Form SB-2/A for HydroFlo, Inc.

POS AM 1 hydroflo.htm Form SB-2/A for HydroFlo, Inc.

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

Post Effective Amendment No. 3

FORM SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

HydroFlo, Inc.
(Name of small business issuer in our charter)

North Carolina 3589 56-2171767
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

3721 Junction Blvd., Raleigh, NC 27603

(Address of principal executive offices) (Zip Code)

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

Registrant's telephone number: 919-772-9925

Dennis Mast
3721 Junction Blvd., Raleigh, NC 27603
919-772-9925

(Name, address and telephone number of agent for service)

________________________________________________________________

Copies to:

M.T. Williams, Esq.
Williams Law Group, P.A.
2503 W. Gardner Ct.
Tampa FL 33611
Phone: 813.831.9348
Fax: 813.832.5284

Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.

If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box: [X]

If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act of 1933 registration number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per aggregate offering registration
unit (1) price fee
Common Stock offered by our
Selling Stockholders (2) 2,273,550 $ 2.00 $ 4,547,100 $ 418.33

------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Selling shareholders will be selling these shares at negotiated prices. We
will not receive proceeds from the sale of shares from the selling
shareholders.

We hereby amend this registration statement on such date or dates as may be
necessary to delay our effective date until we will file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a) may determine.

PROSPECTUS
HYDROFLO, INC.

Selling shareholders are offering up to 2,273,550 shares of common stock. The
selling shareholders will offer their shares at $2.00 per share until our shares
are quoted on the OTC Bulletin Board and thereafter at prevailing market prices
or privately negotiated prices. We will not receive proceeds from the sale of
shares from the selling shareholders.

Prior to this offering, there has been no market for our securities. Our common
stock is now qualified for quotation on the Over the Counter Bulletin Board,
however there are currently no published quotations.

This offering is highly speculative and these securities involve a high degree
of risk and should be considered only by persons who can afford the loss of
their entire investment. There is substantial doubt about our ability to
continue as a going concern. See "Risk Factors" beginning on page 9.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

Offering Information
--------------------

----------------------- --------------------- -------------------- --------------------- --------------------
Price to Public (1) Underwriting Estimated Offering Proceeds to
Discounts and Expenses (3) Company
Commissions (2)
----------------------- --------------------- -------------------- --------------------- --------------------
Per Share
----------------------- --------------------- -------------------- --------------------- --------------------
Until qualified for $2.00 N/A $.02 N/A
quotation on bulletin
board
----------------------- --------------------- -------------------- --------------------- --------------------
After qualified for Prevailing N/A $.02 N/A
quotation on bulletin market prices or
board privately
negotiated
prices
----------------------- --------------------- -------------------- --------------------- --------------------
Total $0.0 $0.0 $50,000 $0.0
----------------------- --------------------- -------------------- --------------------- --------------------

(1) The offering price has been arbitrarily determined and does not bear any
relationship to our assets, results of operations, or book value, or to any
other generally accepted criteria of valuation. The offering price for the
selling shareholders' shares has been determined solely by management.
(2) There are no underwriting commissions involved in this offering.
(3) We have agreed to pay all the costs of this offering. Selling security
holders will pay no offering expenses.

The date of this prospectus is May 14, 2003, as supplemented on July __, 2003.

TABLE OF CONTENTS
-----------------

SUMMARY INFORMATION AND RISK FACTORS...........................................7
RISK FACTORS...............................................................10

Our poor financial condition raises substantial doubt about our
ability to continue as a going concern. We do not have sufficient
cash on hand resources to operate beyond October 15, 2003. You will
be unable to determine whether we will be able to continue in
business thereafter or ever become profitable..............................10

We have a limited operating history; because our planned growth
is contingent upon receiving additional funding, you will be unable
to evaluate whether our business will be successful........................10

Because our wastewater treatment system has not been accepted as
a recognized form of wastewater treatment, we face significant
barriers to acceptance of our services.....................................11

Independent sales representatives may not be successful in
selling our wastewater treatment products and services, causing
our revenues to be reduced.................................................11

For the period from fiscal year-end June 30, 2002 to July 15,
2003, our business has come from only five customers. If we fail
to develop a wide customer base, our revenues will be reduced..............11

To date, most of the raw materials consisting of parts used in
our manufacturing process of the products we sell has come from one
supplier; if we are unable to continue to purchase our parts from
this supplier, our revenues could be reduced...............................12

Because we terminated our license agreement with Aquatex Group
Industries S.A., we will not have their basin aeration technology
and related equipment to sell, which could reduce future revenues..........12

Mr. Dennis Mast, our CEO, can exert control over matters requiring
stockholder approval.......................................................12

Our management decisions are made by our CEO Dennis Mast and
president Tom Barbee; if we lose their services, our revenues may be
reduced....................................................................13

Certain North Carolina corporation law provisions could prevent
a potential takeover of us that could adversely affect the market
price of our common stock or deprive you of a premium over the
market price...............................................................14

USE OF PROCEEDS...............................................................14
DETERMINATION OF OFFERING PRICE...............................................15
DILUTION......................................................................15
SELLING SECURITY HOLDERS......................................................15
PLAN OF DISTRIBUTION..........................................................19
LEGAL PROCEEDINGS.............................................................21
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS.................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................22
DESCRIPTION OF SECURITIES.....................................................23
INTEREST OF NAMED EXPERTS.....................................................24
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES LIABILITIES.....................................................24
DESCRIPTION OF BUSINESS.......................................................24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................37
DESCRIPTION OF PROPERTY.......................................................42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................42
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................43
PENNY STOCK CONSIDERATIONS....................................................43
EXECUTIVE COMPENSATION........................................................45
FINANCIAL STATEMENTS..........................................................48
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE......................................................49
INSIDE FRONT AND OUTSIDE BACK COVER PAGES OF PROSPECTUS.......................50
INDEMNIFICATION OF OFFICERS AND DIRECTORS.....................................50
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION...................................57
RECENT SALES OF UNREGISTERED SECURITIES.......................................57
EXHIBITS......................................................................60
UNDERTAKINGS..................................................................60

SUMMARY INFORMATION AND RISK FACTORS

PROSPECTUS SUMMARY

The prospectus summary contains a summary of all material terms of the
prospectus. You should carefully read all information in the prospectus,
including the financial statements and their explanatory notes, under the
Financial Statements section beginning on page F-1 prior to making an investment
decision. In addition, you should consult your tax, legal, or business advisor
before making an investment.

Our Organization
----------------

We were incorporated in North Carolina on December 30, 1999. We are authorized
to issue 20,000,000 shares of $0.01 par value common stock of which 811,050
shares are outstanding as of July 15, 2003. We are authorized to issue
5,000,000 shares of $0.01 par value preferred stock, of which no shares are
currently outstanding.

Our Business
------------

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

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

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

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

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

The Offering
-------------

As of the date of this prospectus, we had 811,050 shares of common stock and
no shares of preferred stock issued and outstanding.

Selling shareholders are offering up to 2,273,550 shares of common stock. The
selling shareholders will offer their shares at $2.00 per share until our shares
are quoted on the OTC Bulletin Board and thereafter at prevailing market prices
or privately negotiated prices. We will pay all expenses of registering the
securities, estimated at approximately $50,000. We will not receive any proceeds
of the sale of these securities.

Financial Summary
-----------------

Because this is only a financial summary, it does not contain all the financial
information that may be important to you. Therefore, you should carefully read
all the information in this prospectus, including the audited financial
statements and their explanatory notes before making an investment decision.

We are a development stage company. From our inception in December 1999 to March
31, 2003, we have used approximately $1,183,619 in operating activities and
$160,603 in investing activities. To finance these uses of cash we raised
approximately $1,530,041 in cash from sales of our common stock.

As of July 15, 2003 we had $130,735 of cash on hand. We believe this cash on
hand will be sufficient to satisfy our operating cash requirements through
October 15, 2003. As of July 15, 2003 we have remaining receivables due on
known non-cancelable purchase orders and contracts in the amount of $93,178. We
will expend approximately an additional $26,375 in cash for unpaid costs for
parts we utilized in manufacturing these products and sales commissions payable
on these orders and contracts.

Thus, on or before August 31, 2003, the latest date upon which we believe we
will receive all payments due on these purchase orders and contracts, we
anticipate receiving $66,803 in additional net cash revenues from these purchase
orders and contracts. This assumes all customers make full and timely payments
according to revised payment agreements with these customers. We know of no
reason why this will not occur. Accordingly, given our current cash position
plus anticipated additional net cash revenues, we believe we will be able to
satisfy our operating cash requirements through January 1, 2004.

Finally, if we do not generate any additional net revenues from new sales
before January 1, 2004, we will be unable to continue operations thereafter. We
currently have no purchase orders or contracts in place for new sales. We have
no plan in place that will eliminate this risk or the risk that our current
customers will not pay us or pay us in a timely manner.

HYDROFLO, INC.
Summary Financial Data
Balance Sheets

ASSETS

March 31,
2003 June 30, June 30,
(Unaudited) 2002 2001
----------------------------------

TOTAL CURRENT ASSETS $256,654 $101,106 $26,608

PROPERTY AND EQUIPMENT, NET 99,285 42,402 8,967

OTHER ASSETS 37,252 37,672 11,001

----------------------------------
TOTAL ASSETS $393,191 $181,180 $46,576
==================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

TOTAL LIABILITIES $220,101 $157,884 $68,688

TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 173,090 23,296 (22,112)

----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) $393,191 $181,180 $46,576
==================================

HYDROFLO, INC.
Summary Financial Data
Statement of Operations For the Period
For the Period
From Inception
For the Nine Months For the Nine Months (December 8, 1999)
Ended Ended For the Year For the Year Through
March 31, 2003 March 31, 2002 Ended Ended March 31, 2003
(Unaudited) (Unaudited) June 30, 2002 June 30, 2001 (Unaudited)
---------------- ---------------- ---------------- ---------------- ----------------

REVENUES $ 126,481 $ 0 $ 5,001 $ 0 $ 131,482

COST OF GOODS SOLD 17,172 0 5,086 0 22,258
---------------- ---------------- ---------------- ---------------- ----------------
GROSS MARGIN 109,309 0 (85) 0 109,224

OPERATING EXPENSES 1,006,868 675,696 925,149 313,468 2,288,092
---------------- ---------------- ---------------- ---------------- ----------------
NET LOSS FROM OPERATIONS (897,559) (675,696) (925,234) (313,468 (2,178,868)

OTHER INCOME (LOSS) 4,241 521 730 2,191 8,167
---------------- ---------------- ---------------- ---------------- ----------------
NET LOSS ($893,318) ($675,175) ($924,504) ($311,277) ($2,170,701)

WEIGHTED AVERAGE SHARES OUTSTANDING
(basic and diluted) 15,728,457 16,432,212 16,222,518 16,386,293 16,101,748

BASIC AND DILUTED NET LOSS PER SHARE (0.06) (0.04) (0.06) (0.02) (0.13)
---------------- ---------------- ---------------- ---------------- ----------------

RISK FACTORS
------------

In addition to the other information provided in this prospectus, you should
carefully consider the following risk factors in evaluating our business before
purchasing any of our common stock.

Our poor financial condition raises substantial doubt about our ability to
continue as a going concern. We do not have sufficient cash on hand resources
to operate beyond October 15, 2003. You will be unable to determine whether we
will be able to continue in business thereafter or ever become profitable.

Finally, if we do not generate any additional net revenues from new sales
before January 1, 2004, we will be unable to continue operations thereafter. If
this were to occur, we would most likely have to find a buyer for our business
or file for protection under bankruptcy laws. This could result in a loss of
investors' entire investment We currently have no purchase orders or contracts
in place for new sales. We have no plan in place that will eliminate this risk
or the risk that our current customers will not pay us or pay us in a timely
manner.

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

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

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

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

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

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

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

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

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

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

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

For the period from fiscal year-end June 30, 2002 to July 15, 2003, our
business has come from only five customers. If we fail to develop a wide
customer base, our revenues will be reduced.

For the period from fiscal year-end June 30, 2002 to July 15, 2003, the
following were our only five customers, with sales in the following amounts:

o Federal Emergency Management Agency: $500
o Valley Water Technologies: $67,500
o Kimberly Clark: $7,000
o Happy Cloud Ranch: $99,443
o Emory Wilson: $68,735

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

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

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

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

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

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

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

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

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

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

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

The offering price of $2.00 per share has been arbitrarily set by our board of
directors and accordingly does not indicate the actual value of our business.

The offering price of $2.00 per share is not based upon earnings or operating
history, does not reflect our actual value, and bears no relation to our
earnings, assets, book value, net worth or any other recognized criteria of
value. No independent investment banking firm has been retained to assist in
determining the offering price for the shares. Accordingly, the offering price
should not be regarded as an indication of any future market price of our stock.

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

As of June 31, 2003, there are 2,273,550 Shares of our common stock held by
non-affiliates and 13,500,000 Shares of our common stock held by affiliates that
Rule 144 of the Securities Act of 1933 defines as restricted securities. No
Shares have been sold pursuant to Rule 144 of the Securities Act of 1933,
however as of July 31, 2002, approximately all shares held by affiliates are
eligible for resale under 144.

