UNITED
      STATES


S ECURITIES
      AND E XCHANGE C OMMISSION


Washington,
      D.C. 20549




FORM
      10-Q





x
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the quarterly period ended June 30, 2008





or





o
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934.





000-51807


(Commission
      File No.)




**EAU
      TECHNOLOGIES, INC.**


(name
      of
      small business issuer in its charter)




Delaware
            
            87-0654478(State or other jurisdiction of incorporation or
              organization)
            
            (I.R.S. Employer Identification No.)





1890 Cobb International Blvd, Suite A, Kennesaw Georgia
            
            30152(Address of principal executive offices)
            
            (Zip Code)





Issuer’s telephone number: (678)
      388-9492





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or
      for such shorter period that the registrant was required to file such reports),
      and (2) has been subject to such filing requirements for the past 90 days.
      Yes x No  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a small reporting company. See
      definitions of "large accelerated filer," "accelerated filer," and "smaller
      reporting company" in Rule 12b-2 of the Exchange Act. (Check one):





Large
                accelerated filer   ̈
            Accelerated
                filer                    
                 ̈Non-accelerated
                filer     ̈
            Smaller
                reporting company  x


(Do
      not
      check if a smaller reporting company)





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





As
      of
      August 8, 2008, the Registrant had 16,674,380 shares
      of
      Common Stock, $0.0001 par value outstanding.








**EAU
      TECHNOLOGIES, INC.**


QUARTERLY
      REPORT ON FORM 10-Q


June
      30,
      2008





INDEX





PagePART
                I. FINANCIAL INFORMATIONITEM
                1.
            Financial
                StatementsBalance
                Sheets – June 30, 2008 and December 31, 2007
            3Statements
                of Operations – Three and Six months ended June 30, 2008 and
                2007
            5Statement
                of Stockholders’ Equity (Deficit)
            7Statements
                of Cash Flows – Six months ended June 30, 2008 and 2007
            8Notes
                to Financial Statements
            10ITEM
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            16ITEM
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22ITEM
                4T.
            Controls
                and Procedures
            22PART
                II. OTHER INFORMATIONITEM
                1.
            Legal
                Proceedings
            23ITEM
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23ITEM
                3.
            Defaults
                Upon Senior Securities
            24ITEM
                4.
            Submission
                of matters to Vote of Security Holders
            24ITEM
                5.
            Other
                Information
            24ITEM
                6.
            Exhibits
            24SIGNATURES
            25


2





PART
      I -
      FINANCIAL INFORMATION





**EAU
      TECHNOLOGIES, INC.**





***BALANCE
      SHEETS***





ASSETS




June 30,
            
            December 31,2008
            
            2007CURRENT
                ASSETS
            
            
            (Unaudited)
            
            
            (Audited)Cash
                and cash equivalents
            
            $
            676,408
            
            $
            1,413,744Accounts
                receivable, net
            
            
            43,085
            
            
            61,196Accounts
                receivable – related party, net
            
            
            357,797
            
            
            357,615Prepaid
                expense
            
            
            146,916
            
            
            30,600Inventory,
                net
            
            
            2,874,958
            
            
            2,814,533Total
                current assets
            
            
            4,099,164
            
            
            4,677,688PROPERTY
                AND EQUIPMENT, net ofaccumulated
                depreciation of $262,487 and $220,064
            
            
            164,131
            
            
            206,554OTHER
                ASSETSDeposits
            
            
            10,496
            
            
            11,658Restricted
                cash
            
            
            240,000
            
            
            240,000Note
                receivable
            
            
            150,000
            
            
            150,000Intellectual
                property
            
            
            69,304
            
            
            61,558Total
                other assets
            
            
            469,800
            
            
            463,216Total
                assets
            
            $
            4,733,095
            
            $
            5,347,458





See
      notes
      to financial statements.


3


**EAU
      TECHNOLOGIES, INC.**





***BALANCE
      SHEETS (Continued)***




LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)





June 30,
            
            December 31,2008
            
            2007CURRENT
                LIABILITIES
            
            
            (Unaudited)
            
            
            (Audited)Accounts
                payable
            
            $
            225,719
            
            $
            287,183Accrued
                expenses
            
            
            652,150
            
            
            645,054Warranty
                reserve
            
            
            114,000
            
            
            122,000Advance
                – related party
            
            
            -
            
            
            500,000Advance
                deposits on machine orders – related party
            
            
            697,500
            
            
            697,500Current
                portion of long-term debt
            
            
            20,563
            
            
            19,841Senior
                convertible note payable – related party, current portion netof
                discounts of $260,965 and $708,333
            
            
            2,739,035
            
            
            2,291,667Total
                current liabilities
            
            
            4,448,967
            
            
            4,563,245LONG
                TERM LIABILITIESLong
                term debt, net of current portion
            
            
            53,573
            
            
            59,045Deferred
                licensing revenue – related party
            
            
            441,667
            
            
            541,667Derivative
                liability – related party
            
            
            6,929,870
            
            
            6,758,074Total
                long term liabilities
            
            
            7,425,110
            
            
            7,358,786Total
                liabilities
            
            
            11,874,077
            
            
            11,922,031STOCKHOLDERS’
                EQUITY (DEFICIT)Common
                stock, $.0001 par value; 50,000,000 shares authorized;
              16,674,380and
                15,105,650 issued and outstanding, respectively
            
            
            1,668
            
            
            1,511Additional
                paid in capital
            
            
            37,549,984
            
            
            35,406,545Accumulated
                deficit
            
            
            (44,692,634
            )
            
            (41,982,629
            )Total
                stockholders’ equity (deficit)
            
            
            (7,140,982
            )
            
            (6,574,573
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            4,733,095
            
            $
            5,347,458





See
      notes
      to financial statements.


4


**EAU
      TECHNOLOGIES, INC.**





***UNAUDITED
      STATEMENTS OF OPERATIONS***





**Three Months Ended**
            
            **Six Months Ended****June 30,**
            
            **June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**NET
                SALES – RELATED PARTY
            
            $
            75,475
            
            $
            250,786
            
            $
            125,475
            
            $
            309,234NET
                SALES
            
            
            62,381
            
            
            52,972
            
            
            108,036
            
            
            67,999TOTAL
                SALES
            
            
            137,856
            
            
            303,758
            
            
            233,511
            
            
            377,233COST
                OF GOODS SOLD
            
            
            41,411
            
            
            132,086
            
            
            67,068
            
            
            142,971GROSS
                PROFIT
            
            
            96,445
            
            
            171,672
            
            
            166,443
            
            
            234,262OPERATING
                EXPENSESDepreciation
                and amortization
            
            
            21,099
            
            
            36,468
            
            
            42,423
            
            
            57,345Research
                and development
            
            
            20,387
            
            
            8,875
            
            
            30,789
            
            
            82,475General
                and administrative
            
            
            1,055,059
            
            
            4,791,478
            
            
            2,137,442
            
            
            5,845,444Total
                operating expenses
            
            
            1,096,545
            
            
            4,836,821
            
            
            2,210,654
            
            
            5,985,264LOSS
                BEFORE OTHER INCOME (EXPENSE)
            
            
            (1,000,100
            )
            
            (4,665,149
            )
            
            (2,044,211
            )
            
            (5,751,002
            )OTHER
                INCOME (EXPENSE)Interest
                expense
            
            
            (228,474
            )
            
            (283,509
            )
            
            (505,619
            )
            
            (567,043
            )Interest
                income
            
            
            3,351
            
            
            4,549
            
            
            11,481
            
            
            10,710Gain
                (Loss) on derivative liability
            
            
            (257,549
            )
            
            (2,716,765
            )
            
            (171,796
            )
            
            (2,695,328
            )Other
                income (expense)
            
            
            140
            
            
            39,023
            
            
            140
            
            
            38,307Total
                other income (expense)
            
            
            (482,532
            )
            
            2,956,702
            
            
            (665,794
            )
            
            (3,213,354
            )LOSS
                BEFORE PROVISIONFOR
                INCOME TAXES
            
            
            (1,482,632
            )
            
            (7,621,851
            )
            
            (2,710,005
            )
            
            (8,964,356
            )PROVISION
                FOR INCOME TAXES
            
            
            -
            
            
            -
            
            
            -
            
            
            -LOSS
                FROM CONTINUING OPERATIONS
            
            
            (1,482,632
            )
            
            (7,621,851
            )
            
            (2,710,005
            )
            
            (8,964,356
            )





See
      notes
      to financial statements.


