0.03)    |   $       (0.08)    $        (0.07)
                                          =============    =============    |   ==============    ===============
                                                                            |
WEIGHTED AVERAGE NUMBER OF                                                  |
     SHARES OUTSTANDING    - Basic          33,692,897       21,982,800     |      15,916,800         15,740,316
                                          =============    =============    |   ==============    ===============
                           - Diluted        36,333,336       21,982,800     |      15,916,800         15,740,316
                                          =============    =============    |   ==============    ===============
__________________________________________________________________________________________________________________


See notes to financial statements.




                                       24




                                           HYDROFLO, INC.

                    STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEAR ENDED JUNE 30, 2005,
 THE PERIOD MARCH 4, 2004 (date of conversion to a BDC) TO JUNE 30, 2004, AND JULY 1, 2003 TO MARCH 3, 2004
                                AND FOR THE YEAR ENDED JUNE 30, 2003

                                                                                                  Additional        Stock         Stock
                                                Preferred Stock            Common Stock            Paid-In      Subscriptions    Purchase     Deferred         Retained
                                                Shares    Amount         Shares     Amount         Capital        Receivable     Warrants   Compensation   Earnings/(Deficit)     Total

 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              -             -            -                  -           546,000
Stock subscription receipts                           -       -                -          -                -        140,300             -            -                  -           140,300
Stock options granted                                 -       -                -          -          600,750              -             -     (600,750)                 -                 -
Amortization of deferred compensation                 -       -                -          -                -              -             -      582,000                  -           582,000
Common stock to be issued for service                 -       -                -          -           10,416              -             -            -                  -            10,416
Net loss                                              -       -                -          -                -              -             -            -         (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


Stock issued for cash                                 -       -           90,500        905           84,180              -             -            -                  -            85,085
Stock issued for services                             -       -          168,000      1,680          117,958              -             -      (68,000)                 -            51,638
Stock subscription receipts                           -       -                -          -                -          4,001             -            -                  -             4,001
Stock options granted                                 -       -                -          -          681,000              -             -     (681,000)                 -                 -
Amortization of deferred compensation                 -       -                -          -                -              -             -      799,062                  -           799,062
Repayment of debt                             4,000,000   4,000                -          -          462,000              -             -     (300,000)                 -           166,000
Net loss                                              -       -                -          -                -              -             -            -         (1,297,848)       (1,297,848)
 Balance, March 3, 2004                       4,000,000   4,000       16,069,550    160,696        3,675,609         (2,958)      147,834     (300,000)        (3,729,107)          (43,926)
____________________________________________________________________________________________________________________________________________________________________________________________

Transfer of Investment of Hydroflo Water
      Treatment, Inc.                                 -       -                -          -       (1,845,210)             -             -            -          3,729,107         1,883,897
Stock issued for services                             -       -        1,094,617     10,946          185,628              -             -            -                  -           196,574
Stock issued for cash                                 -       -        9,488,359     94,884          464,971              -             -            -                  -           559,855
Amortization of deferred compensation                 -       -                -          -                -              -             -      300,000                  -           300,000
Repayment of debt                                     -       -        1,625,386     16,254          109,346              -             -            -                  -           125,600
Net loss                                              -       -                -          -                -              -             -            -           (589,656)         (589,656)
 Balance, June 30, 2004                       4,000,000   4,000       28,277,912    282,780        2,590,344         (2,958)      147,834            -           (589,656)        2,432,344


Stock issued for cash and notes receivable            -       -        2,810,322     28,103          771,898       (235,000)            -            -                  -           565,001
Stock issued for services                             -       -           60,000        600            2,400              -             -            -                  -             3,000
Stock issued for acquisition of portfolio
companies                                                              6,308,529     63,085        1,113,915              -             -            -                  -         1,177,000
Stock subscription receipts                           -       -                -          -                -          2,958             -            -                  -             2,958
Net income                                            -       -                -          -                -              -             -            -         18,887,666        18,887,666 

 Balance, June 30, 2005                       4,000,000  $4,000       37,456,763  $ 374,568       $4,478,557      $(235,000)     $147,834   $        -        $18,298,010      $ 23,067,969
                                             =========== =======     ============ ==========      ===========     ==========     =========  ===========       ============     =============
____________________________________________________________________________________________________________________________________________________________________________________________


See notes to financial statements




                                       25




                                 HYDROFLO, INC.

                            STATEMENTS OF CASH FLOWS
___________________________________________________________________________________________________________________________
                                                                                      |
                                                       As a Business Development      |  Prior to Converting to a Business
                                                            Company ("BDC")           |      Development Company ("BDC")
                                                                                      |
                                                     For the         For the Period   |   For the Period         For the
                                                    Year ended       March 4, 2004 to |  July 1, 2003 to        Year ended
                                                   June 30, 2005     June 30, 2004    |   March 3, 2004       June 30, 2003
                                                                                      |
CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |
 Net income/ (loss)                                $ 18,887,666      $   (589,656)    | $  (1,297,848)       $  (1,153,876)
 Adjustments to reconcile net income (loss) to                                        |
     net cash used in operating activities:                                           |
   Depreciation                                           9,202            13,892     |        15,770               14,613
   Amortization of patent costs                               -                 -     |           375                  560
   Net unrealized gain on investments               (21,477,939)           (2,592)    |             -                    -
   Other non-cash expense                                 7,208                 -     |             -                    -
   Stock-based compensation                                   -           196,574     |        47,638               10,416
   Amortization of deferred compensation                      -           300,000     |       799,062              582,000
   Gain on insurance claim                               (3,556)                -     |             -                    -
   Loss on impairment of patent costs                         -                 -     |         5,949                    -
   (Increase) decrease in receivables                   (50,000)                -     |       (68,707)             (19,443)
   (Increase) decrease in inventory, net                      -                 -     |       (21,133)               4,695
   (Increase) decrease in deposits                       (4,455)                -     |             -                    -
   Decrease (increase) in prepaid expenses                 (855)                -     |        75,064              (76,505)
   Increase in current liabilities (exclusive                                         |
     of shareholder loan)                             2,127,800             1,261     |       286,184               89,742 
NET CASH USED IN OPERATING ACTIVITIES                  (504,929)          (80,521)    |      (157,646)            (547,798)
                                                                                      |
CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |
    Investment in controlled companies                 (658,268)         (128,807)    |             -                    -
    Return of funds from controlled companies           168,451                 -     |             -                    -
    Proceeds from insurance claim                         4,065                 -     |             -                    -
    Purchases of property and equipment                  (3,524)           (4,297)    |        (2,688)             (66,005)
NET CASH USED IN INVESTING ACTIVITIES                  (489,276)         (133,104)    |        (2,688)             (66,005)
                                                                                      |
CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |
    Proceeds from issuances of common stock,                                          |
     net of transaction costs                           565,000           564,855     |        89,085              686,300
    Proceeds from convertible notes payable                   -            50,000     |        55,000                    -
    Repayments of related party borrowing                     -           (15,000)    |             -                    -
    Proceeds from related party borrowing                25,000            20,000     |        15,000                    - 
NET CASH PROVIDED BY FINANCING ACTIVITIES               590,000           619,855     |       159,085              686,300 
                                                                                      |
NET CHANGE IN CASH                                     (404,205)          406,230     |        (1,249)              72,497
CASH AT BEGINNING OF PERIOD                             406,762               532     |           717               58,876 
CASH AT END OF PERIOD                              $      2,557      $    406,762     | $         532        $     131,373
                                                   =============     =============    |===============       ==============
___________________________________________________________________________________________________________________________