Once this registration statement is effective, the shares of our common stock
being offered by our selling shareholders will be freely tradable without
restrictions under the Securities Act of 1933, except for any shares held by our
"affiliates," which will be restricted by the resale limitations of Rule 144
under the Securities Act of 1933. All of our shares will be eligible for resale
no later than 90 days after this registration statement is declared effective,
assuming the volume and method of sale limitations in Rule 144 can be satisfied
to the extent required.

In addition to the shares available for resale under this registration
statement, as a result of the provisions of Rule 144, all of the restricted
securities could be available for sale in a public market, if developed,
beginning 90 days after the date of this prospectus. The availability for sale
of substantial amounts of common stock under Rule 144 could reduce prevailing
market prices for our securities.

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

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

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

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

SPECIAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS

Some of the statements in this prospectus are "forward-looking statements."
These forward-looking statements involve certain known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. These
factors include, among others, the factors set forth above under "Risk Factors."
The words "believe," "expect," "anticipate," "intend," "plan," and similar
expressions identify forward-looking statements. We caution you not to place
undue reliance on these forward-looking statements. We undertake no obligation
to update and revise any forward-looking statements or to publicly announce the
result of any revisions to any of the forward-looking statements in this
document to reflect any future or developments. However, the Private Securities
Litigation Reform Act of 1995 is not available to us as a non-reporting issuer.

USE OF PROCEEDS

Not applicable. We will not receive any proceeds from the sale of shares
offered by the selling shareholders.

DETERMINATION OF OFFERING PRICE

Our management has determined the offering price for the selling shareholders'
shares. The offering price has been arbitrarily determined and does not bear any
relationship to our assets, results of operations, or book value, or to any
other generally accepted criteria of valuation. Prior to this offering, there
has been no market for our securities.

DILUTION

Not applicable. We are not offering any shares in this registration statement.
All shares are being registered on behalf of our selling shareholders.

SELLING SECURITY HOLDERS

The selling security holders named below are selling the securities. The table
assumes that all of the securities will be sold in this offering. However, any
or all of the securities listed below may be retained by any of the selling
security holders, and therefore, no accurate forecast can be made as to the
number of securities that will be held by the selling security holders upon
termination of this offering. These selling security holders acquired their
shares by purchase or in exchange for software or services in transactions
exempt from registration under section 4(2) of the Securities Act of 1933. We
believe that the selling security holders listed in the table have sole voting
and investment powers with respect to the securities indicated. We will not
receive any proceeds from the sale of the securities by the selling security
holders.

------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Name Nature of Total Shares Shares Percent Percentage Relationship
Business and Owned Registered Before After Offering (2)
Name of Offering (1)
Principal
Executive
Officer of the
business
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Milford S. Mast 112,500 112,500 0.713 0 Relative of
chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Advisory Group Mgmt Company 45,000 45,000 0.285 0
Enterprises Eugene Chappell
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Carol A. Swailes 23,400 23,400 0.148 0 Relative of
chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Maudes Creations, Mgmt Company 15,000 15,000 0.095 0
LLC. Paul Keller
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
John J. Devlin 150,000 150,000 0.951 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Regional Network 1,200,000 1,200,000 7.608 0 Relative of
Marketing Co. Marketing chairman
Company
Milford S. Mast
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------

------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Dayspring Investment 50,400 50,400 0.320 0
Investments Holding Co.
C. Robert Dads
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Janet & Chuck 12,500 12,500 0.079 0 Relative of
Boerema chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
David L. & Janet 21,000 21,000 0.133 0 Relative of
E. Mast chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Virginia M. Fuller 52,500 52,500 0.333 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
John C. & 30,000 30,000 0.190 0
Kathleen Basehore
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Kurvin H. Grove 80,000 80,000 0.507 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Keith Ackerman 20,000 20,000 0.127 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Gideon K. & Susan 32,500 32,500 0.206 0
F. Stoltzfus
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Oliver S. Mast 11,250 11,250 0.071 0 Relative of
chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Harris & Patricia 7,500 7,500 0.048 0
Brody
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Harvest Fiduciary Farming 15,000 15,000 0.095 0 Relative of
Funds Ernest Mast chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Melvin R. Peachey 17,500 17,500 0.111 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Daniel K. Peachey 62,500 62,500 0.396 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Thelma Ewalt 7,500 7,500 0.048 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Joseph D. & Heidi 15,000 15,000 0.095 0
J. Young
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Robert G. 7,500 7,500 0.048 0
Eisenbrown
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Howard Martin 12,500 12,500 0.079 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Truman & Virginia 12,500 12,500 0.079 0 Relative of
Hertzler chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------

------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
James M. 17,500 17,500 0.0111 0
Esbenshade
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
William E. Jr. & 7,500 7,500 0.048 0
Annette A. Kelly
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Martin A. & 15,000 15,000 0.095 0
Gladys F.
Schickram
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Susan Lowenstein 7,500 7,500 0.048 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Preeminence Group Mgmt Co. 20,000 20,000 0.127 0
Glenn Diller
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Tena M. Peachey 37,500 37,500 0.238 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
David G. Peachey 12,500 12,500 0.079 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Jan L. & Keith H. 7,500 7,500 0.048 0
Keeney
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Paul D. Yoder 11,500 11,500 0.073 0 Relative of
chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Robert Getz 7,500 7,500 0.048 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Barbara L. Zerbee 5,000 5,000 0.032 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Excell Equities Mgmt Company 7,500 7,500 0.048 0 Relative of
Oliver Mast chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Amos Beiler 5,000 5,000 0.032 0 Relative of
chairman
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Martin Hatchery Poultry Hatchery 5,000 5,000 0.032 0
Poultry Farm Howard Martin
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Mary Ann Hays 5,000 5,000 0.032 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Elizabeth H. 5,000 5,000 0.032 0
Martin
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Lee H. Martin II 5,000 5,000 0.032 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Brayne Holdings Mgmt Company 10,000 10,000 0.063 0
Paul Yacoe
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------

------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
David B. Grove 5,000 5,000 0.032 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Michael L. Fuller 2,500 2,500 0.016 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Sharon L. Fuller 2,500 2,500 0.016 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Joseph A. Fuller 2,500 2,500 0.016 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Eagle Management Mgmt Company 5,000 5,000 0.032 0
Services John Jacobs
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Ike Stoltzfus 6,000 6,000 0.038 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
William L. & 5,000 5,000 0.032 0
Beverly Casagranda
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Moses S. King 5,000 5,000 0.032 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Richard Howarth 5,000 5,000 0.032 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
James S. Herr 25,000 25,000 0.158 0
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
Robert M. 5,000 5,000 0.032 0
Esbenshade
------------------- ----------------- ------------- --------------- ------------ ---------------- --------------------
(1) Assuming the sale of all shares offered.

(2) Each relative resides in a separate household. Each relative has sole
dispositive and voting power respect to these shares. There are no
agreements or understandings, written or oral, between or among these
relatives and Mr. Mast concerning the disposition or voting of these
shares.

Blue Sky

Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, District of
Columbia, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Maryland,
Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Jersey,
New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island,
South Carolina, Texas, Utah, Washington, West Virginia, and Wyoming. Although we
have submitted all necessary applications to secure this listing, we cannot
secure this listing and thus this qualification until after this registration
statement is declared effective. Once we secure this listing, secondary trading
can occur in these states without further action.

We have been advised by the state of Pennsylvania that our securities will be
automatically qualified for secondary trading in Pennsylvania without any
filing, review or approval after this registration statement is declared
effective.

All our shareholders currently reside in these states.

We currently do not intend to and may not be able to qualify securities for
resale in other states which require shares to be qualified before they can be
resold by our shareholders.

PLAN OF DISTRIBUTION

The securities offered by this prospectus will be sold by the selling
shareholders. We are not aware of any underwriting arrangements that have been
entered into by the selling shareholders. The distribution of the securities by
the selling shareholders may be effected in one or more transactions that may
take place in the over-the-counter market, including broker's transactions or
privately negotiated transactions.

Any of the selling shareholders, acting alone or in concert with one another,
may be considered statutory underwriters under the Securities Act of 1933, if
they are directly or indirectly conducting an illegal distribution of the
securities on behalf of our corporation. For instance, an illegal distribution
may occur if any of the selling shareholders were to provide us with cash
proceeds from their sales of the securities. If any of the selling shareholders
are determined to be underwriters, they may be liable for securities violations
in connection with any material misrepresentations or omissions made in this
prospectus. In addition, the selling shareholders and any brokers and dealers
through whom sales of the securities are made, may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, and the
commissions or discounts and other compensation paid to such persons may be
regarded as underwriters' compensation.

The selling shareholders may pledge all or a portion of the securities owned as
collateral for margin accounts or in loan transactions, and the securities may
be resold pursuant to the terms of such pledges, margin accounts or loan
transactions. Upon default by such selling shareholders, the pledge in such loan
transaction would have the same rights of sale as the selling shareholders under
this prospectus. The selling shareholders may also enter into exchange traded
listed option transactions, which require the delivery of the securities listed
under this prospectus. After our securities are qualified for quotation on the
over the counter bulletin board, the selling shareholders may also transfer
securities owned in other ways not involving market makers or established
trading markets, including directly by gift, distribution, or other transfer
without consideration, and upon any such transfer the transferee would have the
same rights of sale as such selling shareholders under this prospectus.

In addition to the above, each of the selling shareholders and any other person
participating in a distribution will be affected by the applicable provisions of
the Securities Exchange Act of 1934, including, without limitation, Regulation
M, which may limit the timing of purchases and sales of any of the securities by
the selling shareholders or any such other person.

Upon this registration statement being declared effective, the selling
shareholders may offer and sell their shares from time to time until all of the
shares registered are sold; however, this offering may not extend beyond two
years from the initial effective date of this registration statement.

There can be no assurances that the selling shareholders will sell any or all of
the securities. In order to comply with state securities laws, if applicable,
the securities will be sold in jurisdictions only through registered or licensed
brokers or dealers. In various states, the securities may not be sold unless
these securities have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
Under applicable rules and regulations of the Securities Exchange Act of 1934,
as amended, any person engaged in a distribution of the securities may not
simultaneously engage in market-making activities in these securities for a
period of one or five business days prior to the commencement of such
distribution.

All of the foregoing may affect the marketability of our securities. Pursuant to
the various agreements we have with the selling shareholders, we will pay all
the fees and expenses incident to the registration of the securities, other than
the selling shareholders' pro rata share of underwriting discounts and
commissions, if any, which is to be paid by the selling shareholders.

Should any substantial change occur regarding the status or other matters
concerning us or the selling shareholders, we will file a Rule 424(b) prospectus
disclosing such matters.

Blue Sky

Thirty-five states have what is commonly referred to as a "manual exemption" for
secondary trading of securities such as those to be resold by selling
stockholders under this registration statement. In these states, so long as we
obtain and maintain a listing in Standard and Poor's Corporate Manual, secondary
trading can occur without any filing, review or approval by state regulatory
authorities in these states. These states are: Alaska, Arizona, Arkansas,
Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho,
Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Mississippi,
Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Texas, Utah,
Washington, West Virginia, and Wyoming. Although we have submitted all necessary
applications to secure this listing, we cannot secure this listing and thus this
qualification until after this registration statement is declared effective.
Once we secure this listing, secondary trading can occur in these states without
further action.

All our shareholders currently reside in these states.

We currently do not intend to and may not be able to qualify securities for
resale in other states which require shares to be qualified before they can be
resold by our shareholders.

LEGAL PROCEEDINGS

We are not aware of any pending or threatened legal proceedings in which we are
involved.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS

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

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

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

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

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

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

Board Committees

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

Family Relationships

There are no family relationships among our officers or directors.

Legal Proceedings

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables set forth the ownership, as of the date of this
registration statement, of our common stock by each person known by us to be the
beneficial owner of more than 5% of our outstanding common stock, our directors,
and our executive officers and directors as a group. To the best of our
knowledge, the persons named have sole voting and investment power with respect
to such shares, except as otherwise noted. There are not any pending or
anticipated arrangements that may cause a change in control.

-------------------------------------- --------------------------- --------------------
Name and Address Number of Shares of Percentage
---------------- -------------------- -----------
Common Stock
------------
-------------------------------------- --------------------------- --------------------
Dennis L. Mast 13,500,000 85.6
4418 Penrose Valley Circle
Cary, NC 27511(1)
-------------------------------------- --------------------------- --------------------
Milford S. Mast (2) 1,312,500 8.3
466 N. Manor Road
Elverson, PA 19520
-------------------------------------- --------------------------- --------------------
All directors and named executive 13,500,000 85.6
officers as a group
(2 persons)
-------------------------------------- --------------------------- --------------------

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

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

DESCRIPTION OF SECURITIES

The following description as a summary of the material terms of the provisions
of our articles of incorporation and bylaws is qualified in its entirety. The
articles of incorporation and bylaws have been filed as exhibits to the
registration statement of which this prospectus is a part.

Common Stock

We are authorized to issue 20,000,000 shares of common stock with $.001 par
value per share. After giving effect to a three-for-one stock split effective
April 30, 2001 and an additional three-for-two stock split effective July 8,
2002, as of the date of this registration statement, there were 15,811,050
shares of common stock issued and outstanding held by 57 shareholders of record.