5


**EAU
      TECHNOLOGIES, INC.**





***UNAUDITED
      STATEMENTS OF OPERATIONS (continued)***





DISCONTINUED
                OPERATIONS:(Loss)
                from operations of discontinued operations (Net of $0 in income
                taxes)
            
            
            -
            
            
            (171,971
            )
            
            -
            
            
            (375,595
            )(Loss)
                on disposal of discontinued operations (Net of $0 in income
                taxes)
            
            
            -
            
            
            -
            
            
            -
            
            
            -LOSS
                FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            (171,971
            )
            
            -
            
            
            (375,595
            )NET
                LOSS
            
            $
            (1,482,632
            )
            $
            (7,793,822
            )
            $
            (2,710,005
            )
            $
            (9,339,951
            )NET
                LOSS PER SHARE CONTINUING OPERATIONS
            
            $
            (0.09
            )
            $
            (0.56
            )
            
            (0.18
            )
            $
            (0.67
            )NET
                LOSS PER SHARE DISCONTINUED OPERATIONS
            
            $
            0.00
            
            $
            (0.01
            )
            $
            0.00
            
            $
            (0.03
            )WEIGHTED
                AVERAGE OFSHARES
                OUTSTANDING
            
            
            16,486,418
            
            
            13,523,231
            
            
            15,440,794
            
            
            13,431,615





See
      notes
      to financial statements.


6





**EAU
      TECHNOLOGIES, INC.**





***UNAUDITED
      STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)***





**COMMON STOCK**
            
            **ADDITIONAL****PAID IN**
            
            **ACCUMULATED****SHARES**
            
            **AMOUNT**
            
            **CAPITAL**
            
            **DEFICIT**
            
            **TOTAL**Balance, December 31, 2007 (Audited)
            
            
            15,105,650
            
            $
            1,511
            
            $
            35,406,545
            
            $
            (41,982,629
            )
            $
            (6,574,573
            )Issuance
                of shares for cash of $1,500 (unaudited)
            
            
            150,000
            
            
            15
            
            
            1,485
            
            
            -
            
            
            1,500Issuance
                of shares of restricted stock to members of the Board of Directors
                and
                certain employees (unaudited)
            
            
            187,962
            
            
            19
            
            
            216,137
            
            
            -
            
            
            216,156Exercise
                of warrants for $1,000,000, or $1.30 per share, by Water Science,
                a
                related party (unaudited)
            
            
            769,230
            
            
            77
            
            
            999,923
            
            
            -
            
            
            1,000,000Exercise
                of warrants for $600,000, or $1.30 per share, by Water Science, a
                related
                party (unaudited)
            
            
            461,538
            
            
            46
            
            
            599,954
            
            
            -
            
            
            600,000Issuance
                and vesting of options and warrants for services
                (unaudited)
            
            
            -
            
            
            -
            
            
            325,940
            
            
            -
            
            
            325,940Net
                loss for the six months ended June 30, 2008 (unaudited)
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,710,005
            )
            
            (2,710,005
            )Balance,
                June 30, 2008 (unaudited)
            
            
            16,674,380
            
            $
            1,668
            
            $
            37,549,984
            
            $
            (44,692,634
            )
            $
            (7,140,982
            )








See
      notes
      to financial statements.


7


**EAU
      TECHNOLOGIES, INC.**





***UNAUDITED
      STATEMENTS OF CASH FLOWS***








**For the Six Months**
              **Ended June 30,****2008**
            
            **2007**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (2,710,005
            )
            $
            (9,339,951
            )Adjustments
                to reconcile net loss to net cashused
                in operating activities:Depreciation
            
            
            42,423
            
            
            57,345Bad
                debt expense
            
            
            5,092
            
            
            -Shares
                issued for services
            
            
            103,334
            
            
            -Warrants
                and options issued for services
            
            
            325,940
            
            
            4,192,054Discount
                of note payable
            
            
            447,368
            
            
            500,000Loss
                on disposal of assets
            
            
            -
            
            
            716Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            13,019
            
            
            (11,187
            )(Increase)
                decrease in accounts receivable - related party
            
            
            (182
            )
            
            18,304(Increase)
                decrease in pre-paid expense
            
            
            (3,494
            )
            
            802(Increase)
                in inventory
            
            
            (60,425
            )
            
            11,084(Increase)
                decrease in deposits
            
            
            1,162
            
            
            (7,728
            )(Increase)
                in restricted cash
            
            
            -
            
            
            (240,000
            )Increase
                (decrease) in accounts payable
            
            
            (61,464
            )
            
            (338,139
            )Increase
                (decrease) in warranty reserve
            
            
            (8,000
            )
            
            -Increase
                (decrease) in accrued expenses
            
            
            7,096
            
            
            (24,178
            )(Decrease)
                in deferred revenue
            
            
            (100,000
            )
            
            (100,000
            )Increase
                (decrease) in derivative liability
            
            
            171,796
            
            
            2,695,329Net
                cash used in continuing operations
            
            
            (1,826,340
            )
            
            (2,585,549
            )Net
                cash used in discontinued operations
            
            
            -
            
            
            (21,391
            )Net
                cash used in operating activities
            
            
            (1,826,340
            )
            
            (2,606,940
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of property and equipment
            
            
            -
            
            
            (21,127
            )Intellectual
                property disbursements
            
            
            (7,746
            )
            
            (145
            )Net
                cash used in continuing operations
            
            
            (7,746
            )
            
            (21,272
            )Net
                cash used in discontinued operations
            
            
            -
            
            
            (22,526
            )Net
                cash (used) in investing activities
            
            
            (7,746
            )
            
            (43,798
            )CASH
                FLOWS FROM FINANCING ACTIVITIESPayments
                on notes payable
            
            
            (4,750
            )
            
            (10,216
            )Advances
                for purpose of exercising warrants – related party
            
            
            -
            
            
            1,500,000Proceeds from issuance of common stock – related party
            
            
            1,101,500
            
            
            1,500,000Proceeds from issuance of common stock
            
            
            -
            
            
            50,000Net
                cash provided (used) by financing activities
            
            
            1,096,750
            
            
            3,039,784NET
                INCREASE (DECREASE) IN CASH
            
            
            (737,336
            )
            
            389,046Cash
                and cash equivalents, beginning of period
            
            
            1,413,744
            
            
            206,094Cash
                and cash equivalents, end of period
            
            $
            676,408
            
            $
            595,140





See
      notes
      to financial statements.