(Continued)




                                       26




                                 HYDROFLO, INC.

                      STATEMENTS OF CASH FLOWS (Continued)
____________________________________________________________________________________________________________________________
                                                                                      |
                                                       As a Business Development      |  Prior to Converting to a Business
                                                            Company ("BDC")           |      Development Company ("BDC")
                                                                                      |
                                                     For the         For the Period   |   For the Period         For the
                                                    Year ended       March 4, 2004 to |  July 1, 2003 to        Year ended
                                                   June 30, 2005     June 30, 2004    |   March 3, 2004       June 30, 2003
                                                                                      |
                                                                                      |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     |
                                                                                      |
Income taxes paid                                  $          -      $          -     |$            -        $           -
                                                   =============     =============    |===============       ==============
Interest paid                                      $          -      $          -     |$            -        $           -
                                                   =============     =============    |===============       ==============
                                                                                      |
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:                             |
                                                                                      |
Common stock issued for related party note payable $          -      $    105,000     |$            -        $           -
                                                   =============     =============    |===============       ==============
Conversion of related party advances to stock                                         |
  (including interest)                             $          -      $     20,600     |$            -        $           -
                                                   =============     =============    |===============       ==============
                                                                                      |
Common stock issued to Director to satisfy Directors                                  |
Fees Payable                                       $      6,000      $          -     |$            -        $           -
                                                   =============     =============    |===============       ==============
                                                                                      |
Preferred stock issued for related party accrued                                      |
expenses converted to note payable during the                                         |
same period                                        $          -      $          -     |$      170,000        $           -
                                                   =============     =============    |===============       ==============
Common stock issued to acquire investments         $  1,177,000      $          -     |$            -        $           -
                                                   =============     =============    |===============       ==============
Common stock issued for notes receivable           $    235,000      $          -     |$            -        $           -
                                                   =============     =============    |===============       ==============
                                                                                      |
____________________________________________________________________________________________________________________________


See notes to financial statements.




                                       27




                                 HYDROFLO, INC.

                   SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2005
____________________________________________________________________________________________________________________________

                                                     Nature of its Principal                Approximate
     Name of Company                   Ownership             Business                           Cost            Fair Value


HydroFlo Water Treatment, Inc.           100%       Waste water treatment solutions          $ 2,415,476        $ 1,415,000

Metals & Arsenic Removal
   Technology, Inc.                      100%       Arsenic removal technology                   695,741         23,004,000


Safety Scan Technology, Inc.             100%       High frequency scanning                      734,013            734,013


Ultra Choice Water, Inc.                 100%       Water delivery products                          187                187 

Totals                                                                                        $3,845,417        $25,153,200
                                                                                              ===========       ============

____________________________________________________________________________________________________________________________


See notes to financial statements.




                                       28




                                 HYDROFLO, INC.

                          NOTES TO FINANCIAL STATEMENTS

________________________________________________________________________________

Note A - Summary of Significant Accounting Policies

Nature of Operations and Background

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.

Effective March 4, 2004, the Company became a diversified internally managed,
closed-end investment company that elected to be treated as a business
development company ("BDC") under the Investment Company Act of 1940, as
amended. As a BDC, the Company provides long-term debt and equity investment
capital to support the expansion of companies in a variety of industries. These
investments are expected to generally be illiquid securities negotiated through
private transactions.

In connection with the Company's conversion to a BDC, the Company formed
Hydroflo Water Treatment, Inc., and simultaneously transferred substantially all
of its operating assets and liabilities (exclusive of cash and certain property
and equipment) to such entity. HydroFlo Water Treatment, Inc. is an
international provider of wastewater pre-treatment solutions, treating
wastewater for industrial and municipal customers. This entity designs, builds
and installs water and wastewater treatment systems and provides a full range of
related services to companies and municipalities to treat their wastewater.

As a result of the transfer, the Company's deficit at March 4, 2004 was
eliminated and the accompanying statements of operations reflect an allocation
of revenues and expenses during the periods before and subsequent to the
Company's conversion to a BDC.

Although the nature of the Company's operations and its reported financial
position, results of operations and cash flows are dissimilar for the periods
prior and subsequent to becoming a BDC, its financial position as of June 30,
2005 and 2004, and its operating results, cash flows, and changes in net assets
for each of the periods ended June 30, 2005, June 30, 2004, March 3, 2004, and
June 30, 2003 are presented in the accompanying financial statements pursuant to
Regulation S-X. In addition, the accompanying footnotes, although different in
nature as to the required disclosures and information reported therein, are also
presented as they relate to each of the above referenced periods.

Basis of Presentation

In accordance with SEC rules and regulations for BDCs, the Company does not
consolidate or use the equity method to account for its controlling investment
in portfolio companies. Rather, the Company's investments in such entities are
reported at fair value, and the fluctuations in such fair values are reflected
as unrealized gains or losses in the Company's statements of operations in the
periods in which such fluctuations occur.