Each share of common stock entitles the holder to one vote, either in person or
by proxy, at meetings of shareholders. The holders are not permitted to vote
their shares cumulatively. Accordingly, the shareholders of our common stock who
hold, in the aggregate, more than fifty percent of the total voting rights can
elect all of our directors and, in such event, the holders of the remaining
minority shares will not be able to elect any of the such directors. The vote of
the holders of a majority of the issued and outstanding shares of common stock
entitled to vote thereon is sufficient to authorize, affirm, ratify or consent
to such act or action, except as otherwise provided by law.

Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available. We
have not paid any dividends since our inception, and we presently anticipate
that all earnings, if any, will be retained for development of our business. Any
future disposition of dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, our future earnings,
operating and financial condition, capital requirements, and other factors.

Holders of our common stock have no preemptive rights or other subscription
rights, conversion rights, redemption or sinking fund provisions. Upon our
liquidation, dissolution or winding up, the holders of our common stock will be
entitled to share ratably in the net assets legally available for distribution
to shareholders after the payment of all of our debts and other liabilities.
There are not any provisions in our Articles of Incorporation or our by-laws
that would prevent or delay change in our control.

Preferred Stock

We are authorized to issue 5,000,000 shares $0.01 value par preferred stock. As
of the date of this registration statement, there are no preferred shares
outstanding. We presently have no plans to issue any shares of preferred stock.
However, preferred stock may be issued with preferences and designations as the
board of directors may from time to time determine. The board may, without
stockholders approval, issue preferred stock with voting, dividend, liquidation
and conversion rights that could dilute the voting strength of our common
stockholders and may assist management in impeding an unfriendly takeover or
attempted changes in control.

There are no restrictions on our ability to repurchase or reclaim our preferred
shares while there is any arrearage in the payment of dividends on our preferred
stock.

INTEREST OF NAMED EXPERTS

Our Financial Statements as of June 30, 2002 and June 30, 2001 and for the years
then ended and for the period from inception (December 30, 1999) to June 30, 2002
included in this registration statement and prospectus have been audited by
Grant Thornton LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm as
experts in accounting and auditing.

The legality of the shares offered under this registration statement is being
passed upon by Williams Law Group, P.A., Tampa FL. We have entered into an
agreement on May 15, 2003 to retain the principal of Williams Law Group, M. T.
Williams, Esq., individually, to assist us in 1934 Act filings for a period of
two years following the effectiveness of this registration statement and have
agreed to issue to him individually 125,000 shares of our common stock for
providing these services.

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES LIABILITIES

Our by-laws, subject to the provisions of North Carolina Corporation Law,
contain provisions which allow the corporation to indemnify any person against
liabilities and other expenses incurred as the result of defending or
administering any pending or anticipated legal issue in connection with service
to us if it is determined that person acted in good faith and in a manner which
he reasonably believed was in the best interest of the corporation. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to our directors, officers and controlling persons, we have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.

DESCRIPTION OF BUSINESS

BUSINESS DEVELOPMENT

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

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

o Raising capital;
o Developing and patenting our products;
o Securing manufacturers for the products we sell; and
o Developing an independent sales force and markets for the products
and services we offer.

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

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

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

PRINCIPAL PRODUCTS & SERVICES

HydroFlo PLUS system: Aeration system for sewage treatment in pipes prior to
reaching treatment facilities

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

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

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

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

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

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

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

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

Emory Wilson [1]

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

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

[2] We are the manufacturer of this product.

Valley Water Technologies [1]

-------------------------- -----------------------------------------------------
Name of Product [2] Two PLUS 250-20 Systems
-------------------------- -----------------------------------------------------
Date of Purchase Order 4/7/03
-------------------------- -----------------------------------------------------
Date negotiations for
purchase order began May 2002

-------------------------- -----------------------------------------------------
Purchase order negotiated
by Steven Hausman for our distributor Valley Water
Technologies; Tom Barbee for HydroFlo
-------------------------- -----------------------------------------------------
Anticipated date product
will be completed Currently in operation at ConAgra Facility [3]

-------------------------- -----------------------------------------------------
Anticipated date product
will be delivered Currently in operation at ConAgra Facility [3]

-------------------------- -----------------------------------------------------
Total Payments Due $55,760.00, the full amount due net of commissions
-------------------------- -----------------------------------------------------
Date of receipt
of payments by HydroFlo Payment in the amount of $55,760.00, the full amount
due net of commissions to our distributor Valley
Water Technologies, Inc., was received from Valley
Water Technologies, Inc. on May 13, 2003 and has been
deposited into our account.[4]
-------------------------- -----------------------------------------------------

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

[2] We are the manufacturer of this product.

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

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

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

HydroFlo ATS system: Aeration basin aeration system

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

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

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

Happy Cloud Ranch [1]

-------------------------- -----------------------------------------------------
Name of Product [2] Three Pond Aeration and mixing systems
-------------------------- -----------------------------------------------------
Date of Purchase Order 2/24/03
-------------------------- -----------------------------------------------------
Date negotiations for
purchase order began 12/15/02

-------------------------- -----------------------------------------------------
Purchase order negotiated
by Tom Barbee
-------------------------- -----------------------------------------------------
Date product delivered June 30, 2003
-------------------------- -----------------------------------------------------
Total Payments Due $99,443
-------------------------- -----------------------------------------------------
Date of receipt of 2/25/03 - $20,000
payments by HydroFlo 4/5/03 - $20,000
Payment of $20,000 plus $8,968 for sales taxes and
freight received and deposited on June 16, 2003.
Additional payment of $15,000 received on June 30,
2003. Remaining payments of $24,443 anticipated to be
received on or before August 31, 2003. [3]
-------------------------- -----------------------------------------------------

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

[2] We are the manufacturer of this product.

[3] We were advised by the person responsible for authorizing payment for Happy
Cloud Ranch, the project engineer, that they had in fact made the entire
$40,000 payment and had sent the check to us or our distributor. This
representation proved inaccurate. When no check had been received by June
13, 2003, we contacted the project engineer for an explanation. We were
advised by the project engineer during that call that there was a problem
with the installation. The project engineer had approved and signed off on
all design specifications. However, the engineer determined after delivery
that he did not like the diameter of the pipes that were delivered, even
though they met the specifications he had approved, and wanted us to
develop a solution. We were advised that this was the reason for the
partial payment. The project engineer requested a meeting with our
technical personnel to discuss resolution of the issue. This meeting
occurred on July 7, 2003 and all issues were resolved. The project engineer
originally advised that he intended to make an additional payment at this
meeting. However, Mr. Mast called the engineer prior to the meeting to
negotiate an earlier payment and the parties agreed upon a $15,000 payment
if sent before the meeting, which it was. The check was received June 30,
2003.We anticipate receiving the remaining $24,443 on or before August 31,
2003, however this again is based upon a representation from the project
engineer. As an accommodation to our customer in the interest of promoting
positive relations and potential future product orders through them, we
have made a business decision not to press for payment in accordance with
the strict terms of the contract, even though we are entitled to do so. If,
in fact, payments appear not to be forthcoming, we will take all action to
collect the full amount due on this contract.

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

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

----------------------------------------- ------------------------------------- ---------------------------------
Agisa System HydroFlo System
----------------------------------------- ------------------------------------- ---------------------------------
Principal Physical Technology Components Cylindrical pipe with inner piping to High pressure vessels
allow for simple mixing under
approximately one atmosphere or less
of pressure
----------------------------------------- ------------------------------------- ---------------------------------
N/A Gas Introduction systems
----------------------------------------- ------------------------------------- ---------------------------------
N/A High pressure pumps and controls
----------------------------------------- ------------------------------------- ---------------------------------
N/A Mixing system
----------------------------------------- ------------------------------------- ---------------------------------

----------------------------------------- ------------------------------------- --------------------------------
Difference between Agisa system and Agisa system operates as low pressure HydroFlo system operates as high
HydroFlo system components static mixer using pipe pressure gas dissolution system with
vessels, high pressure pumps and
complex external mixing to enhance
oxygen transfer efficiencies
----------------------------------------- ------------------------------------- ---------------------------------

----------------------------------------- ------------------------------------- ---------------------------------
Reason for non-infringement on Agisa None of the physical elements in the
patent for the component HydroFlo system use or are in conflict
with the proprietary pipe or simple
mixing technology of Agisa system
----------------------------------------- ------------------------------------- ---------------------------------

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

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

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

Manufacturing

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

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

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

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

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

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

Royalty Agreement

On April 1, 2000, we entered into a licensing agreement with Aquatex Group
Industrie S.A., also known as Agisa, for the right to manufacture and
sell basin aeration technology and related equipment. The agreement was
terminated by mutual agreement on December 20, 2002. The financial statements
reflect that $22,500 is still owed under this agreement.

Marketing

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

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

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

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

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

If necessary due to a lack of operating income or inability to secure debt or
equity financing, we intend to institute an expense reduction program in April
2003 to reduce our cash expenses by $25,000 per month including reductions in
marketing and travel expenses. We will continue our marketing efforts, but focus
them on areas where we believe, based upon prior sales presentations and
demonstrations, that there is the greatest possibility for sales, including
North Carolina, South Carolina, Virginia, Maryland, Delaware, New Jersey,
Pennsylvania, California, Oregon, Washington, Arkansas and Florida.

The Sales Process

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

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

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

To accelerate the use by end-users, we have designed and built mobile units to
demonstrate the HydroFlo Systems at the end-user's sites as well as to confirm
our sizing models. A second step to shorten the sales cycle has been to offer a
contingent sale. Contingent sales are defined as an offering to perform a full
size trial at a candidate site for a limited period of time. If at the end of a
relatively short, predefined time period the process is operating within a
previously defined set of parameters, then a purchase order is issued based on
a previously agreed to price. A third step to shorten the sales cycle has been
to offer the units on a lease, lease/service agreement basis. The lease,
lease/service agreement is designed to offer the client the option to acquire
the HydroFlo System as an incremental portion of their existing operating costs
rather than as a capital costs. Typically capital equipment requires a lengthy
budgeting and approval period. The Company has not yet determined the
appropriate accounting treatment for these various sales types.

Customers

Our customers are primarily local municipalities or industries that are required
to treat wastewater. Generally, we do not sell our equipment and process.
Instead, systems, equipment, and services are provided by way of an
all-inclusive service contract. These service contracts include the provision,
installation, and maintenance of the HydroFlo systems and related equipment.
This allows customers operating within a budget process to obtain the system for
lower up-front costs, thereby allowing them the opportunity to procure our
equipment and services and stay within their operating budgets.

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

Warranty and Insurance

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

Intellectual Property

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

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

Research and Development

During our last fiscal year we spent $15,658 on research and development.
We expect to spend $90,000 on research and development during the current fiscal
year on the following:

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

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

COMPETITION

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

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

Our primary competitors are:

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

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

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

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

HydroFlo PLUS Systems

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

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

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

Disadvantages of using Bioxide include:

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

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

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

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

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

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

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

HydroFlo ATS Systems

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

Veri-Cant Jet Aeration

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

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

Membrane Diffusers

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

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

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

Floating Mechanical Aerators

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

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

Employees

We currently have the following employees:

Full time: 5
Operations - 1
Management - 1
Sales - 2
Other [specify] - 1 Research & Development

Part time: None

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

Our aggregate revenues for nine months (July 1, 2002 to March 31, 2003) total
$126,481, versus no revenues for the same nine-month period the previous year.
Our revenues consisted of the rental of two units to a major food processing
company in the Pacific Northwest, the paid trial of our system on-site at a
paper-processing mill in Wisconsin, and the paid trial of our system on-site at
a FEMA facility in Virginia, and the sale of an aeration system for an
aquaculture application in Southern California.

For the nine months ended March 31, 2003, we had a net loss of $893,318 and had
a net shareholder's equity of $173,090 at March 31, 2003.

Results of Operations - June 30, 2002 vs. June 30, 2001

Officers' compensation increased by $477,082 or 369.9% to $606,072 for the
period ended June 30, 2002 from $128,990 for the period ended June 30, 2001.
This increase was caused by the issuance of stock options during 2002 with an
exercise price below the fair value of the underlying common stock.

Management fees (related-party) increased by $11,800 or 28.5% to $53,200 for the
period ended June 30, 2002 from $41,400 for the period ended June 30, 2001. This
increase was due to increased management time required subsequent to the
approval of the patent.

Research and development costs decreased by $20,459 or 56.6% to $15,658 for the
period ended June 30, 2002 from $36,117 for the period ended June 30, 2001. This
decrease was the result of a shift in management focus to sales and marketing
rather than research and development of products.

Consulting costs increased by $18,694 or 147.2% to $31,394 for the period ended
June 30, 2002 from $12,700 for the period ended June 30, 2001. This increase was
primarily due to the use of an employment consultant to assist in finding
qualified personnel for hiring.

License Fees increased by $8,000 or 66.7% to $20,000 at year end June 30, 2002
from $12,000 at yearend June 30, 2001. This increase was due to the contractual
terms of the licensing agreement for the aeration basin technology.

Rent costs increased by $1,942 or 20.5% to $11,398 for the period ended June 30,
2002 from $9,456 for the period ended June 30, 2001. This increase was caused by
the expansion of office space due to increased personnel.

Marketing costs increased by $13,898 or 190.9% to $21,177 for the period ended
June 30, 2002 from $7,279 for the period ended June 30, 2001. This increase was
caused by increased spending to provide awareness of our products to industry
and municipalities in order to begin sales.

Contributions increased by $6,600 or 50.0% to $19,800 for the period ended June
30, 2002 from $13,200 for the period ended June 30, 2001. This increase was due
to management's decision to provide additional charitable contributions.