8


**EAU
      TECHNOLOGIES, INC.**





**** ***UNAUDITED
      STATEMENTS OF CASH FLOWS***


**(Continued)**





Six
                Months EndedJune
                30,2008
            
            2007Supplemental
                Disclosures of Cash Flow Information:Cash
                paid during the period for:Interest
            
            $
            13,251
            
            $
            23,567Income
                Taxes
            
            $
            -
            
            $
            -Supplemental
                Disclosures of Non-cash Investing and Financing
                Activities:Common
                stock issued for services
            
            $
            103,334
            
            $
            -Warrants
                and stock options granted
            
            $
            325,940
            
            $
            4,192,054





See
      notes
      to financial statements.


9


**EAU
      TECHNOLOGIES, INC.**





***CONDENSED
      NOTES TO UNAUDITED FINANCIAL STATEMENTS***





**NOTE
      1**–**BASIS OF PRESENTATION**





The
      accompanying condensed financial statements were prepared by the Company without
      audit pursuant to the rules and regulations of the Securities and Exchange
      Commission (SEC). Certain information and footnote disclosures normally included
      in financial statements prepared in accordance with accounting principles
      generally accepted in the United States of America have been condensed or
      omitted pursuant to such rules and regulations. In management’s opinion all
      necessary adjustments, which consist primarily of normal recurring adjustments,
      to the financial statements have been made to present fairly the financial
      position and results of operations and cash flows. The results of operations
      for
      the respective periods presented are not necessarily indicative of the results
      for the respective complete years. The financial statements should be read
      in
      conjunction with the financial statements and notes thereto included in the
      Company's Annual Report on Form 10-KSB for the year ended December 31,
      2007.





**NOTE
      2**–**RESTRICTED CASH**





In
      November 2006 the Company entered into an employment agreement with Wade
      Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited
      $240,000 with an escrow agent in January 2007. The Company has recognized this
      amount as restricted cash on the Company’s financial statements. The Company
      recognized $4,750 in interest income from the escrow account for the six months
      ended June 30, 2008.





**NOTE
      3 - INVENTORIES**





The
      composition of inventories is as follows at:




June
                30,
            
            December
                31,2008
            
            2007Finished
                goods
            
            $
            1,546,877
            
            $
            1,326,599Raw
                materials
            
            
            1,728,081
            
            
            1,887,934Allowance
                for obsolete inventory
            
            
            (400,000
            )
            
            (400,000
            )$
            2,874,958
            
            $
            2,814,533




**NOTE
      4**–**WARRANTY RESERVE**





The
      Company warrants its products against defects in materials and workmanship
      for a
      period of three years. The Company reviews the historical experience of failure
      rates and estimates the rate of warranty claims that will be made and has
      accrued a warranty reserve for these anticipated future warranty costs. If
      actual results differ from the estimates, the Company would adjust the estimated
      warranty liability. Changes in the warranty reserve for the six months ended
      June 30, 2008 are as follows:




Warranty
                reserve at beginning of period
            
            $
            122,000Costs
                accrued for additional warranties
            
            
            2,000Service
                obligations honored
            
            
            (10,000
            )Warranty
                reserve at end of period
            
            $
            114,000


10





**EAU
      TECHNOLOGIES, INC.**





***CONDENSED
      NOTES TO UNAUDITED FINANCIAL STATEMENTS***





**NOTE
      5 - SENIOR CONVERTIBLE DEBT**





In
      September 2005, the Company entered into a Senior Convertible Note (“the Note”)
      with Water Science, a related party, in exchange for $3,000,000. Pursuant to
      the
      debt agreement, the Note accrues interest at the rate of 3% per annum and is
      due, principal and interest together, on September 16, 2008. In June 2008,
      Water
      Science agreed to extend the maturity date of the Note to March 16, 2009. No
      principal or interest payments need to be paid during the loan period. The
      Note
      may be converted into 1,000,000 shares of the Company’s $0.0001 par value common
      stock prior to the maturity date, and at any time, by the holder at a price
      per
      share equal to $3.00 per share, subject to certain other conversion adjustments.
      The Company granted a security interest in all of the Company’s assets as
      collateral for the loan. In connection with the issuance of the Note, the
      Company also granted a three year warrant to purchase up to two million shares
      of the Company’s $0.0001 par value common stock with an exercise price of $2.76
      per share.





In
      May
      2007, the Company entered into a termination agreement related to the
      cancellation and reissuance of the existing warrants (“Original Warrants”) to
      purchase a total of 8.4 million shares of $0.0001 par value common stock of
      the
      Company, at a price of $2.76 per share, held by Water Science. The Company
      granted to Water Science replacement warrants to purchase 8.4 million shares
      of
      common stock at a price of $1.30 per share, with an expiration date of May
      9,
      2010. The Company has a right to require Water Science to exercise warrants
      for
      up to 3,230,769 shares; the Company may exercise the put right from time to
      time, but not more often than once per month.





The
      exercise price of these warrants is to be adjusted if the Company should issue
      stock for less than the original exercise price. Due to this feature wherein
      the
      conversion price is reset if shares are issued at a price less than the fixed
      conversion price, and pursuant to EITF 00-19, the Company has elected to
      bifurcate the conversion feature from the debt host, and accounts for the
      feature as a derivative liability with changes in fair value being recorded
      in
      the income statement. As of June 30, 2008 and December 31, 2007, the value
      of
      the derivative liability was $6,929,870 and $6,758,074. The Company recorded
      a
      loss of $171,796 and $2,695,328 in the change of the derivative liability to
      fair market value for the period ended June 30, 2008 and 2007, respectively.





**NOTE
      6 - RELATED PARTY TRANSACTIONS**





***Sales
      to Affiliates -*** In
      September 2005, Water Science, a related party, paid to the Company $1,000,000
      for the exclusive rights to sell our products in South America and Mexico.
      The
      agreement allows for a pro-rated refund during the first 5 years under certain
      circumstances. The Company recognizes income from this agreement over the first
      5 years of the agreement. The Company recognized $100,000 in each of the periods
      ended June 30, 2008 and 2007. This agreement also gives Water Science the right
      to purchase machinery from the Company at cost plus 25 percent. During
      the six months ended June 30, 2008, the Company recorded sales of $25,475 to
      Water Science. T he
      Company has previously received and recorded $697,500 in advance deposits from
      Water Science on machine orders. In connection with the past sales of machines
      and products, the Company has recorded approximately $349,297 in accounts
      receivable at June 30, 2008. During
      the six months ended June 30, 2007, the Company sold approximately $209,234
      in
      products and services to Water Science.





***Senior
      Note Payable -*** In
      September 2005, the Company entered into a Senior Convertible Note with Water
      Science in exchange for $3,000,000 (see Note 5). For the six months ended June
      30, 2008, the Company recognized $45,000 in interest expense related to the
      Senior Note. The Company also recognized $447,368 and $500,000 in interest
      expense due to the discount of this note and the beneficial conversion feature
      at June 30, 2008 and 2007, respectively. The Company has recorded a loss of
      approximately $171,796 in the change of the derivative liability to fair market
      value for the six months ended June 30, 2008. In June 2008, Water Science agreed
      to extend the maturity date of the note until March 2009.


11


**EAU
      TECHNOLOGIES, INC.**





***CONDENSED
      NOTES TO UNAUDITED FINANCIAL STATEMENTS***





**NOTE
      6 - RELATED PARTY TRANSACTIONS** **-
      continued**





***Licensing
      Fee -*** In
      September 2005, the Company received
      $1,000,000 in exchange for providing Water Science exclusive licensing and
      distribution rights for a five-year term for a specified market area. The
      agreement provides termination rights by Water Sciences and a pro rata refund
      of
      the fee. The Company recognizes the fee on a pro rata basis over the life of
      the
      agreement. The Company recognized $100,000 for the each of the six months ended
      June 30, 2008 and 2007.