Liquidity

The Company's financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business. The Company has suffered negative
cash flows from operations, and at June 30, 2005, has current liabilities that
significantly exceed its cash and other assets that are expected to be converted
to cash within the next year. However, a significant portion of these
liabilities (the due to Free Harbor LLC in the accompanying balance sheet) are
owed to an entity controlled by the Company's CEO (see Note F) and will only be
paid as cash flow permits. The negative cash flows have been funded primarily
through sales of the Company's common stock, and until such time that the
Company can generate sustained positive cash flows from operations the Company
will require additional funding to implement its business plan. During the three
months ended September 30, 2005, the Company received approximately $1,100,000
from the sale of its common stock and at September 30, 2005 the Company had
approximately $390,000 cash on hand. Management believes this amount will be
adequate to cover its operating expenses (exclusive of management fees owed
and/or to be owed to Free Harbor LLC) through June 30, 2006. Because of this,




                                       29




and because management anticipates they will be successful in raising additional
equity capital because the Company has commitments from various entities and
individuals to purchase approximately $9,775,000 of its common stock (although
there can be no assurance that additional sale of stock will occur, and/or that
other financing will be on terms favorable, or acceptable, to the Company) 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.

Use of Estimates

The 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. The reported amounts of revenues and
expenses during the reporting period may be affected by the estimates and
assumptions management is required to make. Estimates that are critical to the
accompanying financial statements include estimates related to the valuation of
investments (as discussed under Valuation of Investments and Revenue Recognition
below). The markets for the products and services of the Company's
investees are characterized by intense competition, evolving standards, changes
in regulations and price competition, all of which could impact the future
realizability of its assets. Estimates and assumptions are reviewed periodically
and the effects of revisions are reflected in the financial statements in the
period they are determined to be necessary. It is at least reasonably possible
that the Company's estimates could change in the near term with respect to these
matters.

Cash and Cash Equivalents

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

Long-Lived Assets

Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" requires that long-lived assets,
including certain identifiable intangibles, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of the
assets in question may not be recoverable. Management evaluated its long-lived
assets as of June 30, 2005 and believes they are recoverable.

Financial Instruments

The Company believes the book value of its note receivable, shareholder loan,
and accounts payable and accrued liabilities approximates their fair values due
to their short-term nature. It was not practicable to estimate the fair value of
the Company's liability to Free Harbor, LLC because of uncertainty surrounding
the date(s) the liabilities will be paid.

Property and Equipment

Property and equipment, which are stated at cost, are being depreciated using
the straight-line method over the estimated useful lives of the assets which
range from five to seven years. Expenditures for maintenance and repairs are
charged directly to expense.

Net Income (Loss) Per Share

In accordance with the provisions of SFAS No. 128, "Earnings Per Share," basic
earnings (loss) per share is computed by dividing net income (loss) by the
number of weighted-average common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income (loss) 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 common stock equivalents granted had been
issued. The effect of options and warrants outstanding were not included in the
computation of diluted earnings per share in the periods in which the Company
incurred net losses because the effect would decrease the net loss per share.
Accordingly, basic and diluted net loss per share are identical for each of the
periods in which the Company incurred losses.




                                       30




Income Taxes

The Company accounts for income taxes under SFAS No. 109, which requires the
asset and liability approach to accounting for income taxes. Under this method,
deferred assets and liabilities are measured based on differences between
financial reporting and tax bases of assets and liabilities measured using
enacted tax rates and laws that are expected to be in effect when differences
are expected to reverse.

The Company is currently taxed as an ordinary corporation under Subchapter C of
the Internal Revenue Code, however management intends to elect to be treated as
a "regulated investment company" or "RIC" under Subchapter M of the Internal
Revenue Code with the filing of its federal corporate income tax return for
fiscal year ending June 30, 2005. This election would be effective as of July 1,
2004. As a RIC, the Company generally will not have to pay corporate taxes on
any income it distributes to its stockholders as dividends, which will allow it
to reduce or eliminate its corporate-level tax liability.

Stock-Based Compensation

The Company has adopted Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure." This
statement amends FASB statement No. 123, "Accounting for Stock Based
Compensation." It provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for employee
stock based compensation. It also amends the disclosure provision of FASB
statement No. 123 to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. As permitted by SFAS No. 123 and amended by
SFAS No. 148, the Company continues to apply the intrinsic value method under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for its stock-based employee compensation
arrangements.

In December 2004, FASB Statement Number 123 ("FAS 123 (R)"), Share-Based
Payments. FAS 123 (R) was issued. This statement requires all entities to
recognize compensation expense in an amount equal to the fair value of
shared-based payments such as stock options granted to employees. The Company
will be required to apply FAS 123 (R) on a modified prospective method. Under
this method, the Company is required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. In addition, the Company may
elect to adopt FAS 123 (R) by restating previously issued financial statements,
basing the amounts on the expense previously calculated and reported in the pro
forma disclosures that had been required by FAS 123. FAS 123 (R) is effective
for the fiscal year beginning July 1, 2005. The Company has determined that the
adoption of FAS 123 (R) will not have a material impact on its financial
statements for past issuances. However, the statement may have a material impact
on future issuances as share based payments will now be expensed based on their
fair values.

Advertising Expense

The Company expenses advertising costs as incurred. Advertising expenses
approximated $0, $3,000, $27,300, and $19,500 for the respective periods ended
June 30, 2005, June 30, 2004, March 3, 2004, and June 30, 2003.

Valuation of Investments and Revenue Recognition (After conversion to a BDC)

As required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all investments.
To comply with Section 2(a)(41) of the Investment Company Act of 1940 (the
"Act") and Rule 2a-4 under the Act, it is incumbent upon the board of directors
to satisfy themselves that all appropriate factors relevant to the value of
securities for which market quotations are not readily available have been
considered and to determine the method of arriving at the fair value of each
such security. To the extent considered necessary, the board may appoint persons
to assist them in the determination of such value, and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the methods
used in valuing each issue of security in the Company's portfolio. The directors
must recognize their responsibilities in this matter and whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.