General and administrative costs increased by $94,124 or 179.9% to $146,450 for
the period ended June 30, 2002 from $52,326 for the period ended June 30, 2001.
This increase was primarily caused by our providing increased sales and
marketing support, literature and training to our representatives.

Results of Operations - Nine months ended March 31, 2003 vs. Nine months ended
March 31, 2002

Employee compensation increased by $241,575 or 56% to $675,416 for the nine
month period ended March 31, 2003 from $433,841 for the nine month period ended
March 31, 2002. This increase was caused primarily by the issuance of stock
options to a Mr. Tom Barbee during fiscal year 2003 with an exercise price below
the market value of the underlying common stock. The increase was caused by our
having to record as a non-cash expense the difference between exercise price and
the market value of the underlying common stock at the date of issuance of the
option. In addition, we hired new employees, but only as replacements for
departing employees. Thus the addition of new employees did not materially
impact compensation expense for this period.

Management fees (related-party) remained stable at $41,400 for the nine-month
period ended March 31, 2003 compared to $41,400 for the nine month period ended
March 31, 2002.

Research and development costs decreased by $5,612 or 48.5% to $5,958 for the
nine-month period ended March 31, 2003 from $11,570 for the nine-month period
ended March 31, 2002. This decrease was the result of a shift in management
focus to sales rather than research and development of products.

Consulting costs decreased by $23,894 to $0 for the nine-month period ended
March 31, 2003 from $23,894 for the nine-month period ended March 31, 2002. This
decrease was due to not using an employment consultant to assist in finding
personnel for hiring during fiscal year 2003.

License Fees decreased by $2,500 or 16.7% to $12,500 for the nine-month period
ended March 31, 2003 from $15,000 for the nine-month period ended March 31,
2002. This decrease was due to the termination of the licensing agreement for
the aeration basin technology.

Rent costs increased by $5,846 or 73.5% to $13,795 for the nine month period
ended March 31, 2003 from $7,949 for the nine-month period ended March 31, 2002.
This increase was caused by the expansion of office space due to increased
personnel.

Marketing costs decreased by $3,568 or 15.6% to $19,315 for the nine-month
period ended March 31, 2003 from $22,883 for the nine-month period ended March
31, 2002. Decreased display advertising and trade show expenses were the
principal reasons for this decrease.

Contributions decreased by $5,400 or 33.3% to $10,800 for the nine-month period
ended March 31, 2003 compared to $16,200 for the nine-month period ended March
31, 2002. Contributions have been halted, although management expects them to be
resumed when profitability is achieved.

General and administrative costs increased by $124,725 or 121% to $227,684 for
the nine-month period ended March 31, 2003 from $102,959 for the nine-month
period ended March 31, 2002. Our providing increased sales support to our
representatives, as well as expenses for sales literature and sales training,
plus costs associated with our registration statement on Form SB-2 primarily
caused this increase.

Plan of Operation for the Period July 31, 2003 - June 30, 2004

Our plan of operations for the coming 12 months is to maintain operations at
current levels so long as our cash flow allows, as described below.

Liquidity and Capital Resources

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

For the nine months ended March 31, 2003, we had a net loss of $893,318 and had
a net shareholder's equity of $173,090 at March 31, 2003. Net cash used in
operating activities for the period from July 1, 2002 to March 31, 2003 was
$412,064. The cash used in operations was primarily due to officers'
compensation, management fees and other costs associated with generating sales
and revenue for the company. Our current assets for the period ended March 31,
2003 are higher than our current liabilities by $36,553.

We have no lines of credit available to us at this time. Inflation has not had a
significant impact on our results of operations.

DESCRIPTION OF PROPERTY

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

Office space of 1,600 square feet is rented for $1,454 per month from Gary and
Theresa Schlotterer. The non-cancelable lease expires July 31, 2003. We have
reached a verbal agreement to extend this lease until July 31, 2004 at the same
rent and under the same terms, except unlike the lease which expires July 31,
2003, the new lease will be able to be cancelled by us on 30 days notice. 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 in insure.
We have no policy with respect to investments in real estate or interests in
real estate and no policy with respect to investments in real estate mortgages.
Further, we have no policy with respect to investments in securities of or
interests in persons primarily engaged in real estate activities.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Effective December 30, 1999, 13,500,000 shares of our common stock were acquired
by Capital Access, Inc. in exchange for a stock subscription of $30,000. The
subscription balance at June 30, 2002 was $6,959. Dennis Mast is the principal
shareholder of Capital Access.

On April 3, 2001 we issued 7,500 shares to Janet Boerema, Mr. Mast's sister, as
payment for corporate logo design work, valued at $2,500 or $1.50 per share by
mutual agreement based upon the time, effort and creativity of the process.

At June 30, 2002 and June 30, 2001, we had accounts payable balances of $115,300
and $62,100, respectively, due to Free Harbor LLC for management services.
Dennis Mast is the managing partner of Free Harbor LLC. This amount is not
payable by us until profitability is reached . During fiscal 2002 Free Harbor
earned $53,200 and during fiscal 2001 Free Harbor earned $41,000 as management
fees. These amounts have not yet been paid.

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

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

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

There is no established public trading market for our securities and a regular
trading market may not develop, or if developed, may not be sustained. A
shareholder in all likelihood, therefore, will not be able to resell his or her
securities should he or she desire to do so when eligible for public resales.
Furthermore, it is unlikely that a lending institution will accept our
securities as pledged collateral for loans unless a regular trading market
develops. We have no plans, proposals, arrangements, or understandings with any
person with regard to the development of a trading market in any of our
securities.

Options, Warrants, Convertible Securities

Options

We granted options to purchase shares of common stock in conjunction with an
employment agreement with Mr. Barbee entered into during fiscal 2001. The
options vest 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 value of the options is $.031 and $.094 per
share for options granted during fiscal 2002 and 2001, respectively. The
weighted average remaining contractual lives of granted options are
approximately 4.5 years. The summary of stock option activity is shown below:

o Options granted during fiscal 2001 - 337,500 @ $0.22
o Outstanding at June 30, 2001 - 337,500 @ $0.22
o Options exercisable at June 30, 2001 - 0

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

None of these options has been exercised.

Common Stock Warrants

Since inception, warrants to purchase 1,012,500 shares of common stock have been
granted to non-management stockholders. The warrants are exercisable at $.22 per
share for a five-year period beginning upon full satisfaction of the
shareholders' stock subscriptions. Of these warrants, 506,250 were cancelled due
to cancellation of a stock subscription agreement in fiscal year 2002. As of
June 30, 2002, no warrants have been exercised although 56,250 warrants are
exercisable.

Penny Stock Considerations

Our shares will be "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
Commissions 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.

Over the Counter Bulletin Board Considerations

The over-the-counter bulletin board is separate and distinct from the Nasdaq
stock market. Nasdaq has no business relationship with issuers of securities
quoted on the over-the-counter bulletin board. The SEC's order handling rules,
which apply to Nasdaq-listed securities do not apply to securities quoted on the
bulletin board.

Although the Nasdaq stock market has rigorous listing standards to ensure the
high quality of its issuers, and can delist issuers for not meeting those
standards, the over-the-counter bulletin board has no listing standards. Rather,
it is the market maker who chooses to quote a security on the system, files the
application and is obligated to comply with keeping information about the issuer
in its files. The NASD cannot deny an application by a market maker to quote the
stock of a company. The only requirement for inclusion in the bulletin board is
that the issuer be current in its reporting requirements with the SEC.

Investors may have greater difficulty in getting orders filled because it is
anticipated that if our stock trades on a public market, it initially will trade
on the over-the-counter bulleting board rather than on Nasdaq. Investors' orders
may be filled at a price much different than expected when an order is placed.
Trading activity in general is not conducted as efficiently and effectively as
with Nasdaq-listed securities.

Investors must contact a broker dealer to trade bulletin board securities.
Investors do not have direct access to the bulletin board service. For bulletin
board securities, there only has to be one market maker.

Bulletin board transactions are conducted almost entirely manually. Because
there are no automated systems for negotiating trades on the bulletin board,
they are conducted via telephone. In times of heavy market volume, the
limitations of this process may result in a significant increase in the time it
takes to execute investor orders. Therefore, when investors place market orders
- an order to buy or sell a specific number of shares at the current market
price - it is possible for the price of a stock to go up or down significantly
during the lapse of time between placing a market order and getting execution.

Because bulletin board stocks are usually not followed by analysts, there may be
lower trading volume than for Nasdaq-listed securities.

Holders

As of the date of this registration statement, we had 56 holders of record of
our common stock.

Dividends

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

Reports to Shareholders

As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will file
periodic reports, proxy statements and other information with the Securities and
Exchange Commission. We will voluntarily send an annual report to shareholders
containing audited financial statements.

Where You Can Find Additional Information

We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 statement. For further information about us and the
shares of common stock to be sold in the offering, please refer to the
registration statement and the exhibits and schedules thereto. The registration
statement and exhibits may be inspected, without charge, and copies may be
obtained at prescribed rates, at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
registration statement and other information filed with the SEC are also
available at the web site maintained by the SEC at http://www.sec.gov.

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, 2002
and 2001 respectively by our Chief Executive Officer and President.

----------------------------------- ----------------- ------------ ----------------- ---------------------
Dollar Value of
Name Position Year Salary Stock-Based
Compensation
----------------------------------- ----------------- ------------ ----------------- ---------------------
Dennis Mast (1) CEO 2002 $53,200
----------------------------------- ----------------- ------------ ----------------- ---------------------
2001 $41,400
----------------------------------- ----------------- ------------ ----------------- ---------------------
Thomas Barbee (2) President 2002 $100,000 $347,560
----------------------------------- ----------------- ------------ ----------------- ---------------------
2001 $94,615 $ 34,375
----------------------------------- ----------------- ------------ ----------------- ---------------------

(1) Mr. Mast's services are provided under an agreement with his affiliate,
Free Harbor, LLC. These amounts have not yet been paid. These numbers
reflect that in June 2002, the management fee was reduced to $2,600 due to
some time off and that for fiscal year 200, the management fee was $3,450
per month.

(2) Mr. Barbee has a written memorandum of employment with us. The discrepancy
between his annual salary under his amended memorandum and his compensation
number for 2001 is due to the fact that a portion of his 2001 salary was
paid in advance in the last pay period of 2000.

The value of Mr. Barbee's stock-based compensation, as described more fully
below, totaled $347,560 and $34,375 during fiscal years 2002 and 2001,
respectively. Such amounts were estimated in the stock option pricing models at
each grant date. Both agreements are terminable at will by either party without
notice.

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

Compensation Agreements

Free Harbor is entitled to a monthly management fee of $4,600. The fees set
forth in the above table reflect management fees earned by Free Harbor. We owe
Free Harbor for unpaid fees the amount of $115,300 as of June 30, 2002, which is
deferred until we reach profitability. Upon profitability after deduction for
all business expenses, depreciation and amortization, Free Harbor is entitled to
10% of our pre-tax profits after deduction for all business expenses,
depreciation and amortization annually so long as our management agreement with
them is in effect.

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

Board Compensation

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

Financial Statements with Report of
Independent Certified Public Accountants
HYDROFLO, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
June 30, 2002 and 2001

HydroFlo, Inc.

Table of Contents

Report of Independent Certified Public Accountants...........................F-1

Financial Statements:

Balance Sheets......................................................F-2

Statements of Operations............................................F-3

Statements of Changes in Shareholders' (Deficit) Equity.............F-4

Statements of Cash Flows............................................F-5

Notes to Financial Statements.........................................F-6 - F-11

Report of Independent Certified Public Accountants

To the Shareholders of HydroFlo, Inc.:

We have audited the accompanying balance sheets of HydroFlo, Inc. (a North
Carolina development stage enterprise) as of June 30, 2002 and 2001, and the
related statements of operations, changes in shareholders' equity (deficit) and
cash flows for the years then ended and for the period from inception
(December 30, 1999) to June 30, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HydroFlo, Inc. as of June 30,
2002 and 2001, and the results of their operations and their cash flows for the
years then ended and for the period from inception (December 30, 1999) to
June 30, 2002 in conformity with accounting principles generally accepted in
the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A, the Company
incurred a net loss of $924,504 during the fiscal year ended June 30, 2002, and,
as of that date, the current liabilities exceeded the current assets by $56,778.
These factors, among others, as discussed in Note A to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Grant Thornton LLP
Raleigh, North Carolina
July 23, 2002

F-1

HydroFlo, Inc.
(a development stage enterprise)

Balance Sheets - June 30, 2002 and 2001
___________________________________________________________________

Assets
2002 2001
Current assets:
Cash $ 58,876 $ 11,222
Accounts receivable 5,000 0
Inventory, net of
reserves of $2,320 and $0 36,740 15,176
Prepaid expenses 490 210
Total current assets ------------- -----------
101,106 26,608
------------- -----------
Property and equipment:
Office equipment 14,977 6,358
Office furniture 5,311 4,109
Testing equipment 30,639 1,050
Less - Accumulated depreciation (8,525) (2,550)
Total property and equipment ------------- -----------
42,402 8,967
------------- -----------
Patent costs, net 36,918 10,247
------------- -----------
Deposits 754 754
------------- -----------
$ 181,180 $ 46,576
============= ===========

Liabilities and Shareholders' Equity (Deficit)