***Escrow
      Arrangement with Chief Executive Officer -*** In
      October 2006, the Company entered into an escrow agreement with the Chief
      Executive Officer. Pursuant to the escrow agreement, to secure the Company’s
      obligation to make the Severance Payment, the Company is required to deposit,
      at
      its election, either (1) cash in the amount of $240,000 or (2) an irrevocable
      letter of credit with a face amount of $240,000, with an agreed upon escrow
      agent who shall hold such funds (or letter of credit) in escrow. In January
      2007, the Company elected to deposit $240,000 in cash with an escrow agent.
      The
      escrow agreement provides different scenarios upon which either the Company
      or
      the Chief Executive Officer shall be entitled to interest on the escrowed funds.





***Advances*** -
      Periodically throughout the year, the Company advances officers and employees
      cash for certain reimbursable expenses. As of June 30, 2008 and 2007, the
      Company had advances to employees or officers in the amount of $8,500 and
      $1,500, respectively.





***Employee
      Options*** - In
      January 2008, an officer of the Company exercised 150,000 options for $1,500
      or
      $0.01 per share. The options were granted in 2003 for services.





In
      December 2007, the Company granted 480,260 options to various employees. The
      options are for a term of ten (10) years and have an exercise price of $1.30
      per
      share. The options vest over a period of four (4) years. The warrants were
      valued using the Black-Scholes model with the following assumptions: risk free
      rate of 4.64%, volatility at 87.06% and the stock price at $1.30. The value
      of
      each warrant is approximately $1.13 per warrant. The number of options granted
      was based on recommendations from a non-related human resource consulting firm.
      The Company recognized $141,076 in expense during the six months ended June
      30,
      2008.





In
      November 2007, the Company granted 530,000 options to Douglas Kindred, in
      connection with the appointment of Mr. Kindred as Chief Technology Officer.
      The
      options are for a term of ten (10) years and have an exercise price of $1.30
      per
      share. The options vest over a period of four (4) years. The warrants were
      valued using the Black-Scholes model with the following assumptions: risk free
      rate of 4.28%, volatility at 85.99% and the stock price at $1.01. The value
      of
      each warrant is approximately $0.85 per warrant. The number of options granted
      was based on recommendations from a non-related human resource consulting firm.
      The Company recognized $117,318 in expense during the six months ended June
      30,
      2008.





***Restricted
      Stock Grant*** - In
      February 2008, the Compensation Committee of the Board of Directors of the
      Company granted $30,000 to each board member in the form of 23,077 shares of
      restricted stock for each director, effective on February 27, 2008. The
      restricted stock will vest ratably over a period of two years from the date
      of
      grant. These grants were made pursuant to the annual directors’ compensation
      program approved by the Board in December 2007. The amount of compensation
      was
      based on recommendations from a non-related human resource consulting firm.
      The
      Compensation Committee also granted 49,500 shares of restricted stock to various
      employees, which will vest one year from the date of grant. The Company
      recognized $98,592 in expense for the six months ended June 30, 2008 for the
      value of the restricted stock that has vested.


12





**EAU
      TECHNOLOGIES, INC.**





***CONDENSED
      NOTES TO UNAUDITED FINANCIAL STATEMENTS***





**NOTE
      7**–**CAPITAL STOCK**





In
      January 2008, an officer of the Company exercised 150,000 options for $1,500
      or
      $0.01 per share. The options were granted in 2003 for services.





In
      February 2008, the Compensation Committee of the Board of Directors of the
      Company granted $30,000 to each board member in the form of 23,077 shares of
      restricted stock for each director, effective on February 27, 2008. The
      restricted stock will vest ratably over a period of two years from the date
      of
      grant. These grants were made pursuant to the annual directors’ compensation
      program approved by the Board in December 2007. The amount of compensation
      was
      based on recommendations from a non-related human resource consulting firm.
      The
      Compensation Committee also granted 49,500 shares of restricted stock to various
      employees, which will vest one year from the date of grant.





**NOTE
      8**–**GOING CONCERN**




The
      Company has incurred significant losses and has had negative cash flows from
      operations. As a result, at June 30, 2008, the Company has had a high level
      of
      equity financing transactions and additional financing will be required by
      the
      Company to fund its future activities and to support its operations. Management
      is seeking to obtain sufficient funding for its operations through either debt
      or equity financing. However, there is no assurance that the Company will be
      able to obtain additional financing. Furthermore, there is no assurance that
      rapid technological changes, changing customer needs and evolving industry
      standards will enable the Company to introduce new products and services on
      a
      continual and timely basis so that profitable operations can be attained. The
      Company’s ability to achieve and maintain profitability and positive cash flows
      is dependent upon its ability to achieve positive sales and profit margins
      and
      control operating expenses.





The
      Company estimates that it will need approximately $5,000,000 for the upcoming
      twelve months. Management plans to mitigate its losses in the near term through
      the further development and marketing of its trademarks, brand and product
      offerings.





Our
      auditors have issued their Independent Registered Public Accountants’ Report on
      the Company's financial statements for the fiscal year ended December 31, 2007
      with an explanatory paragraph regarding the Company's ability to continue as
      a
      going concern. The financial statements have been prepared on a going concern
      basis, which contemplates continuity of operations, realization of assets and
      satisfaction of liabilities in the ordinary course of business. However, as
      a
      result of recurring operating losses, such realization of assets and
      satisfaction of liabilities are subject to uncertainty, which raises substantial
      doubt about the Company's ability to continue as a going concern. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





**NOTE
      9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Stock
      Based-Compensation Expense





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires
      the measurement and recognition of compensation expense for all share-based
      payments to employees and directors including employee stock options  and
      stock purchases related to the Company’s employee stock option and award plans
      based on estimated fair values. SFAS 123(R) supersedes the Company’s previous
      accounting under Accounting Principles Board Option No. 25, “Accounting for
      Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In
      March 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied
      the provisions of SAB 107 in its adoption of SFAS 123(R).


13





**EAU
      TECHNOLOGIES, INC.**





***CONDENSED
      NOTES TO UNAUDITED FINANCIAL STATEMENTS***





**NOTE
      9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**





The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006,
      the first day of the Company’s fiscal year 2006. The Company’s financial
      statements as of and for the six month period ended June 30, 2008 reflect the
      impact of SFAS 123(R). In accordance with the modified prospective transition
      method, the Company’s financial statements for the prior year have not been
      restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based
      compensation expense recognized under SFAS 123(R) for the six month period
      ended
      June 30, 2008 and 2007 was $325,940 and $217,170, respectively, related to
      employee stock options issued and vesting during the period.





Basic
      and
      Fully Diluted Loss Per Share





Basic
      and
      Fully Diluted net loss per share is computed using the weighted-average number
      of common shares outstanding during the period.





For the Three Months Ended
            
            For the Six Months EndedJune 30,
            
            June 30,2008
            
            2007
            
            2008
            
            2007Net
                Loss (numerator)
            
            $
            (1,482,632
            )
            $
            (7,793,822
            )
            $
            (2,710,005
            )
            $
            (9,339,951
            )Shares
                (denominator)
            
            
            16,486,418
            
            
            13,523,231
            
            
            15,440,794
            
            
            13,431,615Per
                share amount
            
            $
            (0.09
            )
            $
            (0.58
            )
            $
            (0.18
            )
            $
            (0.70
            )





The
      Company’s outstanding stock options have been excluded from the basic net loss
      per share calculation for the three and six month periods ended June 30, 2008
      and 2007, because they are anti-dilutive.