Valuations for HydroFlo Water Treatment, Inc. and Metals & Arsenic Removal
Technology, Inc. were established with the assistance of an independent
valuation specialist. Valuations for Safety Scan Technology, Inc. and Ultra
Choice Water, Inc. were based on costs invested, since both of these entities
are still in the development stage.

In those cases in which there is not a readily available source for determining
the market value of the investments (either because the investments are not




                                       31




publicly traded, or are thinly traded) the value of these investments are based
on the following criteria:

        - Total amount of the Company's actual investment ("AI"). This
          amount shall include all loans, purchase price of securities, and
          fair value of securities given at the time of exchange.

        - Total revenues for the preceding twelve months ("R").

        - Earnings before interest, taxes and depreciation ("EBITD")

        - Estimate of likely sale price of investment ("ESP")

        - Net assets of investment ("NA")

        - Likelihood of investment generating positive returns (going
          concern).

The estimated value of each such investment shall be determined as follows:

        - Where no or limited revenues or earnings are present, then the
          value shall be the greater of the investment's a) net assets, b)
          estimated sales price, or c) total amount of actual investment.

        - Where revenues and/or earnings are present, then the value shall
          be the greater of one time (1x) revenues or three times (3x)
          earnings, plus the greater of the net assets of the investment or
          the total amount of the actual investment.

Under both scenarios, the value of the investment shall be adjusted down if
there is a reasonable expectation that the Company will not be able to recoup
its investment or if there is reasonable doubt about the investee's ability to
continue as a going concern.

At June 30, 2004, the Company used an independent valuation specialist to assist
it in its good faith estimate of the fair value of its investments.

Concentration of Credit Risk (after conversion to a BDC)

At June 30, 2005, financial instruments, which potentially subject the Company
to significant concentrations of credit risk, consist primarily of investments
in controlled companies and cash and cash equivalents. Since the Company has
only four investments at such date, it is at least reasonably possible that the
Company could experience a severe impact on its operations and financial
position if the fair value of one of these investees declines.

With respect to cash and cash equivalents, during the year ended June 30, 2005,
the Company maintained all of its cash and cash equivalents in deposit accounts
with one high quality financial institution, which deposit balances, at times,
may have exceeded federally insured balances. The Company has not experienced
any losses in such accounts.

Patent Costs (Prior to Becoming a BDC)

Prior to becoming a BDC, patent costs consisted of expenditures incurred for
various patent applications. These costs were being amortized over the lives of
the patents. On September 4, 2001, the first patent was issued to the Company.
The Company recorded $375 and $560 of amortization expense during the period
July 1, 2003 to March 3, 2004 and the fiscal year ended June 30, 2003,
respectively.

Revenue Recognition (Prior to Becoming a BDC)

Prior to becoming a BDC, revenues consisted of direct sales or leases to
customers and paid demonstrations of the Company's product. Sales were
recognized when products were shipped to customers, with provisions for
discounts and rebates to customers and returns and other adjustments, if any,
provided for in the period the related sales were recorded. No amounts were
recorded for such provisions during the periods presented. Rental income was
recognized over the period the related equipment was provided to the customer.

Customer Concentrations (Prior to Becoming a BDC)

Two customers accounted for 96.9% of the Company's revenues during the year
ended June 30, 2003.




                                       32




Research and Development Costs

The Company expenses research and development costs as incurred.

Reclassifications

Certain amounts in the 2003 and March 2004 financial statements have been
reclassified to conform to the 2004 and 2005 presentations.

New Accounting Pronouncements

Management has reviewed all new accounting pronouncements issued through
September 15, 2005 and has determined that none of them would have a material
impact on the Company's financial position or results of operations.

Note B - Acquisition of Portfolio Companies

On August 4, 2004 the Company acquired Arsenic Removal Technology, Inc, a
company holding the arsenic removal technology rights developed by the
University of Wyoming. This portfolio company was purchased using 2,823,529
shares of restricted common stock of the Company, valued at approximately
$480,000 based on the fair market value of the shares issued on that date. The
Company holds 100% of the stock in this entity and plans to develop and market
the technology throughout the world. After the purchase, the entity was
re-incorporated in North Carolina with a change of name to Metals & Arsenic
Removal Technology, Inc.

On December 20, 2004 the Company acquired 100% of Safety Scan Technology, Inc.,
a company holding the rights to a patented process known as Swept Frequency
Acoustic Interferometry (SFAI) that is a non-invasive measurement technique that
uses high frequency sound waves to determine the properties of fluids in sealed
containers. This entity was acquired by issuing 3,485,000 shares of restricted
common stock of the Company valued at approximately $697,000.

On April 12, 2005 the Company established a 100% owned portfolio company, Ultra
Choice Water, Inc., for the purpose of providing water coolers without bottles
and other water delivery products for offices and individual consumers. This
entity will provide the water treatment systems to commercial and residential
customers for a monthly fee or direct sale. Ultra Choice Water, Inc. will use
water purification media supplied by Metals and Arsenic Removal Technology, Inc.
(MARTI), another portfolio company of Hydroflo, Inc.

Note C - Stockholders' Equity

Common Stock

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.

At June 30, 2005, the Company had issued certain common stock in exchange for
notes receivable of $235,000. In accordance with accounting principles generally
accepted in the United States of America, the receivables have been reflected as
deductions from stockholders' equity as of June 30, 2005.

The Company entered into an agreement with its external legal counsel for
certain legal services over a two-year period beginning once the Company became
a public registrant in exchange for 125,000 shares of the Company's common
stock. These shares had a fair value of approximately $60,100 at the date of the
agreement, and accordingly, this amount was recognized as stock based
compensation on a pro-rata basis during the fiscal years ended June 30, 2003 and
2004 ($10,416 in 2003 and the remainder in 2004).

The Company entered into an agreement with an unrelated party during June 2003
for assistance 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.

The Company issued 60,000 shares of its common stock to one director in exchange
for services as a director during the fiscal year ended June 30, 2005. The
shares were valued at $3,000.