Current liabilities - Accounts
payable and accrued expenses $ 157,884 $ 68,688
------------- -----------
Commitments and Contingencies (Note B, C and I)
Shareholders' equity (deficit):
Common stock, $0.01 par value,
authorized 20,000,000 shares,
issued and outstanding 15,538,059
shares as of June 30, 2002, and
16,406,409 shares as of June 30, 2001 155,381 109,376
Additional paid-in-capital 1,176,035 571,657
Stock subscriptions receivable (147,259) (642,808)
Stock purchase warrants 147,834 295,667
Deferred compensation (31,312) (3,125)
Deficit accumulated during development stage (1,277,383) (352,879)
Total shareholders' equity (deficit) ------------- -----------
23,296 (22,112)
------------- -----------
$ 181,180 $ 46,576
============= ===========

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

F-2

HydroFlo, Inc.
(a development stage enterprise)

Statements of Operations
For the Years Ended June 30, 2002 and 2001, and
For the Period From Inception (December 30, 1999) to June 30, 2002
______________________________________________________________________

Period From Inception
(December 30, 1999) to
2002 2001 June 30, 2002
Revenue $ 5,001 $ 0 $ 5,001
Cost of goods sold 5,086 0 5,086
Gross margin ----------- ----------- -----------
(85) 0 (85)
Expenses:
Officers' compensation 606,072 128,990 735,062
Management fee 53,200 41,400 115,300
Research and development 15,658 36,117 53,801
Consulting 31,394 12,700 44,494
License fee 20,000 12,000 35,000
Rent 11,398 9,456 23,116
Marketing 21,177 7,279 28,456
Contribution 19,800 13,200 33,000
General and administrative 146,450 52,326 212,995
----------- ----------- -----------
Operating expenses 925,149 313,468 1,281,224
----------- ----------- -----------
Operating loss (925,234) (313,468) (1,281,309)
Interest income 730 2,191 3,926
Net loss ----------- ----------- -----------
$(924,504) $(311,277) $(1,277,383)
=========== =========== ===========
Weighted average shares
outstanding 16,222,518 16,386,293 15,831,987
Basic and diluted loss
per share $(0.06) $(0.02) $(0.08)
=========== =========== ===========

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

F-3

HydroFlo, Inc.
(a development stage enterprise)

Statements of Changes in Shareholders' (Deficit) Equity
For the Years Ended June 30, 2002 and 2001, and
For the Period From Inception (December 30, 1999) to June 30, 2002
__________________________________________________________________________

Deficit
Accumulated
Additional Stock Stock During
Common Stock Paid in Subscriptions Purchase Deferred Development
Shares Amount Capital Receivable Warrants Compensation Stage Total
---------- --------- ---------- ---------- ---------- ---------- ---------- ---------
Initial Capital Infusion 16,380,000 $36,400 $598,333 $(822,700) $295,667 0 0 $107,700
Stock subscription receipts 0 0 0 14,192 0 0 0 14,192
Net loss 0 0 0 0 0 0 (41,602) (41,602)
---------- --------- ---------- ---------- ---------- ---------- ---------- ---------
Balance, June 30, 2000 16,380,000 36,400 598,333 (808,508) 295,667 0 (41,602) 80,290
Common stock issued 26,400 59 8,741 (6,300) 0 0 0 2,500
Stock subscription receipts 0 0 0 172,000 0 0 0 172,000
Stock options granted 0 0 37,500 0 0 (37,500) 0 0
Stock options vested 0 0 0 0 0 34,375 0 34,375
Stock split 0 72,917 (72,917) 0 0 0 0 0
Net loss 0 0 0 0 0 0 (311,277) (311,277)
---------- --------- ---------- ---------- ---------- ---------- ---------- ---------
Balance, June 30, 2001 16,406,400 109,376 571,657 (642,808) 295,667 (3,125) (352,879) (22,112)
Common stock issued 416,250 2,775 552,225 0 0 0 0 555,000
Stock subscription receipts 0 0 0 67,349 0 0 0 67,349
Stock subscription
cancellations (1,284,600) (8,564) (419,636) 428,200 0 0 0 0
Stock options granted 0 0 375,750 0 0 (375,750) 0 0
Stock options vested 0 0 0 0 0 347,563 0 347,563
Stock purchase
warrants cancelled 0 0 147,833 0 (147,833) 0 0 0
Stock split 0 51,794 (51,794) 0 0 0 0 0
Net loss 0 0 0 0 0 0 (924,504) (924,504)
---------- --------- ---------- ---------- ---------- ---------- ---------- ---------
Balance, June 30, 2002 15,538,050 $155,381 $1,176,035 $(147,259) $147,834 $(31,312) $(1,277,383) $ 23,296
========== ========= ========== ========== ========== ========== ========== =========

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

F-4

HydroFlo, Inc.
(a development stage enterprise)

Statements of Cash Flows
For the Years Ended June 30, 2002 and 2001, and
For the Period From Inception (December 30, 1999) to June 30, 2002
__________________________________________________________________________

Period From
Inception
(December 30,
1999) to June 30,
2002 2001 2002
Cash flows from operating activities:
Net loss $(924,504) $(311,277) $(1,277,383)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Depreciation 5,975 2,069 8,525
Amortization of patent costs 466 0 466
Deferred compensation amortization 347,563 34,375 381,938
Increase in accounts receivable (5,000) 0 (5,000)
Increase in inventory, net (21,564) (7,616) (36,740)
(Increase) decrease in prepaid expenses (280) 11,790 (490)
Decrease (increase) in deposits 0 25 (754)
Increase in accounts payable
and accrued expenses 89,196 38,921 157,884
------------ ------------ ------------
Net cash used in
operating activities (508,148) (231,713) (771,554)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (39,410) (6,209) (50,927)
Payments to acquire patents (27,137) (3,518) (37,384)
------------ ------------ ------------
Net cash used in
investing activities (66,547) (9,727) (88,311)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock 555,000 2,500 665,200
Stock subscription receipts 67,349 172,000 253,541
Net cash provided
by financing activities 622,349 174,500 918,741
------------ ------------ ------------
Net (decrease) increase in cash 47,654 (66,940) 58,876
Cash, beginning of year 11,222 78,162 0
Cash, end of year ------------- ------------ ------------
$ 58,876 $ 11,222 $ 58,876
============ ============ ============

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

F-5

HydroFlo, Inc.
(a development stage enterprise)

Notes to Financial Statements
June 30, 2002 and 2001
_________________________________________________________________________

Note A - Summary of Significant Accounting Policies

Organization and Liquidity

HydroFlo, Inc. (the Company) is a development stage enterprise, incorporated in
North Carolina on December 30, 1999, to design and distribute aeration
and oxygen mixing equipment specifically designed for municipalities and
industry requiring improved dissolved oxygen in water.

Since inception, the Company has focused primarily on developing and patenting
this new technology for the sewage treatment industry. The Company plans to
focus on marketing and selling their technology to this industry. As a
development stage enterprise, the Company is subject to a number of risks
including successful development and marketing of its technologies, access to
necessary start-up capital and attracting and retaining key personnel.

The Company has recognized net losses and negative operating cash flow since its
inception and has negative working capital of $56,778 as of June 30, 2002. For
the year ended June 30, 2002, the Company had a net loss of $924,504 and at
year-end had a net shareholder's equity of $23,296. Cash used in operations
during fiscal 2002 totaled $508,148 and an additional $66,547 was used in
acquiring additional property and equipment and for patent related costs. The
Company has funded its initial operations through the sale of common stock,
primarily to related parties. Until such time that the Company can generate
sustained profitable operations, the Company will require additional funding to
further develop, market and distribute its products. Subsequent to year-end, the
Company has sold 235,500 additional common shares for an additional $471,000;
however, management believes the Company will require additional capital beyond
these committed amounts.

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

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

Cash and Cash Equivalents

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

Inventory

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

F-6

HydroFlo, Inc.
(a development stage enterprise)

Notes to Financial Statements
June 30, 2002 and 2001
_________________________________________________________________________

Property and Equipment

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

Patent Costs

Patent costs consist of expenditures incurred for various patent applications.
These costs are amortized over the life of the patent. No amortization was
recorded during 2001 as no patents had been granted yet. On September 4, 2001,
the first patent was issued to the Company. The Company recorded $466 of
amortization expense during the year ended June 30, 2002.

Revenue Recognition

The Company recognizes revenue as earned when product is installed and accepted
by the customer.

Research and Development Costs

The Company expenses research and development costs as incurred.

Advertising Expense

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

Earnings per Share

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

Estimates

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

Note B - Royalty Agreement

On April 1, 2000, the Company entered into a five-year licensing agreement with
a supplier for the right to manufacture and sell the supplier's technology. The
agreement stated that the Company is required to pay a minimum royalty fee each
year, as well as additional royalty fees on sales generated.

F-7

HydroFlo, Inc.
(a development stage enterprise)

Notes to Financial Statements
June 30, 2002 and 2001
_________________________________________________________________________

Future minimum payments under the royalty agreement are as follows over the
remaining term of the royalty agreement:

Years ending June 30
2003 $ 25,000
2004 35,000
2005 50,000
-----------
$110,000
===========

Royalty expense under the licensing agreement was $20,000, $12,000 and $35,000
for the years ended June 30, 2002, and June 30, 2001, and the period from
inception (December 30, 1999) to June 30, 2002, respectively.

Note C - Lease Commitments

The Company has a lease for office facilities in Raleigh, North Carolina, for a
period of 15 months commencing May 1, 2002, and ending July 31, 2003.

Minimum payments under noncancelable operating leases are as follows:

Years ending June 30
2003 $17,448
2004 1,454
-----------
$18,902
===========

Lease expense under noncancelable operating facility leases was $11,398, $9,456
and $23,116 for the years ended June 30, 2002, and June 30, 2001, and the period
from inception (December 30, 1999) to June 30, 2002, respectively.

Note D - Related-party Transactions

Effective December 30, 1999, 13,500,000 shares of the Company's common stock
were acquired by Capital Access, Inc. in exchange for a stock subscription of
$30,000. The subscription balance at June 30, 2002 and 2001, was $6,959 and
$15,808, respectively. A director of the Company is a significant stockholder of
Capital Access.

On April 3, 2001, the Company issued 7,500 shares of the Company's common stock
to a related party in exchange for the design of a company logo valued at
$2,500.

At June 30, 2002, and June 30, 2001, the Company had accounts payable balances
of $115,300 and $62,100, respectively, due to Free Harbor LLC for management
services. A director of the Company is the managing partner of Free Harbor LLC.
Expenses incurred under this arrangement totaled $53,200, $41,400 and $115,300,
respectively, for the years ended June 30, 2002 and 2001, and for the period
from inception (December 30, 1999) to June 30, 2002. This amount is not payable
by the Company until profitability is reached by the Company.

F-8

HydroFlo, Inc.
(a development stage enterprise)

Notes to Financial Statements
June 30, 2002 and 2001
_________________________________________________________________________

Note E - Shareholders' Equity

The Company announced a three-for-one stock split effective April 30, 2001, with
the issuance of 7,291,738 shares of common stock and the transfer of $72,917
from additional paid-in-capital to the common stock account. 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 both stock splits.

The Company has entered into stock subscriptions on several of their funding
commitments whereby the Company issues stock in exchange for the investors'
promise to fund their aggregate purchase price of the stock over a period of two
years without interest. As of June 30, 2002 and 2001, the subscriptions totaled
$147,259 and $642,808, respectively. The Company had stock subscription receipts
of $67,349, $172,000 and $253,541 during fiscal 2002, 2001 and the period from
inception (December 30, 1999) to June 30, 2002, respectively, and
cancelled stock subscriptions of $428,200 during fiscal 2002.

Note F - Common Stock Warrants

As an incentive to purchase the Company's stock, certain shareholders have been
granted stock purchase warrants. Since inception, warrants to purchase 1,012,500
shares have been granted. The warrants are exercisable at $.22 per share for a
five-year period beginning upon full satisfaction of the shareholders' stock
subscriptions. Due to the cancellation of some stock subscriptions during fiscal
2002, 506,250 of these stock purchase warrants were also cancelled. The Company
has allocated the total amount received from the shareholders to common stock
and stock purchase warrants based on the relative fair values of each component.
The Company has reserved these shares for issuance. As of June 30, 2002, no
warrants have been exercised although 56,250 warrants are exercisable.