The
      following table is a summary of the status of the warrants and options granted
      for the six months ended June 30, 2008:




Number
            
            Weightedof
                Options
            
            Average
                Exerciseand
                Warrants
            
            PriceOutstanding
                at beginning of period
            
            
            10,641,839
            
            $
            1.55Granted
            
            
            -
            
            
            -Exercised
            
            
            (1,380,768
            )
            
            1.16Forfeited
            
            
            -
            
            
            -Expired
            
            
            (335,000
            )
            
            1.99Outstanding
                at end of period
            
            
            8,926,071
            
            $
            1.60





14





**EAU
      TECHNOLOGIES, INC.**





***CONDENSED
      NOTES TO UNAUDITED FINANCIAL STATEMENTS***





**NOTE
      9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued**





A
      summary
      of the status of the warrants outstanding at June 30, 2008 is presented
      below:





Warrants
                Outstanding
            
            Warrants
                ExercisableRange
                of
              Exercise
              Prices
            
            Number
              Outstanding
            
            Weighted-Average
              Remaining
              Contractual
                Life
            
            Weighted-Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-Average
              Exercise
              Price$
            .01-.50
            
            
            310,000
            
            
            1.6
                years
            
            $
            0.04
            
            
            310,000
            
            $
            0.041.00-1.99
            
            
            7,186,029
            
            
            3.1
                years
            
            
            1.30
            
            
            5,895,769
            
            
            1.302.00-2.99
            
            
            720,000
            
            
            6.1
                years
            
            
            2.56
            
            
            720,000
            
            
            2.563.00-3.99
            
            
            191,666
            
            
            4.1
                years
            
            
            3.38
            
            
            191,666
            
            
            3.384.00-4.99
            
            
            255,000
            
            
            1.3
                years
            
            
            4.00
            
            
            255,000
            
            
            4.005.00-5.50
            
            
            263,376
            
            
            1.4
                years
            
            
            5.15
            
            
            263,376
            
            
            5.15$
            .01-5.50
            
            
            8,926,071
            
            
            3.2
                years
            
            $
            1.60
            
            
            7,635,811
            
            $
            1.64





The
      fair
      value of each warrant granted is estimated on the date granted using the
      Black-Scholes pricing model, with the following assumptions for warrants issued
      in 2007: risk-free interest rate of between 4.6% and 4.99%, expected dividend
      yield of zero, expected lives of 3 and 5 years and expected volatility of
      between 59.76% and 89.54%.


15




**Item
      2.**  **** **Management's
      Discussion and Analysis or Plan of Operation**





The
      following discussion and analysis provides information, which management
      believes is relevant to an assessment and understanding of the Company’s
      condensed results of operations and financial condition. The discussion should
      be read in conjunction with the financial statements included in our annual
      report on Form 10-KSB, and notes thereto.





**Overview**





EAU
      TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc.
      (referred to herein sometimes as “EAU,” “we,” “us,” or the “Company”), is in the
      business of developing, manufacturing and marketing equipment that uses water
      electrolysis to create fluids. These fluids have various commercial applications
      and may be used in commercial food processing organic or conventional
      agricultural products that clean, disinfect, remediate, hydrate and moisturize.
      The processes for which these fluids may be used are referred to in this Report
      as the “EW Technology.” For example, we believe that our food and agricultural
      treatment products potentially may be used to systemically treat all facets
      and
      phases of the food chain, from soil to animal feed to meat processing. Our
      products would accomplish this by eliminating dangerous and unhealthy pathogens
      from the food chain with organically based and highly effective solutions.
      We
      make the claim that our products are “non-toxic” and safe to human, animals and
      the environment at the levels employed. We can do this because at the levels
      we
      employ our technology, our studies both internal as well as through third
      parties show no toxicity. We are conducting further studies so we can make
      more
      specific claims in the future. Our fluids and products also do not contain
      or
      leave harmful residues often associated with chemical-based supplements and
      disinfecting and cleaning agents. The electrolyzed fluids created by the EW
      Technology (referred to herein sometimes as the “EO Fluids” or “Empowered
      Water TM ”)
      generated by our patented and patent pending specialized equipment currently
      replace many of the traditional products used in commercial, industrial and
      residential disinfecting and cleaning.





We
      have
      identified the following industries for early stage sales and marketing focus:
      1) dairy production and processing, 2) meat and poultry processing, 3) clean
      in
      place (“CIP”) for food and beverage processing and 4) agricultural grow-out and
      processing ( **“Primary
      Markets”** ).
      As of
      the date of this Report, the Company was focused on these markets because we
      believe that for each of these markets we have a competitive advantage, a
      leading strategic industry partner, or we can provide an attractive value-added
      proposition. To penetrate these markets, EAU is conducting trials that will
      lead
      to partnerships with industry leaders who can assist in rolling the technology
      out on a large scale.




We
      have
      obtained patent protection on two separate facets of electrolyzed fluids as
      well
      as the water generating technology. The facets for which we have obtained patent
      protection are how the fluids are used and how they are stabilized for use
      in
      different applications. Additionally, we have patents pending on poultry
      processing, and we have filed several provisional patent pending applications
      to
      protect new processes and products. Previously, we generated our revenues
      primarily from equipment sales to the carpet and living surfaces industries,
      and
      some consumer product sales. In 2006, we saw our first sales in the agriculture
      segment. All of these sales were made to Water Science, LLC, a company set
      up
      primarily to market Empowered WaterTM in Latin America. Currently we are seeking
      to expand those markets as well as introducing what we have learned in those
      markets to the United States. We will continue to seek to derive future EW
      Technology revenues from recurring fees we charge to customers based on per-unit
      or per-gallon of fluid used after equipment has been installed. Additionally,
      we
      will seek to introduce our technology to meat and poultry processing by
      leveraging the development and trials that we conducted in the United States.





We
      have
      recently signed a contract to install our pathogen remediation equipment at
      Murray’s Chicken in South Fallsburg, NY. Murray’s Chicken processes poultry
      grown without antibiotics and is Certified Humane. Murray’s recently announced
      the launching of its Eco Friendly packaging.


16





We
      have
      shipped and installed five of the nine units ordered from Water Sciences, LLC.
      The units have been installed in Holland, Ecuador, Costa Rica, Mexico and
      Colombia. Shipment dates and locations of the remaining units have yet to be
      determined by Water Sciences. Water Sciences is currently using Empowered WaterTM
fluids in various agricultural channels.





We
      are
      currently installed in four Whole Foods Market (WFM) stores in the South Region.
      These stores are using the Empowered WaterTM in three areas of the store: floral,
      fresh cut produce and leafy vegetable rinse area. In January 2007, the Company
      entered into an amended exclusive licensing and product supplier agreement
      with
      Zerorez Franchising Systems, Inc. (Zerorez), a previously affiliated entity,
      to
      provide Zerorez with its Primacide water solutions and water generator for
      its
      carpet cleaning franchisees. The Company has sold Empowered WaterTM generators to
      over 30 franchises. The Company is committed to sell to Zerorez the Primacide
      B
      water generator over the next three and a half years under the agreement, ending
      on December 31, 2011. The agreement allows for the automatic renewal of the
      agreement for three (3) terms of five year terms, unless both parties agree
      to
      the cancellation of the agreement.





In
      May
      2007, we signed an agreement with a small dairy plant whereby the dairy has
      agreed to lease our equipment and pay a royalty for the technology beginning
      in
      August 2007. The Company had been testing our equipment in this facility for
      over one year. While the amounts for this agreement are not significant, the
      Company believes that this agreement will serve as a model for expanding its
      presence in the dairy industry. Since then, we have also signed agreements
      with
      multiple other dairies to install our equipment and begin testing our equipment
      at their facilities. We are currently in trials on four farms in different
      regions of the Country.