                                       33




Series A Preferred Stock

The Company is authorized to issue 5,000,000 shares of preferred stock. On March
1, 2004, the Company designated 4,000,000 shares of this stock as Series A and
issued 3,800,000 shares of Series A Preferred Stock in consideration of a
$170,000 non-interest bearing note payable issued in June 2003 to Free Harbor
LLC (a company controlled by the Company's CEO) and 200,000 shares to Nicholas
Investment Company, Inc. in consideration of services valued at $300,000 (which
amount has been reflected as stock based compensation).

The Series A Preferred Stock has no preference in liquidation over common stock,
is convertible into three (3) shares of common stock at the election of the
individual holders after twelve months following the date of issuance, shall not
be entitled to receive dividends and distributions, has no voting rights, and
are entitled, as a class, to elect two members of the Board of Directors.

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, however due to the cancellation of some stock
subscriptions during fiscal 2002, 506,250 of these stock purchase warrants were
cancelled. The warrants are exercisable at $.22 per share for a five-year period
beginning upon full satisfaction of the shareholders' stock subscriptions. The
Company allocates the total amount received from the shareholders to common
stock and stock purchase warrants based on the relative fair values of each
component, and has reserved 506,260 shares of its common stock for issuance if
and when the warrants are exercised (all of these warrants are exercisable as of
June 30, 2005). The warrants expire July 1, 2007.

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 and expire six years after the
grant date. All options issued to date have an exercise price of $0.22 per
share. The weighted average fair values of the options issued under this
employment agreement were $0.23, $2.03, and $1.82 per share for options granted
during fiscal 2005, 2004 and 2003, respectively. The weighted average remaining
contractual lives of granted options are approximately 3 years. The summary of
stock option activity is shown below:

                                                                      Weighted
                                                                       Average
                                                     Options          Exercise
                                                   Outstanding          Price

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 granted during fiscal 2004                    337,500            0.22
Options exercised during fiscal 2004                   (3,000)           0.22

Outstanding at June 30, 2004                        1,347,000            0.22
Options granted during fiscal 2005                    337,500            0.22

Outstanding at June 30, 2005                        1,684,500            0.22
                                                   ===========
Options exercisable at June 30, 2005                1,347,000            0.22
                                                   ===========

The Company accounts for stock-based compensation arising from employee stock
based awards using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". If
its compensation expense for employee stock-based compensation plans was
determined based upon fair values at the grant dates for awards under this plan
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," its
net loss and proforma net loss per share amounts would have been as follows:




                                       34




                                                                                     |    Prior to Converting to a
                                                   As a Business Development Company |   Business Development Company
                                                                ("BDC")              |              ("BDC")
                                                                                     |
                                                     Year ended        March 4, 2004 |   July, 1, 2003     Year ended
                                                       June 30           to June 30, |     to March 3,       June 30
                                                        2005              2004       |       2004             2003
                                                                                     |
    Net income (loss), as reported                  $  18,887,666    $   (589,656)   |  $  (1,297,848)    $  (1,153,876)
                                                                                     |
    Increased compensation expense                         46,913           1,125    |          2,250            11,646 
                                                                                     |
    Pro forma net income (loss)                     $  18,840,753    $   (590,781)   |  $  (1,300,098)    $  (1,165,522)
                                                    ==============   =============   |  ==============    ==============
                                                                                     |
    Pro forma income (loss) per share - basic       $        0.56    $      (0.03)   |  $       (0.08)    $       (0.07)
                                                    ==============   =============   |  ==============    ==============
    Pro forma income (loss) per share - diluted     $        0.52    $      (0.03)   |  $       (0.08)    $       (0.07)
                                                    ==============   =============   |  ==============    ==============

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
2005, 2004 and 2003 with the following assumptions:

                                  2005         2004         2003

Expected dividend yield           0.00%        0.00%        0.00%
Risk-free interest rate           2.38%        2.40%        2.76%

Note D - Income Taxes

With the exception of the year ended June 30, 2005, the Company recognized
losses for financial and income tax reporting for each of the periods in the
accompanying statements of operations. Because of this, and because the deferred
income tax assets were fully reserved by valuation allowances, no income taxes
were provided for in the accompanying financial statements for such periods. The
valuation allowance approximated $36,000 at June 30, 2004.

During the year ended June 30, 2005, the Company generated significant net
income for financial statement purposes. However, because the net unrealized
gain on investments of $21,477,939 would not be currently taxable (even if the
Company intended to remain as a regular corporation), the Company had a loss for
income tax purposes. Furthermore, because the Company is registered under the
Investment Company Act of 1940, it is allowed to elect to be qualified as a
regulated investment company ("RIC"), under the Internal Revenue Code. Since
management intends to make this election, the Company will not be subject to
income taxes, unless it fails to distribute substantially all its taxable income
to its shareholders. Accordingly, no income taxes have been provided for in the
accompanying 2005 financial statements.

Note E - Commitments

At June 30, 2005, the Company had a lease for office facilities in Raleigh,
North Carolina, on month-to-month lease terms at $1,350 per month. Effective
September 1, 2005 the Company relocated its offices to 2501 Reliance Ave., Apex,
NC 27539 and entered a lease for 4,550 square feet with Production Reliance,
LLC. The lease, which has a term of 62 months,and requires monthly payments of
approximately $4,500, contains a provision which allows the Company to extend
the term for two consecutive periods of five years. This space is shared with
the Company's portfolio companies. Rent expense under operating facility leases
was approximately $16,200 for the fiscal year ended June 30, 2005 and $18,000
for each of the fiscal years ended June 30, 2004 and 2003. Future minimum rental
payments required under the terms of the Company's Apex office lease agreement
are approximately as follows:

    Year Ended
     June 30,             Amounts

       2006              $ 44,600
       2007                54,800
       2008                56,400
       2009                58,100
       2010                59,800
    Thereafter             10,000
    TOTAL                $283,700




                                       35




Note F - Other Related Party Transactions

In July 2001, the Company entered a management fee agreement with Free Harbor
LLC (an entity company controlled by the Company's CEO), whereby the Company has
agreed to pay Free Harbor LLC $4,600 per month plus 10% of pretax profits as
long as the management agreement is in effect. Expenses incurred under this
arrangement totaled $2,153,830, $55,200, and $55,200 for the years ended June
30, 2005, 2004 and 2003 respectively , and at June 30, 2005 and 2004, the
Company had amounts payable of approximately $2,102,300 and $0, respectively,
due to Free Harbor LLC. During the year ended June 30, 2004, $170,000 of the
payable balance was satisfied through the issuance of 3,800,000 non-voting
preferred shares of the Company (see Note B).