Weighted
Average
Warrants Exercise
Outstanding Price
July 1, 2000 0 $0.00
Warrants granted during fiscal 2001 1,012,500 0.22
----------
Outstanding at June 30, 2001 1,012,500 0.22
==========
Warrants exercisable at June 30, 2001 0 0.22
==========
Outstanding at July 1, 2001 1,012,500 0.22
==========
Warrants granted during fiscal 2002 0 0.22
Warrants cancelled during fiscal 2002 (506,250) 0.22
Outstanding at June 30, 2002 ----------
506,250 0.22
==========
Warrants exercisable at June 30, 2002 56,250 $0.22
========== ==========

F-9

HydroFlo, Inc.
(a development stage enterprise)

Notes to Financial Statements
June 30, 2002 and 2001
_________________________________________________________________________

Note G - Common Stock Options

The Company has granted options to purchase shares of common stock in
conjunction with an employment agreement entered into during fiscal 2001. The
options vest one year from the date of each grant. All options issued to date
have an exercise price of $0.22 per share. The weighted average fair value of
the options is $.031 and $.094 per share for options granted during fiscal 2002
and 2001, respectively. The weighted average remaining contractual lives of
granted options are approximately 4.5 years. The summary of stock option
activity is shown below:

Weighted
Average
Options Exercise
Outstanding Price
July 1, 2000 0 $0.00
Options granted during fiscal 2001 337,500 0.22
---------
Outstanding at June 30, 2001 337,500 0.22
=========
Options exercisable at June 30, 2001 0 0.22
=========
Outstanding at July 1, 2001 337,500 0.22
---------
Options granted during fiscal 2002 337,500 0.22
=========
Outstanding at June 30, 2002 675,000 0.22
=========
Options exercisable at June 30, 2002 337,500 $0.22
========= =========

The Company accounts for the options under Accounting Principles Board Opinion
No. 25. The Company has elected to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Had compensation costs for these issuances been
determined consistent with SFAS No. 123, the Company's net loss would have
increased by the following amounts:

2002 2001
Net loss, as reported $924,504 $311,277
Increased compensation expense 25,269 20,928
Pro forma net loss ----------- -----------
$949,773 $332,205
=========== ===========

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 2002
and 2001 with the following assumptions:

2002 2001
Expected dividend yield 0.00% 0.00%
Risk-free interest rates 6.05% 6.05%

F-10

HydroFlo, Inc.
(a development stage enterprise)

Notes to Financial Statements
June 30, 2002 and 2001
_________________________________________________________________________

Note H - Income Taxes

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

A deferred income tax asset arises for the amount of income tax benefits
available in future periods from the income tax net operating loss carryforwards
and tax credits. In addition, a deferred income tax asset or liability is
established for the amount of income tax benefits or liabilities from the
assumed effect of temporary differences. A valuation allowance is established to
adjust the deferred income tax asset to its estimated net realizable value. The
following table reflects the deferred income tax asset and its related valuation
allowance and deferred income tax liabilities as of June 30, 2002 and 2001:

2002 2001
Deferred income tax assets
related to net operating loss tax
credit carryforwards for income tax
reporting purposes $332,101 $117,663
Deferred income tax assets related
to stock options 147,237 13,252
Deferred income tax assets related
to other temporary differences 12,723 5,102
Deferred income tax liability related
to book and tax depreciation differences (1,487) (382)
Less - Valuation allowance (490,574) (135,635)
Net deferred income tax asset ----------- -----------
$ 0 $ 0
=========== ===========

As of June 30, 2002, the Company has available $861,480 of federal and
state net operating loss carryforwards. The carryforwards will begin to expire
in 2020. The criteria for recording a deferred income tax asset is whether the
asset "more likely than not" will be realized. Due to the uncertainty about the
Company's ability to generate future taxable income, a valuation allowance as of
June 30, 2002 and 2001, has been recorded to offset the full amount of the
Company's deferred income tax assets.

Note I - Commitments and Contingencies

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

F-11

HydroFlo, Inc.
(a development stage enterprise)
Balance Sheet
March 31, 2003

Assets March 31, 2003
(Unaudited)
Current assets: ----------------
Cash $ 185,819
Accounts receivable, net of allowance for doubtful
accounts of $1,000 37,481
Inventory, net of reserves of $2,320 30,443
Prepaid expenses 2,911
Total current assets 256,654
----------------
Property and equipment:
Office equipment 16,245
Office furniture 6,601
Testing equipment 93,429
Display equipment 6,141
Computer software 803
Less - Accumulated depreciation (23,934)
Total property and equipment 99,285
----------------
Patent costs, net 36,498
Deposits 754
----------------
$ 393,191
----------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 62,011
Accounts payable and accrued expenses - related parties (Note C) 158,090
Total current liabilities 220,101
----------------
Commitments and contingencies (Notes B, C and F)
Shareholders' equity:
Common stock, $0.01 par value, authorized 20,000,000
shares, issued and outstanding
15,773,550 shares as of March 31, 2003 157,736
Preferred stock, $0.01 par value, authorized
5,000,000 shares, issued and outstanding 0
shares as of March 31, 2003 0
Additional paid-in-capital 2,245,430
Stock subscriptions receivable (6,959)
Stock purchase warrants 147,834
Deferred compensation (200,250)
Deficit accumulated during development stage (2,170,701)
Total shareholders' equity 173,090
$ 393,191

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

F-1

HydroFlo, Inc.
(a development stage enterprise)
Statements of Operations
For the Three Months Ended March 31, 2003 and 2002

March 31, 2003 March 31, 2002
(Unaudited) (Unaudited)
Revenues $ 73,981 $ 0
Cost of goods sold 10,996 0
Gross margin 62,985 0
---------------- ----------------
Expenses:
Employee compensation 228,139 159,378
Management fee 13,800 13,800
Research and development 341 1,677
Consulting 0 480
License fee 0 5,000
Rent 4,671 2,800
Marketing 3,018 12,559
Contribution 0 5,400
Selling, general and administrative 75,605 28,088
Operating expenses 325,574 229,182
---------------- ----------------
Operating loss (262,589) (229,182)
Interest income 1,224 90
Net loss $ (261,365) $ (229,092)
---------------- ----------------
Weighted average shares outstanding 15,773,550 16,617,704
Basic and diluted loss per share $ (0.02) $ (0.01)
---------------- ----------------

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

F-2

HydroFlo, Inc.
(a development stage enterprise)
Statements of Operations
For the Nine Months Ended March 31, 2003 and 2002, and For the Period
From Inception (December 30, 1999) to March 31, 2003

Nine Months Nine Months Period From
Ended Ended Inception
March 31, 2003 March 31, 2002 (December
(Unaudited) (Unaudited) 30,1999)
to
March 31, 2003
(Unaudited)

Revenues $ 126,481 $ 0 $ 131,482
Cost of goods sold 17,172 0 22,258
Gross margin 109,309 0 109,224
---------------- -------------- -------------
Expenses:
Employee compensation 675,416 433,841 1,410,478
Management fee 41,400 41,400 156,700
Research and development 5,958 11,570 59,759
Consulting 0 23,894 44,494
License fee 12,500 15,000 47,500
Rent 13,795 7,949 36,911
Marketing 19,315 22,883 47,771
Contribution 10,800 16,200 43,800
Selling, general and
administrative 227,684 102,959 440,679
Operating expenses 1,006,868 675,696 2,288,092
Operating loss (897,559) (675,696) (2,178,868)
Interest income 4,241 521 8,167
Net loss $ (893,318) $ (675,175) $ (2,170,701)

Weighted average shares
outstanding 15,728,457 16,432,212 16,101,748
Basic and diluted loss
per share $ (0.06) $ (0.04) $ (0.13)

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

F-3

HydroFlo, Inc.
(a development stage enterprise)
Statements of Changes in Shareholders' (Deficit) Equity
For the Period From Inception (December 30, 1999) to March 31, 2003
Deficit
Accumulated
Additional Stock Stock During
Common Stock Paid in Subscriptions Purchase Deferred Development
Shares Amount Capital Receivable Warrants Compensation Stage Total
Initial Capital Infusion

16,380,000 $ 36,400 $ 598,333 $ (822,700) $ 295,667 $ 0 $ 0 $ 107,700
Stock subscription receipts 0 0 0 14,192 0 0 0 14,192
Net loss 0 0 0 0 0 0 (41,602) (41,602)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 16,380,000 36,400 598,333 (808,508) 295,667 0 (41,602) 80,290
Common stock issued 26,400 59 8,741 (6,300) 0 0 0 2,500
Stock subscription receipts 0 0 0 172,000 0 0 0 172,000
Stock options granted 0 0 37,500 0 0 (37,500) 0 0
Stock options vested 0 0 0 0 0 34,375 0 34,375
Stock split 0 72,917 (72,917) 0 0 0 0 0
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss 0 0 0 0 0 0 (311,277) (311,277)
Balance, June 30, 2001 16,406,400 109,376 571,657 (642,808) 295,667 (3,125) (352,879) (22,112)
Common stock issued 416,250 2,775 552,225 0 0 0 0 555,000
Stock subscription receipts 0 0 0 67,349 0 0 0 67,349
Stock subscription
cancellations (1,284,600) (8,564) (419,636) 428,200 0 0 0 0
Stock options granted 0 0 375,750 0 0 (375,750) 0 0
Stock options vested 0 0 0 0 0 347,563 0 347,563
Stock purchase warrants cancelled 0 0 147,833 0 (147,833) 0 0 0
Stock split 0 51,794 (51,794) 0 0 0 0 0
Net loss 0 0 0 0 0 0 (924,504) (924,504)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2002 15,538,050 155,381 1,176,035 (147,259) 147,834 (31,312) (1,277,383) 23,296
Common stock issued 235,500 2,355 468,645 0 0 0 0 471,000
Stock subscription receipts 0 0 0 140,300 0 0 0 140,300
Stock options granted 0 0 600,750 0 0 (600,750) 0 0
Stock options vested 0 0 0 0 0 431,812 0 431,812
Net loss 0 0 0 0 0 0 (893,318) (893,318)
Balance, March 31, 2003 (Unaudited) ---------- --------- ------------ ------------- ---------- ------------ ----------- ---------
15,773,550 $ 157,736 $ 2,245,430 $ (6,959) $ 147,834 $ (200,250) $(2,170,701)$ 173,090
=========== =========== =========== =========== =========== =========== =========== ===========

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

F-4

HydroFlo, Inc.
(a development stage enterprise)
Statements of Cash Flows
For the Nine Months Ended March 31, 2003 and 2002, and For the Period From
Inception (December 30, 1999) to March 31, 2003
Period From
Inception
(December 30,
March 31, 2003 March 31, 2002 1999) to March 31,
(Unaudited) (Unaudited) 2003 (Unaudited)
Cash flows from operating activities:
Net loss $(893,318) $(675,175) $(2,170,701)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 15,409 3,894 23,934
Amortization of patent costs 420 326 886
Deferred compensation amortization 431,812 253,625 813,750
(Increase) decrease in accounts receivable (32,481) 0 (37,481)
Decrease (increase) in inventory, net 6,297 331 (30,443)
Increase in prepaid expenses (2,421) (182) (2,911)
Increase in deposits 0 0 (754)
Increase in accounts payable and accrued expenses 62,218 90,006 220,101
Net cash used in operating activities (412,064) (327,175) (1,183,619)
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (72,293) (31,544) (123,219)
Payments to acquire patents 0 (26,966) (37,384)
Net cash used in investing activities (72,293) (58,510) (160,603)
--------------- --------------- ---------------
Cash flows from financing activities:
Issuance of common stock 471,000 335,000 1,136,200
Stock subscription receipts 140,300 43,500 393,841
Net cash provided by financing
activities 611,300 378,500 1,530,041
--------------- --------------- ---------------
Net increase (decrease) in cash 126,943 (7,185) 185,819
Cash, beginning of year 58,876 11,222 0
Cash, end of period $ 185,819 $ 4,037 $ 185,819
--------------- --------------- ---------------

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

F-5

Note A - Basis of Presentation

In the opinion of management of HydroFlo, Inc. (the Company), all adjustments
necessary for a fair statement of the results of operations for the three-month
periods, nine-month periods and the period from inception to date are reflected
in the unaudited interim financial statements presented. These adjustments are
of a normal recurring nature.

Note B - Summary of Significant Accounting Policies

Organization and Liquidity

The Company has recognized net losses of $2,170,701 and negative operating cash
flow of $1,183,619 since its inception. For the nine months ended March 31,
2003, the Company had a net loss of $893,318 and at March 31, 2003 had a net
shareholders' equity of $173,090. Cash used in operations during the first nine
months of fiscal 2003 totaled $412,064 and an additional $72,293 was used in
acquiring additional property and equipment and for patent related costs. The
Company has funded its initial operations through the sale of common stock,
primarily to related parties. Until such time that the Company can generate
sustained profitable operations, the Company will require additional funding to
further develop, market and distribute its products.

Earnings Per Share

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

F-6

Estimates

Revenue Recognition

Revenue in the accompanying statements of operations consists of direct sales or
leases to customers and paid demonstrations of the Company's product. Sales are
recognized when products are shipped to the customers, with provisions for
discounts and rebates to customers and returns and other adjustments, if any,
provided for in the period the related sales are recorded. No amounts have been
recorded for such provisions during the periods presented. Rental income is
recognized over the period the related equipment is provided to the customer.
The one existing rental agreement at March 31, 2003 is on a month-to-month basis
and has an associated fee of $7,500 per month. Additionally, during the period
from inception to March 31, 2003, the Company earned $11,500 from successful
product demonstrations.

Note C - Related-party Transactions

Effective December 30, 1999, 13,500,000 shares of the Company's common stock
were acquired by Capital Access, Inc. in exchange for a stock subscription of
$30,000. The subscription balance at March 31, 2003 was $6,959. A director of
the Company is a significant stockholder of Capital Access.

At March 31, 2003, the Company had an accounts payable balance of $156,700, due
to Free Harbor LLC for management services. A director of the Company is the
managing partner of Free Harbor LLC. Expenses incurred under this arrangement
totaled $13,800 and $41,400 for the three and nine months ended March 31, 2003,
respectively. Expenses incurred under this arrangement also totaled $13,800 and
$41,400 for the three and nine months ended March 31, 2002, respectively. This
amount is not payable by the Company until the Company reaches profitability.