Our
      operations are currently funded by a combination of revenues and capital
      funding.





Financial
      Position and Results of Operations





The
      following discussion should be read in conjunction with selected financial
      data
      and the financial statements and notes to financial statements.





*Financial
      Position*





The
      Company had $676,408 in cash as of June 30, 2008, compared to $1,413,744 at
      December 31, 2007. We also had $240,000 in restricted cash related to an escrow
      agreement. The Company has received and recorded $697,500 in advance deposits
      from Water Science on machine orders at June 30, 2008. This will be reduced
      as
      the Company delivers machines on order to Water Science, a related party. Water
      Science, who has exclusive rights to sell our products in Central and South
      America, is also an affiliate of the Company, by agreement may purchase
      machinery from us at cost plus 25 percent. Long
      term
      debt decreased slightly from $59,045 at December 31, 2007 to $53,573 at June
      30,
      2008. At June 30, 2008, our stockholders’ deficit was $7,140,982.





*Results
      of Operations* *for the Three months ended June 30, 2008 and 2007*





*Revenues
      and Net Income*





The
      Company had total revenues of $137,856 for the three months ended June 30,
      2008,
      which represents a decrease of 55% from the $303,758 in total revenues for
      the
      same period one year earlier. The majority of the decrease is due to the limited
      number of sales as the Company continues to implement its business plan and
      increasing product sales. In an effort to streamline our corporate focus and
      our
      business plan, the Company is no longer marketing products that are not directly
      related to its core competencies, which is the development of Empowered WaterTM
technologies.





Net
      loss
      from continuing operations for the three months ended June 30, 2008 was
      $1,482,632, or a loss of $0.09 per share, compared with a net loss from
      continuing operations of $7,621,851, or $0.56 per share for the same period
      in
      2007. For the three months ended June 30, 2007, the Company had additional
      losses of $171,971 related to the Consumer Products division, which was sold
      during 2007. The significant difference from the current quarter net loss and
      the loss during the same period in 2007 is primarily related to the expense
      related to the financing agreement entered into with Water Science in May 2007.
      During the period in 2007, the Company recognized a net change in the derivative
      liability of $2,716,765. The current quarter net loss includes $228,474 in
      interest expense, compared to $283,509 in 2007. This is due to interest expense
      related to the senior note payable entered into in September 2005, which was
      extended until March 2009.


17


*General
      and Administrative Expenses*





The
      Company’s general and administrative expenses totaled $1,055,059 during the
      three months ended June 30, 2008, compared to $4,791,478 during the three months
      ended June 30, 2007, for a decrease of $3,736,419, or 78%. The primary reason
      for the decrease is due to the re-issuance of new warrants during the three
      months ended June 2007. General and administrative expense for 2008 consist
      primarily payroll and other compensation expense ($431,954), legal and
      professional fees ($141,504), expense related to granting of stock and options
      ($162,970) and insurance expenses ($68,060).





*Research
      and Development*





Research
      and development expenses incurred during the three month period ended June
      30,
      2008 increased $11,512 or 130%, from $8,875 in 2007 to $20,387 in 2008. While
      the Company believes it has developed proven products that have commercial
      value
      in its targeted markets, we will continue to conduct limited research to improve
      our products and their performance.





*Results
      of Operations* *for the Six months ended June 30, 2008 and 2007*





*Revenues
      and Net Income*





The
      Company had total revenues of $233,511 for the six months ended June 30, 2008,
      which represents a decrease of 38% from the $377,233 in total revenues for
      the
      same period one year earlier. The majority of the decrease is due to the limited
      number of sales as the Company continues to implement its business plan and
      increasing product sales. In an effort to streamline our corporate focus and
      our
      business plan, the Company is no longer marketing products that are not directly
      related to its core competencies, which is the development of Empowered WaterTM
technologies.





Net
      loss
      from continuing operations for the six months ended June 30, 2008 was
      $2,710,005, or a loss of $0.18 per share, compared with a net loss from
      continuing operations of $8,964,356, or $0.67 per share for the same period
      in
      2007. For the six months ended June 30, 2007, the Company had additional losses
      of $375,595 related to the Consumer Products division, which was sold during
      2007. The significant difference from the current quarter net loss and the
      loss
      during the same period in 2007 is primarily related to the expense related
      to
      the financing agreement entered into with Water Science in May 2007. During
      the
      period in 2007, the Company recognized a net change in the derivative liability
      of $2,695,328. The current period net loss includes $505,619 in interest
      expense, compared to $567,043 in 2007. This is due to interest expense related
      to the senior note payable entered into in September 2005, which was extended
      until March 2009.





*General
      and Administrative Expenses*





The
      Company’s general and administrative expenses totaled $2,137,442 during the six
      months ended June 30, 2008, compared to $5,845,444 during the six months ended
      June 30, 2007, for a decrease of $3,708,002, or 63%. The primary reason for
      the
      decrease is due to the re-issuance of new warrants during the six months ended
      June 2007. General and administrative expense for 2008 consist primarily payroll
      and other compensation expense ($845,804), legal and professional fees
      ($357,431), expense related to granting of stock and options ($325,940) and
      insurance expenses ($151,160).


18





*Research
      and Development*





Research
      and development expenses incurred during the six month period ended June 30,
      2008 decreased $51,686 or 63%, from $82,475 in 2007 to $30,789 in 2008. While
      the Company believes it has developed proven products that have commercial
      value
      in its targeted markets, we will continue to conduct limited research to improve
      our products and their performance.





**Liquidity
      and Capital Resources**




The
      Company had $676,408 in cash as of June 30, 2008, compared to $1,413,744 at
      December 31, 2007, for a change of 737,336. We have had continuing losses of
      $2,710,005 for the six months ended June 30, 2008, compared with losses of
      $9,339,951 for the six months ended June 30, 2007.





Net
      cash
      used in operating activities in the six month period ended June 30, 2008 was
      $1,826,340, a 30% decrease, compared to $2,606,940 for the same period in 2007. The
      majority of the change is due to the decreased net loss and the increase in
      restricted cash during the six months ended June 30, 2007. Also included in
      the
      net cash used is $21,391 used from discontinued operations.





At
      June
      30, 2008, the Company’s net inventory was $2,874,958, representing a decrease of
      approximately 2% from the $2,814,533 on hand at December 31, 2007. The Company
      is in multiple tests of our equipment and has included the machines in inventory
      until they are sold and enter into revenues.





The
      operating outflow of cash was reduced by the Company issuing warrants and stock
      options in lieu of cash during the quarter of $325,940. The Company adopted
      SFAS
      123(R), effective January 1, 2006, and now expenses stock options given to
      employees. The Company recognized a non-cash increase from the discounting
      of
      the Company’s note payable to Water Science, LLC of $447,368. (See Note 5 to the
      Company’s financial statements.) Further, the Company recognized a non-cash
      increase in the derivative liability of $171,796, due to changes in the
      Black-Scholes value of the liability.





The
      Company used $7,746 in cash flows from investing activities during the period
      ended June 30, 2008 as compared to $43,798 provided for in the same period
      in
      2007. During 2008, the cash flows consisted of expenditures made related to
      intellectual property. During 2007 the primary cash flows from investing
      activities consisted of $21,127 used to purchase equipment and $145 related
      to
      intellectual property. Also included in the net cash used is $22,526 used from
      discontinued operations.