At June 30, 2005, the Company had a loan outstanding of $25,000 payable to a
director of the Company. This loan has been fully repaid subsequent to the
fiscal year end.

Note G - Other Subsequent Events

On July 1, 2005, the Company entered into agreements with HydroFlo Water
Treatment, Inc., Metals & Arsenic Removal Technology, Inc. and Safety Scan
Technology, Inc. whereby a monthly fee of $13,500 is charged to each company for
providing management services.

On July 15, 2005, the Company formed a portfolio company, Advanced Water
Recycle, Inc., to combine resources from each of the Company's current portfolio
companies to provide customers with water recycling and reuse.

On September 13, 2005, the Company received a second subpoena from the SEC
regarding a non-public, fact-finding inquiry into activities of other entities
not managed by HydroFlo, Inc. The Company has complied with the subpoena.

Note H - Quarterly financial information (unaudited)

The information set forth below should be read in conjunction with the
information included in our Report on Form 10-K for the period ended June 30,
2005, including "Management's Discussion and Analysis of Financial Condition and
Results of Operations,", in order to understand the factors that may affect the
comparability of the financial data presented below.

The information set forth below is not necessarily indicative of results of
future operations

                                              Three          Three           Three            Three
                                              Months        Months          Months           Months
                                              Ended          Ended           Ended            Ended
                                             June 30,      March 31,     December 31,     September 30,
                                               2005          2005            2004             2004

Revenues                                    $         -    $         -    $        -        $         -

Operating expenses                            2,228,433         98,417       111,727            154,858

Net unrealized gain on investments           20,827,822        552,869       111,388            (14,170)

Net Income (loss)                            18,595,932        454,639         4,377           (167,282)

Income (loss) per common share
  - Basic                                          0.51           0.01          0.00              (0.01)
  - Diluted                                        0.52           0.01          0.00              (0.01)





                                       36





                                                      As a Business Development   |              Prior to Converting to a
                                                           Company ("BDC")        |        Business Development Company ("BDC")
                                                                                  |
                                                        Three         For the     |     For the            Three             Three
                                                        Months         period     |     period            Months             Months
                                                        Ended      March 4, 2004  |   January 1,           Ended             Ended
                                                       June 30,     to March 31,  |  2004 to March 3,   December 31,      September 30,
                                                         2004           2004      |      2004              2003               2003
                                                                                  |
           Revenues                                 $         -      $        -   |   $    2,600         $    37,790       $   68,818
                                                                                  |
           Gross profit                                       -               -   |       (6,001)             24,099           52,020
                                                                                  |
           Operating expenses                           269,509         319,795   |      580,485             303,143          453,950
                                                                                  |
           Net unrealized gain on investments             2,592               -   |            -                   -                -
                                                                                  |
           Net Income (loss)                           (269,861)       (319,795)  |     (586,711)           (309,485)        (401,652)
                                                                                  |
           Income (loss) per common share                                         |
             - Basic                                      (0.01)          (0.02)  |        (0.04)              (0.02)           (0.03)
             - Diluted                                    (0.01)          (0.02)  |        (0.04)              (0.02)           (0.03)
                                                                                  |

End of financial Statements
________________________________________________________________________________




                                       37




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no disagreements with our independent accounting firm during our last
fiscal year.

On January 23, 2004 we filed an 8K to announce that the Company has engaged
Kingery & Crouse, P.A. as its principal accountant to replace its former
principal accountant, Grant Thornton LLP. The former accountant resigned
effective January 20, 2004. The resignation of Grant Thornton LLP was accepted
and the decision to retain Kingery & Crouse, P.A. was approved by the Board of
Directors of the Company.

During the Company's two fiscal years prior to their resignation and during any
subsequent interim periods preceding the date of resignation, the Company has
had no disagreements with Grant Thornton LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Grant
Thornton LLP, would have caused them to make reference to the subject matter in
their reports. Grant Thornton LLP's reports on the financial statements of the
Registrant as of and for each of the years ended June 30, 2002 and 2003 were
modified as to uncertainty that the Registrant will continue as a going concern;
other than this, Grant Thornton LLP's reports on the above referenced financial
statements neither contained an adverse opinion nor a disclaimer of opinion nor
were they qualified or modified as to audit scope or accounting principles.

By letter to the Board of Directors of the Registrant dated November 14, 2003,
Grant Thornton LLP notified the Registrant of certain significant continuing
internal control deficiencies that Grant Thornton LLP concluded to be material
weaknesses in the design and operation of internal control under standards
established by the American Institute of Certified Public Accountants. As
reported in our report filed on Form 10-QSB for the period ending September 30,
2003, management is confident that its financial statements for the three months
ended September 30, 2003 fairly present, in all material respects, the financial
condition and results of operations of the Company.

The material weaknesses have been discussed in detail among HydroFlo's Board of
Directors and Grant Thornton LLP. Management has assigned high priority to the
correction of these material weaknesses, and management is committed to
addressing and resolving them fully. As the corporation continues its growth and
strives to achieve financial stability, management intends to devote additional
resources to further develop its financial accounting, analysis and reporting
functions.

In addition, Grant Thornton LLP did not advise the Company with regard to any of
the following:

1. That information has come to the attention of Grant Thornton LLP, which made
them unwilling to rely on management's representations, or unwilling to be
associated with the financial statements prepared by management; or

2. That the scope of the audit should be expanded significantly, or information
has come to the attention of Grant Thornton LLP that they have concluded will,
or if further investigated might, materially impact the fairness or reliability
of a previously issued audit report or the underlying financial statements, or
the financial statements issued or to be issued covering the fiscal periods
subsequent to the date of the most recent audited financial statements, and the
issue was not resolved to Grant Thornton LLP's satisfaction prior to its
resignation.