At March 31, 2003, the Company also had an accounts payable balance of $1,390,
due to a director of the Company for expenses incurred by that director.

Note D - Shareholders' Equity

F-7

Note E - Common Stock Options

The Company has granted options to one executive to purchase shares of common
stock in conjunction with an employment agreement entered into during fiscal
2001. The options vest one year from the date of each grant. All options issued
to date have an exercise price of $0.22 per share. The weighted average fair
value of the options is $1.81 for options granted during fiscal 2003. The
weighted average remaining contractual lives of granted options are
approximately 5 years. Stock option compensation expense recorded during the
three months ended March 31, 2003 and 2002 was $150,187 and $93,937,
respectively. Stock option compensation expense recorded during the nine months
ended March 31, 2003 and 2002 was $431,812 and $253,625, respectively. The
summary of stock option activity is shown below:

Weighted
Average
Options Exercise
Outstanding Price

Outstanding at July 1, 2002 675,000 $0.22
Options granted during fiscal 2003 337,500 0.22
Outstanding at March 31, 2003 1,012,500 0.22
Options exercisable at March 31, 2003 675,000 0.22

================================================================================

March 31, March 31,
2003 2002

Net loss, as reported $261,365 $229,092
Increased compensation expense 2,674 5,521
Pro forma net loss ------------- -------------
$264,039 $234,613

Had compensation costs for these issuances been determined consistent with SFAS
No. 123, the Company's net loss would have increased by the following amount for
the nine months ended March 31, 2003 and 2002:
================================================================================

March 31, March 31,
2003 2002

Net loss, as reported $893,318 $675,175
Increased compensation expense 8,972 16,624
Pro forma net loss ------------- -------------
$902,290 $691,799

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 during the
nine months ended March 31, 2003 and 2002 with the following assumptions:
================================================================================

March 31, March 31,
2003 2002

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

================================================================================

F-8

Note F - Commitments and Contingencies

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

The Company has entered into an agreement with its external legal counsel,
whereby said legal counsel will provide certain legal services over a two-year
period beginning once the Company becomes a public registrant in exchange for
125,000 shares of the Company's common stock. The shares will be granted
pro-rata over those two years and recorded as expense, valued at the fair value
of the shares on the issuance date. As this agreement is not yet in effect,
there is no effect on the financial statements for the three and nine months
ended March 31, 2003.

In December 2002, the Company terminated its licensing agreement with a supplier
under which the Company had been obligated to pay minimum royalty fees. The
Company has $22,500 included in accounts payable and accrued expenses at March
31, 2003 under the terms of this agreement.

F-9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

PROSPECTUS HYDROFLO, INC.

Dated May 14, 2003, as supplemented on July ___, 2003

Selling Shareholders are offering up to 2,273,550 shares of common stock.

The selling shareholders will offer their shares at $2.00 per share until our
shares are quoted on the OTC Bulletin Board and thereafter at prevailing market
prices or privately negotiated prices. We will not receive proceeds from the
sale of shares from the selling shareholders. We will pay all expenses of
registering the securities, currently estimated at $50,000.

Our common stock is not now listed on any national securities exchange, the
NASDAQ stock market or the Over the Counter Bulletin Board.

Dealer Prospectus Delivery Obligation
-------------------------------------

Until August 13, 2003 (90 days from the date of this prospectus) all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.

Part II-INFORMATION NOT REQUIRED IN PROSPECTUS

INDEMNIFICATION OF OFFICERS AND DIRECTORS

Our Articles of Incorporation and By-laws, subject to the provisions of North
Carolina law, contain provisions that allow the corporation to indemnify any
person under certain circumstances.

North Carolina law provides the following:

Part 5. Indemnification.
ss.55-8-50. Policy statement and definitions.
(a) It is the public policy of this State to enable corporations organized
under this Chapter to attract and maintain responsible, qualified directors,
officers, employees and agents, and, to that end, to permit corporations
organized under this Chapter to allocate the risk of personal liability of
directors, officers, employees and agents through indemnification and insurance
as authorized in this Part.
(b) Definitions in this Part:
(1) "Corporation" includes any domestic or foreign corporation absorbed
in a merger which, if its separate existence had continued, would have had the
obligation or power to indemnify its directors, officers, employees, or agents,
so that a person who would have been entitled to receive or request
indemnification from such corporation if its separate existence had continued
shall stand in the same position under this Part with respect to the surviving
corporation.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is or was
serving at the corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise. A director is
considered to be serving an employee benefit plan at the corporation's request
if his duties to the corporation also impose duties on, or otherwise involve
services by, him to the plan or to participants in or beneficiaries of the plan.
"Director" includes, unless the context requires otherwise, the estate or
personal representative of a director.
(3) "Expenses" means expenses of every kind incurred in defending a
proceeding, including counsel fees.
(4) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a proceeding.
(4a) "Officer", "employee", or "agent" includes, unless the context
requires otherwise, the estate or personal representative of a person who acted
in that capacity.
(5) "Official capacity" means: (i) when used with respect to a
director, the office of director in a corporation; and (ii) when used with
respect to an individual other than a director, as contemplated in G.S. 55-8-56,
the office in a corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise.

(6) "Party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
and whether formal or informal. (1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973,
c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1; 1993,
c. 552, s. 12.) ss.55-8-51. Authority to indemnify.
(a)Except as provided in subsection (d), a corporation may indemnify an
individual made a party to a proceeding because he is or was a director against
liability incurred in the proceeding if:
(1) He conducted himself in good faith; and
(2) He reasonably believed (i) in the case of conduct in his official
capacity with the corporation, that his conduct was in its best interests; and
(ii) in all other cases, that his conduct was at least not opposed to its best
interests; and
(3) In the case of any criminal proceeding, he had no reasonable cause
to believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he reasonably believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirement of
subsection (a)(2)(ii).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of no contest or its equivalent is not, of itself,
determinative that the director did not meet the standard of conduct described
in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
(2) In connection with any other proceeding charging improper personal
benefit to him, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him.
(e) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation that is concluded without a
final adjudication on the issue of liability is limited to reasonable expenses
incurred in connection with the proceeding.
(f) The authorization, approval or favorable recommendation by the board of
directors of a corporation of indemnification, as permitted by this section,
shall not be deemed an act or corporate transaction in which a director has a
conflict of interest, and no such indemnification shall be void or voidable on
such ground. (1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985
(Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1.)
ss.55-8-52. Mandatory indemnification.
Unless limited by its articles of incorporation, a corporation shall indemnify
a director who was wholly successful, on the merits or otherwise, in the defense
of any proceeding to which he was a party because he is or was a director of the
corporation against reasonable expenses incurred by him in connection with the
proceeding. (1955, c. 1371, s. 1; 1969, c. 797, ss. 2, 3; 1973, c. 469, s. 6;
1985 (Reg. Sess., 1986), c. 1027, ss. 39, 40; 1989, c. 265, s. 1.)
ss.55-8-53. Advance for expenses.

Expenses incurred by a director in defending a proceeding may be paid by the
corporation in advance of the final disposition of such proceeding as authorized
by the board of directors in the specific case or as authorized or required
under any provision in the articles of incorporation or bylaws or by any
applicable resolution or contract upon receipt of an undertaking by or on behalf
of the director to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the corporation against such expenses.
(1955, c. 1371, s. 1; 1969, c. 797, s. 1; 1973, c. 469, s. 5; 1985 (Reg. Sess.,
1986), c. 1027, ss. 35-38; 1989, c. 265, s. 1.)
ss.55-8-54. Court-ordered indemnification.
Unless a corporation's articles of incorporation provide otherwise, a director
of the corporation who is a party to a proceeding may apply for indemnification
to the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court after giving any notice
the court considers necessary may order indemnification if it determines:
(1) The director is entitled to mandatory indemnification under G.S.
55-8-52, in which case the court shall also order the corporation to pay the
director's reasonable expenses incurred to obtain court-ordered indemnification;
or
(2) The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not he met the standard of
conduct set forth in G.S. 55-8-51 or was adjudged liable as described in G.S.
55-8-51(d), but if he was adjudged so liable his indemnification is limited to
reasonable expenses incurred. (1955, c. 1371, s. 1; 1969, c. 797, ss. 2, 3;
1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, ss. 39, 40; 1989, c. 265,
s. 1.)
ss.55-8-55. Determination and authorization of indemnification.
(a)A corporation may not indemnify a director under G.S. 55-8-51 unless
authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because he
has met the standard of conduct set forth in G.S. 55-8-51.
(b) The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (1), by majority
vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely of two
or more directors not at the time parties to the proceeding;
(3) By special legal counsel (i) selected by the board of directors or
its committee in the manner prescribed in subdivision (1) or (2); or (ii) if a
quorum of the board of directors cannot be obtained under subdivision (1) and a
committee cannot be designated under subdivision (2), selected by majority vote
of the full board of directors (in which selection directors who are parties may
participate); or
(4) By the shareholders, but shares owned by or voted under the control
of directors who are at the time parties to the proceeding may not be voted on
the determination.

(c) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (b)
(3) to select counsel. (1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469,
s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1.)
ss.55-8-56. Indemnification of officers, employees, and agents.
Unless a corporation's articles of incorporation provide otherwise:
(1) An officer of the corporation is entitled to mandatory
indemnification under G.S. 55-8-52, and is entitled to apply for court-ordered
indemnification under G.S. 55-8-54, in each case to the same extent as a
director;
(2) The corporation may indemnify and advance expenses under this Part
to an officer, employee, or agent of the corporation to the same extent as to a
director; and
(3) A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with public
policy, that may be provided by its articles of incorporation, bylaws, general
or specific action of its board of directors, or contract. (1955, c. 1371, s.
1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027,
s. 39; 1989, c. 265, s. 1.)
ss.55-8-57. Additional indemnification and insurance.
(a)In addition to and separate and apart from the indemnification provided for
in G.S. 55-8-51, 55-8-52, 55-8-54, 55-8-55 and 55-8-56, a corporation may in its
articles of incorporation or bylaws or by contract or resolution indemnify or
agree to indemnify any one or more of its directors, officers, employees, or
agents against liability and expenses in any proceeding (including without
limitation a proceeding brought by or on behalf of the corporation itself)
arising out of their status as such or their activities in any of the foregoing
capacities; provided, however, that a corporation may not indemnify or agree to
indemnify a person against liability or expenses he may incur on account of his
activities which were at the time taken known or believed by him to be clearly
in conflict with the best interests of the corporation. A corporation may
likewise and to the same extent indemnify or agree to indemnify any person who,
at the request of the corporation, is or was serving as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or as a trustee or
administrator under an employee benefit plan. Any provision in any articles of
incorporation, bylaw, contract, or resolution permitted under this section may
include provisions for recovery from the corporation of reasonable costs,
expenses, and attorneys' fees in connection with the enforcement of rights to
indemnification granted therein and may further include provisions establishing
reasonable procedures for determining and enforcing the rights granted therein.
(b) The authorization, adoption, approval, or favorable recommendation by the
board of directors of a public corporation of any provision in any articles of
incorporation, bylaw, contract or resolution, as permitted in this section,
shall not be deemed an act or corporate transaction in which a director has a
conflict of interest, and no such articles of incorporation or bylaw provision
or contract or resolution shall be void or voidable on such grounds. The
authorization, adoption, approval, or favorable recommendation by the board of
directors of a nonpublic corporation of any provision in any articles of
incorporation, bylaw, contract or resolution, as permitted in this section,
which occurred prior to July 1, 1990, shall not be deemed an act or corporate
transaction in which a director has a conflict of interest, and no such articles
of incorporation, bylaw provision, Part 5. Indemnification.

ss.55-8-50. Policy statement and definitions.
(a) It is the public policy of this State to enable corporations organized
under this Chapter to attract and maintain responsible, qualified directors,
officers, employees and agents, and, to that end, to permit corporations
organized under this Chapter to allocate the risk of personal liability of
directors, officers, employees and agents through indemnification and insurance
as authorized in this Part.
(b) Definitions in this Part:
(1) "Corporation" includes any domestic or foreign corporation absorbed
in a merger which, if its separate existence had continued, would have had the
obligation or power to indemnify its directors, officers, employees, or agents,
so that a person who would have been entitled to receive or request
indemnification from such corporation if its separate existence had continued
shall stand in the same position under this Part with respect to the surviving
corporation.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is or was
serving at the corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise. A director is
considered to be serving an employee benefit plan at the corporation's request
if his duties to the corporation also impose duties on, or otherwise involve
services by, him to the plan or to participants in or beneficiaries of the plan.
"Director" includes, unless the context requires otherwise, the estate or
personal representative of a director.0
(3) "Expenses" means expenses of every kind incurred in defending a
proceeding, including counsel fees.
(4) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a proceeding.
(4a) "Officer", "employee", or "agent" includes, unless the context
requires otherwise, the estate or personal representative of a person who acted
in that capacity.
(5) "Official capacity" means: (i) when used with respect to a
director, the office of director in a corporation; and (ii) when used with
respect to an individual other than a director, as contemplated in G.S. 55-8-56,
the office in a corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise.
(6) "Party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
and whether formal or informal. (1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973,
c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1; 1993,
c. 552, s. 12.) ss.55-8-51. Authority to indemnify.