The
      Company received $1,096,750 in cash flows from financing activities for the
      period ended June 30, 2008 compared with $3,039,784 provided to the Company
      during the same period in 2007. The Company received proceeds of $1,101,500
      from
      the exercising of options during the first six months of 2008, whereas, the
      Company received proceeds of $1,500,000 from the issuance of stock and
      $1,500,000 from advances during the six months ended June 30, 2007. The other
      financing activity consisted of payments made on notes payable in the amount
      of
      $4,750 and $10,216 in 2008 and 2007, respectively.





Our
      working capital requirements for the foreseeable future will vary based upon
      a
      number of factors, including, our timing in the implementation of our business
      plan, our growth rate and the level of our revenues. We have no commitments
      to
      fund any future capital expenditures. Our current assets, along with cash
      generated from anticipated revenues, will not provide us with sufficient funding
      for the next twelve months. Our senior convertible note payable with Water
      Science will become due in March 2009, which will require cash of $3,000,000
      in
      order to satisfy the debt, if the note is not converted into common stock.
      We
      anticipate that we may need an additional $2,000,000 or more in future funding
      to execute our business plan over the next twelve months. Moreover, if we able
      to expand our sale of EO machines as anticipated, we will need significant
      additional working capital to fund that expansion. We currently anticipate
      that
      during the third quarter we will exercise our put rights under the warrant
      with
      Water Science (see Note 5 to the financial statements) for a total of $600,000.
      Otherwise, we do not have arrangements in place to provide us with this funding
      or any additional funding. Management is seeking to obtain sufficient funding
      for its operations through either debt or equity financing. In light of these
      circumstances, the ability of the Company to continue as a going concern is
      in
      substantial doubt.


19





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that is material to investors.





**Critical
      Accounting Policies**





The
      preparation of financial statements and related disclosures in conformity with
      U.S. generally accepted accounting principles and our discussion and analysis
      of
      our financial condition and results of operations require us to make judgments,
      assumptions and estimates that affect the amounts reported in our financial
      statements and accompanying notes.  Note 1 of the notes to consolidated
      financial statements in Part II, Item 7 of the Company’s Annual Report on
      Form 10-KSB, dated December 31, 2007, describes the significant accounting
      policies and methods used in preparation of our consolidated financial
      statements.  We base our estimates on historical experience, current
      trends, future projections, and on various other assumptions we believe to
      be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities. 
Actual results may differ from these estimates. There were no material changes
      in our judgments or estimates during the second quarter of 2008.




**Recent
      Accounting Pronouncements**





In
      June
      2006, the FASB issued Financial Interpretation No. (FIN) 48, “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement 109.” FIN 48
      prescribes a recognition threshold and a measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This interpretation also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. We
      have
      noted that the Company has one item that would be subject to FIN 48, in that
      the
      Company has not filed certain of its past tax returns. The Company is working
      with the accounting firm to have all returns filed no later than the end of
      the
      third quarter. We believe that the adoption of FIN 48 will not have a material
      impact on our results of operations due to the ongoing net losses incurred
      by
      the Company, which will offset any taxable income that may arise.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” that
      provides guidance for using fair value to measure assets and liabilities. Under
      SFAS 157, fair value refers to the price that would be received to sell an
      asset
      or paid to transfer a liability in an orderly transaction between market
      participants in the market in which the reporting entity transacts. SFAS 157
      establishes a fair value hierarchy that prioritizes the information used to
      develop the assumptions that market participants would use when pricing the
      asset or liability. The fair value hierarchy gives the highest priority to
      quoted prices in active markets and the lowest priority to unobservable data.
      In
      addition, SFAS 157 requires that fair value measurements be separately disclosed
      by level within the fair value hierarchy. This standard will be effective for
      financial statements issued for fiscal periods beginning after November 15,
      2007
      and interim periods within those fiscal years. The Company is currently
      evaluating the impact of applying the various provisions of SFAS 157.





In
      September 2006, SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* —an
      amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”), improves
      financial reporting by requiring an employer to recognize the over-funded or
      under-funded status of a defined benefit postretirement plan as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income.  We do not believe SFAS 158 will have an impact on our results of
      operations, financial position, or cash flow.


20





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities, including
      an
      amendment of FASB Statement No. 115* (“SFAS
      159”), which allows an entity the irrevocable option to elect fair value for the
      initial and subsequent measurement for certain financial assets and liabilities
      under an instrument-by-instrument election. Subsequent measurements for the
      financial assets and liabilities an entity elects to fair value will be
      recognized in earnings. SFAS 159 also establishes additional disclosure
      requirements. SFAS 159 is effective for fiscal years beginning after
      November 15, 2007, with early adoption permitted provided that the entity
      also adopts SFAS 157. We have not yet determined the impact this standard will
      have on our financial statements.




In
      December 2007, the FASB issued SFAS 141(R), *Business
      Combinations* ,
      an
      Amendment of SFAS 141, which provides additional guidance on business
      combinations including defining the acquirer, recognizing and measuring the
      identifiable assets acquired and the liabilities assumed, and any noncontrolling
      interest in the acquiree.  Also in December 2007, the FASB issued SFAS 160, *Noncontrolling
      Interests in Consolidated Financial Statements* ,
      which
      amended ARB 51, to establish accounting and reporting standards for the
      noncontrolling interest in a subsidiary and for the deconsolidation of a
      subsidiary.  SFAS Nos. 141(R) and 160 are scheduled to become effective for
      us for financial statements issued for fiscal year 2009.  We do not believe
      SFAS 141(R) will have an impact on our future financial position, results of
      operations and operating cash flows.




In
      March 2008, the FASB issued SFAS No. 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities, an amendment of FASB
      Statement No. 133” (“SFAS No. 161”).* SFAS
      No. 161 amends and expands the disclosure requirements of SFAS No. 133
      with the intent to provide users of financial statements with an enhanced
      understanding of: 1) How and why an entity uses derivative instruments; 2)
      How
      derivative instruments and related hedged items are accounted for under SFAS
      No. 133 and its related interpretations and 3) How derivative instruments
      and related hedged items affect an entity’s financial position, financial
      performance and cash flows. This statement is effective for financial statements
      issued for fiscal years and interim periods beginning after November 15,
      2008, with early application encouraged. The Company is currently assessing
      the
      impact of SFAS 161 on its consolidated financial position and results of
      operations.





In
      April
      2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
      Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in
      developing renewal or extension assumptions used to determine the useful life
      of
      a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
      Assets”. FSP 142-3 is effective for fiscal years beginning after December 15,
      2008. The Company is currently assessing the impact of FSP 142-3 on its
      consolidated financial position and results of operations.





**Inflation**





We
      do not
      expect the impact of inflation on operations to be significant.





**Precious
      Metals**





Raw
      materials used by the Company in the EO Machines include a number of precious
      metals and minerals. Prices of these materials can be volatile and the Company
      has no fixed price contracts or arrangements. The Company ordinarily does not
      attempt to hedge the price risk of its raw materials. Commercial deposits of
      certain metals that are required for the alloys used in the EO Machines are
      found in only a few parts of the world, and for certain materials only single
      sources are readily available. The availability and prices of these metals
      and
      other materials may be influenced by private or governmental cartels, changes
      in
      world politics, unstable governments in exporting nations, production
      interruptions, inflation and other factors. Although the Company has not
      experienced significant shortages of its supplies and raw materials, there
      can
      be no assurance that such shortages will not occur in the future. Any such
      shortages or prices fluctuations could have a material adverse effect on the
      Company.