During the fiscal years ended June 30, 2004 and 2003 and during any subsequent
interim periods preceding the date of engagement, the registrant has not
consulted Kingery & Crouse, P.A. regarding any matter requiring disclosure under
Regulation S-K, Item 304(a)(2).

ITEM 9A CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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




                                       38




Changes in Internal Controls

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

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

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

The company has appointed the Chief Executive Officer as Chief Financial Officer
and has hired a part time consultant to help address internal control issues as
well as improve processes and procedures.

ITEM 9B OTHER INFORMATION

NONE

                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT; IDENTIFICATION OF DIRECTORS
AND EXECUTIVE OFFICERS

Our directors, executive officers and key employees and their respective ages
and positions are set forth below. Biographical information is also presented
below. Our executive officers are appointed by our Board of Directors and serve
at its discretion.

Dennis L. Mast - Chief Executive Officer, Chairman - Age: 46

From 1988 to 1997 Mr. Mast held the position of President / Chief Executive
Officer at Environmental Aspecs, Inc., where he was responsible for the
development and oversight of all facets of the environmental engineering company
employing approximately 55 professionals. Services included engineering,
geological studies, testing, consulting and remediation of properties containing
regulated hazardous wastes. During his time with Environmental Aspecs, Mr. Mast
grew the company from start-up to eight million dollars annual revenues and was
the recipient of the Triangle Fast 50 Award as one of 50 fastest growing
companies in the Triangle North Carolina area in 1993, 1994, 1995, and 1997.

His accomplishments at Environmental Aspecs, Inc. also won him the Future 30
Award as one of 30 fastest growing companies in the Raleigh area in 1995 and
1997, the North Carolina Technology Award as one of 50 fastest growing
technological companies in the North Carolina area in 1995 and 1996, and
qualified the company as a North Carolina Qualified Business Venture with the
Secretary of State

Shane Traveller - Director - Age: 39

Mr. Traveller brings an extensive background in service to public companies both
as an independent auditor, then later as an officer and director. He is a
licensed CPA and sits on the board of directors of a number of other public
companies where he serves as chairman of the audit committee. From 1998 though
2001, Mr. Traveller served the Chief Financial Officer of Trimedyne, Inc., a
NASDAQ NMS-listed medical device company. In 2002, he was named President and
COO where he oversaw all operations, product development and manufacturing in




                                       39




addition to financial reporting, investor relations, and information systems for
all aspects of the company's operations. In 2003, Mr. Traveller left Trimedyne
to become a partner with Javelin Holdings, Inc. With a company he co-founded
prior to joining Trimedyne, Mr. Traveller established supply channels in Eastern
Europe, negotiated a letter of intent and subsequent joint venture agreement
with a Russian supplier, and oversaw the market release of five new products. He
raised seed capital and set up the production facility and internal accounting
controls. As a consultant and independent auditor, Mr. Traveller has been
closely involved in the development and implementation of internal controls,
management of staff, preparation and filing of countless financial statements
and SEC filings. He has led clients through IPO's and secondary offerings,
private placements, mergers and acquisitions, and conversions to a Business
Development Company under the Investment Act of 1940.

Ross W. Smith - Director - Age: 46

Ross W. Smith is a successful business professional that has started, owned, and
operated several businesses in the past twenty years, ranging from printing and
distribution to real estate holdings and investments. Through growth and
management of various businesses, Mr. Smith has gained valuable experience in
every aspect of successful business operations. Mr. Smith's accomplishments have
included the startup and management of mini-storage facilities, acquisition and
management of significant real estate holdings and a successful turnaround and
sale of a previously faltering printing business.

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.

The primary responsibility of the Audit Committee is to oversee the Company's
financial reporting process on behalf of the Company's Board of Directors and
report the result of their activities to the Board. Such responsibilities shall
exclude but shall not be limited to, the selection, and if necessary the
replacement of the Company's independent auditors, review and discuss with such
independent auditors and the Company's internal audit department (i) the overall
scope and plans for the audit, (ii) the adequacy and effectiveness of the
accounting and financial controls, including the Company's system to monitor and
manage business risks, and legal and ethical programs, and (iii) the results of
the annual audit, including the financial statements to be included in the
Company's annual report on Form 10-K. Hydroflo's audit committee charter is
filed as an exhibit to this Form 10-K.

The Investment Committee shall have oversight responsibility with respect to
reviewing and overseeing the Company's contemplated investments and portfolio
companies and investments on behalf of the Board and shall report the results of
their activities to the Board. Such Investment Committee shall (i) have the
ultimate authority for and responsibility to evaluate and recommend investments,
and (ii) review and discuss with management (a) the performance of portfolio
companies, (b) the diversity and risk of the Company's investment portfolio,
and, where appropriate, make recommendations respecting the role or addition of
portfolio investments and (c) all solicited and unsolicited offers to purchase
portfolio companies. Hydroflo's investment committee charter is filed as an
exhibit to this Form 10-K.

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.

Code of Ethics

The Company has adopted a code of ethics which applies to, among others, its
senior officers, including its Chief Executive Officer and its Chief Financial
Officer, as well as every director and employee of the Company.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the officers and
directors of the Company and persons who beneficially own more than 10% of the




                                       40




Company's common stock to file reports of securities ownership and changes in
such ownership with the SEC. Officers, directors and 10% stockholders are also
required by the rules promulgated by the SEC to furnish to the Company copies of
all Section 16(a) reports they file.

Based solely upon a review of the copies of such forms furnished to the Company,
the Company believes that each of its officers and directors complied with all
Section 16(a) filing requirements applicable to them during the fiscal year
ended June 30, 2005.

ITEM 11. 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,
2003, 2004 and 2005 respectively by our Chief Executive Officer.


                                                                            Dollar Value of
                                                                              Stock-Based
           Name             Position      Year       Salary      Bonus       Compensation


     Dennis Mast (1)           CEO        2003        $55,200          $0         $0
                                          2004        $55,200          $0         $0
                                          2005        $55,200  $2,098,630         $0

    Thomas Barbee (2)       President     2003       $100,000          $0      $582,000
                                          2004       $100,000          $0      $728,000
                                          2005        $66,665          $0       $33,750

(1) Mr. Mast's services are provided under an agreement with his affiliate, Free
Harbor, LLC. In connection with the management agreement with Free Harbor LLC,
the Company has agreed to pay Free Harbor LLC 10% of pretax profits as long as
the management agreement is in effect. This agreement is 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.