(a)Except as provided in subsection (d), a corporation may indemnify an
individual made a party to a proceeding because he is or was a director against
liability incurred in the proceeding if:
(1) He conducted himself in good faith; and
(2) He reasonably believed (i) in the case of conduct in his official
capacity with the corporation, that his conduct was in its best interests; and
(ii) in all other cases, that his conduct was at least not opposed to its best
interests; and
(3) In the case of any criminal proceeding, he had no reasonable cause
to believe his conduct was unlawful. (b) A director's conduct with respect to
an employee benefit plan for a purpose he reasonably believed to be in the
interests of the participants in and beneficiaries of the plan is conduct that
satisfies the requirement of subsection (a)(2)(ii).
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of no contest or its equivalent is not, of itself,
determinative that the director did not meet the standard of conduct described
in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
(2) In connection with any other proceeding charging improper personal
benefit to him, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him.
(e) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation that is concluded without a
final adjudication on the issue of liability is limited to reasonable expenses
incurred in connection with the proceeding.
(f) The authorization, approval or favorable recommendation by the board of
directors of a corporation of indemnification, as permitted by this section,
shall not be deemed an act or corporate transaction in which a director has a
conflict of interest, and no such indemnification shall be void or voidable on
such ground. (1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985
(Reg. Sess., 1986), c. 1027, s. 39; 1989, c.
265, s. 1.)
ss.55-8-52. Mandatory indemnification.
Unless limited by its articles of incorporation, a corporation shall indemnify
a director who was wholly successful, on the merits or otherwise, in the defense
of any proceeding to which he was a party because he is or was a director of the
corporation against reasonable expenses incurred by him in connection with the
proceeding. (1955, c. 1371, s. 1; 1969, c. 797, ss. 2, 3; 1973, c. 469, s. 6;
1985 (Reg. Sess., 1986), c. 1027, ss. 39, 40; 1989, c. 265, s. 1.)
ss.55-8-53. Advance for expenses.
Expenses incurred by a director in defending a proceeding may be paid by the
corporation in advance of the final disposition of such proceeding as authorized
by the board of directors in the specific case or as authorized or required
under any provision in the articles of incorporation or bylaws or by any
applicable resolution or contract upon receipt of an undertaking by or on behalf
of the director to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the corporation against such expenses.
(1955, c. 1371, s. 1; 1969, c. 797, s. 1; 1973, c. 469, s. 5; 1985 (Reg. Sess.,
1986), c. 1027, ss. 35-38; 1989, c. 265, s. 1.)
ss.55-8-54. Court-ordered indemnification.
Unless a corporation's articles of incorporation provide otherwise, a director
of the corporation who is a party to a proceeding may apply for indemnification
to the court conducting the proceeding or to another court of competent
jurisdiction. On receipt of an application, the court after giving any notice
the court considers necessary may order indemnification if it determines:

(1) The director is entitled to mandatory indemnification under G.S.
55-8-52, in which case the court shall also order the corporation to pay the
director's reasonable expenses incurred to obtain court-ordered indemnification;
or
(2) The director is fairly and reasonably entitled to indemnification in
view of all the relevant circumstances, whether or not he met the standard of
conduct set forth in G.S. 55-8-51 or was adjudged liable as described in G.S.
55-8-51(d), but if he was adjudged so liable his indemnification is limited to
reasonable expenses incurred. (1955, c. 1371, s. 1; 1969, c. 797, ss. 2, 3;
1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, ss. 39, 40; 1989, c. 265,
s. 1.) ss.55-8-55. Determination and authorization of indemnification.
(a)A corporation may not indemnify a director under G.S. 55-8-51 unless
authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because he
has met the standard of conduct set forth in G.S. 55-8-51.
(b) The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (1), by majority
vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely of two
or more directors not at the time parties to the proceeding;
(3) By special legal counsel (i) selected by the board of directors or
its committee in the manner prescribed in subdivision (1) or (2); or (ii) if a
quorum of the board of directors cannot be obtained under subdivision (1) and a
committee cannot be designated under subdivision (2), selected by majority vote
of the full board of directors (in which selection directors who are parties may
participate); or
(4) By the shareholders, but shares owned by or voted under the control
of directors who are at the time parties to the proceeding may not be voted on
the determination.
(c) Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subsection (b)
(3) to select counsel. (1955, c. 1371, s. 1; 1969, c. 797, s. 2; 1973, c. 469,
s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39; 1989, c. 265, s. 1.) ss.55-8-56.
Indemnification of officers, employees, and agents.
Unless a corporation's articles of incorporation provide otherwise:
(1) An officer of the corporation is entitled to mandatory
indemnification under G.S. 55-8-52, and is entitled to apply for court-ordered
indemnification under G.S. 55-8-54, in each case to the same extent as a
director;

(2) The corporation may indemnify and advance expenses under this Part
to an officer, employee, or agent of the corporation to the same extent as to a
director; and
(3) A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with public
policy, that may be provided by its articles of incorporation, bylaws, general
or specific action of its board of directors, or contract. (1955, c. 1371, s. 1;
1969, c. 797, s. 2; 1973, c. 469, s. 6; 1985 (Reg. Sess., 1986), c. 1027, s. 39;
1989, c. 265, s. 1.)
ss.55-8-57. Additional indemnification and insurance.
(a)In addition to and separate and apart from the indemnification provided for
in G.S. 55-8-51, 55-8-52, 55-8-54, 55-8-55 and 55-8-56, a corporation may in its
articles of incorporation or bylaws or by contract or resolution indemnify or
agree to indemnify any one or more of its directors, officers, employees, or
agents against liability and expenses in any proceeding (including without
limitation a proceeding brought by or on behalf of the corporation itself)
arising out of their status as such or their activities in any of the foregoing
capacities; provided, however, that a corporation may not indemnify or agree to
indemnify a person against liability or expenses he may incur on account of his
activities which were at the time taken known or believed by him to be clearly
in conflict with the best interests of the corporation. A corporation may
likewise and to the same extent indemnify or agree to indemnify any person who,
at the request of the corporation, is or was serving as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise or as a trustee or
administrator under an employee benefit plan. Any provision in any articles of
incorporation, bylaw, contract, or resolution permitted under this section may
include provisions for recovery from the corporation of reasonable costs,
expenses, and attorneys' fees in connection with the enforcement of rights to
indemnification granted therein and may further include provisions establishing
reasonable procedures for determining and enforcing the rights granted therein.
(b) The authorization, adoption, approval, or favorable recommendation by the
board of directors of a public corporation of any provision in any articles of
incorporation, bylaw, contract or resolution, as permitted in this section,
shall not be deemed an act or corporate transaction in which a director has a
conflict of interest, and no such articles of incorporation or bylaw provision
or contract or resolution shall be void or voidable on such grounds. The
authorization, adoption, approval, or favorable recommendation by the board of
directors of a nonpublic corporation of any provision in any articles of
incorporation, bylaw, contract or resolution, as permitted in this section,
which occurred prior to July 1, 1990, shall not be deemed an act or corporate
transaction in which a director has a conflict of interest, and no such articles
of incorporation, bylaw provision, contract or resolution shall be void or
voidable on such grounds. Except as permitted in G.S. 55-8-31, no such bylaw,
contract, or resolution not adopted, authorized, approved or ratified by
shareholders shall be effective as to claims made or liabilities asserted
against any director prior to its adoption, authorization, or approval by the
board of directors.
(c) A corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have power to indemnify him against the
same liability under any provision of this Chapter. (1955, c. 1371, s. 1; 1969,
c. 797, s. 1; 1973, c. 469, s. 5; 1985 (Reg. Sess., 1986), c. 1027, ss. 35-38;
1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.14.)

ss.55-8-58. Application of Part.
(a)If articles of incorporation limit indemnification or advance for expenses,
indemnification and advance for expenses are valid only to the extent consistent
with the articles.
(b) This Part does not limit a corporation's power to pay or reimburse
expenses incurred by a director in connection with his appearance as a witness
in a proceeding at a time when he has not been made a named defendant or
respondent to the proceeding.
(c) This Part shall not affect rights or liabilities arising out of acts or
omissions occurring before July 1, 1990. (1989, c. 265, s. 1.)

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table is an itemization of all expenses, without
consideration to future contingencies, incurred or expected to be incurred by
our Corporation in connection with the issuance and distribution of the
securities being offered by this prospectus. Items marked with an asterisk (*)
represent estimated expenses. We have agreed to pay all the costs and expenses
of this offering. Selling security holders will pay no offering expenses.

------------------------------- -------------------
ITEM AMOUNT
------------------------------- -------------------
SEC Registration Fee* $ 100
------------------------------- -------------------
Legal Fees and Expenses $25,000
------------------------------- -------------------
Accounting Fees and Expenses* $15,000
------------------------------- -------------------
Miscellaneous* $ 9,900
------------------------------- -------------------
Total* $50,000
------------------------------- -------------------
* Estimated Figure

RECENT SALES OF UNREGISTERED SECURITIES
On April 30, 2001 our stock split 3 for 1, and on July 8, 2002, the stock split
3 for 2. The numbers of shares set forth below reflect these splits.

On or about January 1, 2000, at corporate inception, we issued 13,500,000 shares
to Dennis Mast, for assignment of the technology and patent rights. The
aggregate consideration received was $30,000 or $0.01 per share [pre-splits]
based upon the amount of time and effort expended by Mr. Mast in obtaining the
patent.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances.

We believed that Section 4(2) was available because:

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

Also at this time, we issued:

o 112,500 shares to Milford Mast, for which the consideration received
was $37,500.00 cash;
o 45,000 shares to Eugene Chappell, in the name Advisory Group
Enterprise, for which the consideration received was $15,000.00 cash;
o 22,500 shares to Carol Swailes, for which the consideration received
was $7500.00 cash.
o The price per share in these transactions was $1.50 per share
[pre-splits].

All of these purchasers were accredited and/or sophisticated.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances.

We believed that Section 4(2) was available because:

Between February 3, 2000 and April 3, 2001, we issued 1,434,300 shares to 6 non-
affiliated accredited and/or sophisticated shareholders at $1.50 per share [pre-
splits]. The aggregate consideration received was $478,099.50.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances.

We believed that Section 4(2) was available because:

On April 3, 2001 we issued 7,500 shares to Janet Boerema, Mr. Mast's sister, as
payment for corporate logo design work, valued at $2,500 or $1.50 per share
[pre-split] by mutual agreement based upon the time, effort and creativity of
the process.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances.

We believed that Section 4(2) was available because:

Between July 5, 2001 and June 28, 2002, we sold 416,250 shares to 26 non-
affiliated accredited and/or sophisticated shareholders at $2.00 per share [pre-
split]. The aggregate consideration received was $555,000.00.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances.

We believed that Section 4(2) was available because:

Between July 27, 2002 and August 30, 2002, we sold 235,500 shares to 19
non-affiliated shareholders at $2.00 per share. The aggregate consideration
received was $471,000.00.

We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances.

We believed that Section 4(2) was available because:

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

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

Prospective investors were invited to review at our offices at any reasonable
hour, after reasonable advance notice, any materials available to us concerning
our business. Prospective Investors were also invited to visit our offices.

EXHIBITS
Item 3

1 Articles of Incorporation of Hydroflo, Inc.
2 By-laws of Hydroflo, Inc.

Item 4

1 Form of common stock Certificate of the Hydroflo, Inc. (1)

Item 5

1 Legal Opinion of Williams Law Group, P.A.

Item 10

1 Form of manufacturer representative agreement
2 Royalty agreement
3 Barbee Agreement
4 Free Harbor Agreement
5 Tri-Weld Agreement
6 Amended Barbee Agreement
7 Agreement with Michael T. Williams, Esq.
8 Purchase Order: Emory Wilson
9 Contract: Happy Cloud Ranch
10 Purchase Order: Valley Water Technology

Item 23

1 Consent of Grant Thornton LLP.*
2 Consent of Williams Law Group, P.A. (included in Exhibit 5.1)

* filed herewith

All other Exhibits called for by Rule 601 of Regulation SB-2 or SK are not
applicable to this filing.

(1) Information pertaining to our common stock is contained in our Articles of
Incorporation and By-Laws.

UNDERTAKINGS

Information pertaining to our common stock is contained in our Articles
of Incorporation and By-Laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes to:

1. File, during any period in which we offer or sell securities, a post-
effective amendment to this registration statement to:

i. Include any prospectus required by section 10(a)(3) of the
Securities Act;

ii. Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and Notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation From the low or high end of the
estimated maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement. iii. Include any additional or
changed material information on the plan of distribution.

2. For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.

3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in Raleigh NC on July 29, 2003.

Hydroflo, Inc.

---------------------------- -------------------------- -------------------------- --------------------------
Title Name Date Signature
---------------------------- -------------------------- -------------------------- --------------------------
Principal Executive Officer Dennis Mast 7-29-2003 /s/ Dennis Mast
---------------------------- -------------------------- -------------------------- --------------------------
Principal Accounting Dennis Mast 7-29-2003 /s/ Dennis Mast
Officer
---------------------------- -------------------------- -------------------------- --------------------------
Principal Financial Officer Dennis Mast 7-29-2003 /s/ Dennis Mast
---------------------------- -------------------------- -------------------------- --------------------------

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 7-29-2003
---------------------------- -------------------------- -------------------------- --------------------------
/s/ Thomas Barbee Thomas Barbee Director 7-29-2003
---------------------------- -------------------------- -------------------------- --------------------------