21





**Forward-Looking
      Statements**





All
      forward-looking statements contained herein are deemed by the Company to be
      covered by and to qualify for the safe harbor protection provided by the Private
      Securities Litigation Reform Act of 1995. Prospective shareholders should
      understand that several factors govern whether any forward-looking statement
      contained herein will be or can be achieved. Any one of those factors could
      cause actual results to differ materially from those projected herein. These
      forward-looking statements include our expectations regarding working capital
      requirements and future funding, and plans and objectives of management for
      future operations, including plans and objectives relating to the products
      and
      the future economic performance of the Company. Assumptions relating to the
      foregoing involve judgments with respect to, among other things, future
      economic, competitive and market conditions, future business decisions, and
      the
      time and money required to successfully complete development projects, all
      of
      which are difficult or impossible to predict accurately and many of which are
      beyond the control of the Company. Although the Company believes that the
      assumptions underlying the forward-looking statements contained herein are
      reasonable, any of those assumptions could prove inaccurate and, therefore,
      there can be no assurance that the results contemplated in any of the
      forward-looking statements contained herein will be realized. Forward-looking
      information is inherently subject to risks and uncertainties, and actual results
      could differ materially from those currently anticipated due to a number of
      factors, which include, but are not limited to, risks associated with
      successfully developing our business in evolving markets, our need for
      additional capital, our continuing operating losses, the ability of our
      management to conduct distribution activities and sell products, possible
      failure to successfully develop new products, vulnerability to competitors
      due
      to lack of patents on our products, and other risk factors listed in our annual
      report on Form 10-KSB for the year ended December 31, 2007 and our other SEC
      reports. Based on actual experience and business development, the Company may
      alter its marketing, capital expenditure plans or other budgets, which may
      in
      turn affect the results of operations. In light of the significant uncertainties
      inherent in the forward-looking statements included therein, the inclusion
      of
      any such statement should not be regarded as a representation by the Company
      or
      any other person that the objectives or plans will be achieved *.*





**Item
      3.** **Quantitative
      and Qualitative Disclosures About Market Risk**





A
      smaller
      reporting company is not required to provide the information required by this
      Item.





**Item
      4T.** **Controls
      and Procedures**





**Disclosure
      Controls and Procedures**





The
      Company has evaluated, with the participation of the Company’s principal
      executive and principal financial officers, the effectiveness of the issuer’s
      disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2008,
      pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the principal
      executive and financial officers concluded that the Company’s disclosure
      controls and procedures were not effective at the reasonable assurance
      level.





The
      Company engaged an outside accounting firm to assist the Company with
      documenting and testing our internal controls. Based on the results of their
      tests and the evaluation of management, it was determined that some controls
      were not effective. The majority of the deficiencies result from a lack of
      segregation of duties, due to the size of our company and its accounting
      department. While most of the control deficiencies were mitigated by alternative
      procedures, the Company determined that there were some material weaknesses.
      The
      Company noted that certain audit adjustments were proposed by HJ &
Associates for the period ended December 31, 2007. In reviewing the audit
      adjustments it was determined that the Company did have material weaknesses
      as
      described below.


22





A
      “material weakness” is a significant deficiency, or combination of significant
      deficiencies, in internal control over financial reporting such that there
      is a
      reasonable possibility that a material misstatement of the annual or interim
      financial statements will not be prevented or detected on a timely basis. In
      its
      assessment of internal control over financial reporting, management determined
      that the following areas had a material weakness:





·
            Inventory
                price testing was determined to be misstated. The Company has subsequently
                tested approximately 98% of inventory item costs and has performed
                price
                tests on certain inventory items.


·
            Certain
                accrued expenses were not properly reconciled and accrued. The Company
                has
                created an allowance account for unbilled and/or unknown expenses
                not
                received at the quarter end. Management will estimate an allowance
                and
                will reconcile subsequent invoices with this account on a quarterly
                basis


·
            Certain
                stock options or warrants were not properly reconciled and accrued.
                The
                Company will review all stock grants and option/warrants grants at
                least
                quarterly and will reconcile the accounting records on a timelier
                basis.





The
      Company plans to test the remediation controls for the third quarter to
      determine how effective the new procedures are in alleviating the material
      weakness and deficiencies.





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      The
      design of any system of controls is based in part upon certain assumptions
      about
      the likelihood of future events, and there can be no assurance that any design
      will succeed in achieving its stated goals under all potential future
      conditions. Further, the design of a control system must reflect the fact that
      there are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      or
      will be detected. These inherent limitations include the realities that
      judgments in decision-making can be faulty, and that breakdown can occur because
      of simple error or mistake.





**Changes
      to Internal Control Over Financial Reporting**





Management
      has made significant changes to internal controls over financial reporting
      and
      has taken the following corrective actions:





·
            Management
                has implemented a regular routine of reconciling all balance sheet
                accounts, particularly inventory and equity accounts, on a regular
                timely
                basis to ensure the accuracy of our
                records;


·
            Management
                has, and will, implement better review procedures of all balance
                sheet
                accounts.





Other
      than the changes indicated above, there have been no significant changes in
      our
      internal control over financial reporting that occurred during our most recently
      completed fiscal quarter that have materially affected, or are reasonably likely
      to materially affect, our internal control over financial reporting, or other
      factors that could significantly affect internal controls subsequent to the
      date
      of our most recent evaluation.





**PART
      II**–**OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





None





**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





None


23





**Item
      3.**  **Defaults
      Upon Senior Securities**





None





**Item
      4.**  **Submission
      of matters to Vote of Security Holders**





There
      were no matters submitted to a vote of stockholders during the second quarter
      of
      2008.





**Item
      5. Other Information**





None





**Item
      6.**  **Exhibits
      and Reports on Form 8-K**





EXHIBIT NO.
              
              DESCRIPTION OF
                  EXHIBIT3(i).1
              
              Certificate
                  of Incorporation (Incorporated by reference from registration statement
                  on
                  Form SB-1 filed with the SEC on July 29, 2002 (File No.333-86830))3(i).2
              
              Certificate
                  of Amendment of Certificate of Incorporation (Incorporated by reference
                  from registration statement on Form SB-1 filed with the Securities
                  and
                  Exchange Commission on July 29, 2002 (File No.333-86830))3(i).3
              
              Certificate
                  of Amendment of Certificate of Incorporation (Incorporated by reference
                  from current report on Form 8-K filed with the Securities and Exchange
                  Commission on January 17, 2007)3(ii).1
              
              Amended
                  and Bylaws (Incorporated by reference from registration statement
                  on
                  current report on Form 8-K filed with the Securities and Exchange
                  Commission on September 12, 2007)10.1
              
              Settlement
                  and License Amendment dated as of March 7, 2008 between the Company
                  and
                  University of Georgia Research Foundation (Incorporated by reference
                  from
                  current report on Form 8-K filed with the Securities and Exchange
                  Commission on March 13, 2008)10.2
              
              Amended
                  and Restated Senior Secured Convertible Promissory Note dated as
                  of June
                  2, 2008 between the Company and Water Sciences LLC (Incorporated
                  by
                  reference from current report on Form 8-K filed with the Securities
                  and
                  Exchange Commission on June 3, 2008)31.1
              
              Certification
                  byWade
                  R. Bradleyunder Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2
              
              Certification
                  byBrian D. Heinholdunder Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              
              Certification
                  ofWade
                  R. Bradleypursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.





24


SIGNATURES





In
      accordance with the requirements of the Exchange Act, the registrant cause
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





Dated:
      August 8, 2008





EAU
                TECHNOLOGIES, INC.By:
            /s/
                Wade R. BradleyWade
                R. BradleyChief
                Executive Officer(Principal
                Executive Officer)By:
            /s/
                Brian D. HeinholdBrian
                D. HeinholdChief
                Financial Officer(Principal
                Financial Officer)