(2) Mr. Barbee had a written memorandum of employment with us. Effective
February 24, 2005, Mr. Barbee resigned as President and was reassigned as the
Chief Operating Officer of one of our portfolio companies, HydroFlo Water
Treatment, Inc. The position of President has been eliminated and all such
duties will be performed by Dennis L. Mast, Chief Executive Officer. Mr. Barbee
will continue to receive stock options as required by his original employment
agreement

The value of Mr. Barbee's stock-based compensation, as described more fully
above, totaled approximately $582,000, $728,000, and $33,750 during fiscal years
2003, 2004 and 2005 respectively. Such amounts were estimated in the stock
option pricing models at each grant date.

Compensation Agreements

At June 30, 2005 and June 30, 2004, the Company had amounts payable of
$2,102,330 and $0, 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 $2,153,830, $55,200, and $55,200 for the years ended
June 30, 2005, 2004 and 2003 respectively. As of June 30, 2004, $170,000 of the
payable balance was transferred for the acquisition of 3,800,000 non-voting
preferred stock of the Company.

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. The Company issued
60,000 shares of its common stock to one director in exchange for services as a
director during the fiscal year ended June 30, 2005. In the future, we may have
to consider compensating any outside directors that become members of our board.




                                       41




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth information as of June 30, 2005, regarding the
beneficial ownership of our common stock and preferred stock (i) by each person
or group known by our management to own more than 5% of the outstanding shares
of each such class, (ii) by each director, the chief executive officer and each
of the other four executive officers that were paid more than $100,000 during
the last fiscal year, and (iii) by all directors and executive officers as a
group. Unless otherwise noted, each person has sole voting and investment power
over the shares indicated below, subject to applicable community property laws.

Except as otherwise stated, the mailing address for each person identified below
is 2501 Reliance Ave., Apex, NC 27539.


                                                             Shares
Name                                           Class         Owned

Capital Access, Inc.                           Common      13,460,000
Dennis L. Mast, Managing Director

UTEK Corp.                                     Common      6,708,529
202 South Wheeler, Plant City, FL

Ross W. Smith                                  Common        60,000
Director

Free Harbor, LLC                             Preferred     3,800,000
Dennis L. Mast, Managing Director

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
41,706,761 shares of common stock outstanding as of September 1, 2005.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

At June 30, 2005 and June 30, 2004, the Company had amounts payable of
$2,102,330 and $0, 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 $2,153,830, $55,200, and $55,200 for the years ended
June 30, 2005, 2004 and 2003 respectively. As of June 30, 2004, $170,000 of the
payable balance was transferred for the acquisition of 3,800,000 non-voting
preferred stock of the Company.

Other than the above transactions, we have not entered into any material
transactions in 2005 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 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth fees billed to us by our auditors during the
fiscal years ended June 30, 2005 and June 30, 2004 for: (i) services rendered
for the audit of our annual financial statements and the review of our quarterly
financial statements, (ii) services by our auditor that are reasonably related
to the performance of the audit or review of our financial statements and that
are not reported as Audit Fees, (iii) services rendered in connection with tax
compliance, tax advice and tax planning, and (iv) all other fees for services
rendered.




                                       42




           (i) Audit Fees
                                                 2004             2005

Kingery & Crouse, P.A.                         $16,475          $32,167
Grant Thornton, LLP                            $27,179               $0

           (ii) Audit  Related Fees

None

           (iii) Tax Fees

None

           (iv) All Other Fees

None

TOTAL FEES
                                                 2004             2005

Kingery & Crouse, P.A.                        $16,475          $41,391
Grant Thornton, LLP                           $27,179               $0


AUDIT FEES. Consists of fees billed for professional services rendered for the
audit of our financial statements and review of the interim financial statements
included in quarterly reports and services that are normally provided in
connection with statutory and regulatory filings or engagements.

AUDIT-RELATED FEES. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under "Audit Fees." There were no
Audit-Related services provided in fiscal 2004 or 2003.

TAX FEES. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning.

ALL OTHER FEES. Consists of fees for products and services other than the
services reported above.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITORS

The policy of the company's Audit Committee is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, and tax services
and other services. Pre-approval is generally provided for up to one year and
any pre-approval is detailed as to the particular service or category of
services and is generally subject to a specific budget. The independent auditors
and management are required to periodically report to the Company's Audit
Committee regarding the extent of services provided by the independent auditors
in accordance with this pre-approval, and the fees for the services performed to
date. The Board of Directors may also pre-approve particular services on a
case-by-case basis.




                                       43




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements. - Included at Item 8

Financial Statement Schedules

All Schedules are omitted because the required information is shown in the
financial statements or the notes thereto or is considered to be immaterial.

(b) Exhibits.

Exhibit No.    Description                                                                                   Location

3.1            Articles of Incorporation                                                                     *
3.2            Bylaws                                                                                        *
3.3            Amended Articles of Incorporation                                                             Filed herewith
14             Code of Ethics adopted March 24, 2005                                                         Filed herewith
31.1           Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act    Filed herewith
               of 2002
31.2           Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act    Filed herewith
               of 2002
32.1           Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act    Filed herewith
               of 2002
32.2           Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act    Filed herewith
               of 2002
99.1           Audit Committee Charter adopted March 24, 2005                                                Filed herewith
99.2           Investment Committee Charter adopted March 24, 2005                                           Filed herewith

* Incorporated by reference to the exhibits to the Company's General Form for
Registration of Securities of Small Business Issuers on Form SB-2, and
amendments thereto, previously filed with the Commission.




                                       44




                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.


HYDROFLO, INC.

    Title                   Name            Date              Signature


Principal Executive,
Accounting
And Financial               Dennis Mast     October 13, 2005 /s/Dennis Mast
Officer

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.

SIGNATURE              NAME               TITLE        DATE


/s/Dennis Mast         Dennis Mast        Director     October 13, 2005

/s/Ross Smith          Ross Smith         Director     October 13, 2005

/s/Shane Traveller     Shane Traveller    Director     October 13, 2005