UNITED
      STATES


S ECURITIES
      AND E XCHANGE C OMMISSION




Washington,
      D.C. 20549





FORM
      10-QSB





x
            Quarterly
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the quarterly period ended March 31, 2007




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.)1464
                W. 40 S. Suite #200, Lindon,
                Utah
            84042-1629(Address
                of principal executive
                offices)
            (Zip
                Code)Issuer’s
                telephone number:(801)
                443-1031





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 shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No x





As
      of
      April 20, 2007, the Registrant had 13,467,187 shares
      of
      Common Stock, $0.0001 par value outstanding.








**EAU
      TECHNOLOGIES, INC.**


QUARTERLY
      REPORT ON FORM 10-QSB


March
      31,
      2007





INDEX


PagePART
                  I. FINANCIAL INFORMATIONITEM
                  1.
              
              Financial
                  StatementsBalance
                  Sheets - March 31, 2007 and December 31, 2006
              
              3Statements
                  of Operations - Three months ended March 31, 2007 and 2006
              
              5Statement
                  of Stockholders’ Equity (Deficit)
              
              6Statements
                  of Cash Flows - Three months ended March 31, 2007 and 2006
              
              7Notes
                  to Financial Statements
              
              9ITEM
                  2.
              
              Management's
                  Discussion and Analysis or Plan of Operation
              
              14ITEM
                  3.
              
              Controls
                  and Procedures
              
              20PART
                  II. OTHER INFORMATIONITEM
                  1.
              
              Legal
                  Proceedings
              
              20ITEM
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              21ITEM
                  3.
              
              Defaults
                  Upon Senior Securities
              
              21ITEM
                  4.
              
              Submission
                  of matters to Vote of Security Holders
              
              21ITEM
                  5.
              
              Other
                  Information
              
              21ITEM
                  6.
              
              Exhibits
              
              21SIGNATURES
              
              22
 2


PART
      I -
      FINANCIAL INFORMATION





**EAU
      TECHNOLOGIES, INC.**





***BALANCE
      SHEETS***




March
                31,
            
            December
                31,2007
            
            2006(Unaudited)
            
            (Audited)ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            209,334
            
            $
            206,094Accounts
                receivable, net
            
            
            94,004
            
            
            134,225Accounts
                receivable - related party, net
            
            
            205,602
            
            
            219,479Pre-paid
                expense
            
            
            13,956
            
            
            15,641Inventory,
                net
            
            
            2,515,591
            
            
            2,502,263Total
                current assets
            
            
            3,038,487
            
            
            3,077,702PROPERTY
                AND EQUIPMENT - held for sale, net ofaccumulated
                depreciation of $278,083 and $0
            
            
            330,503
            
            
            -PROPERTY
                AND EQUIPMENT, net ofaccumulated
                depreciation of $184,889 and $406,919
            
            
            286,597
            
            
            633,477OTHER
                ASSETSDeposits
            
            
            13,465
            
            
            27,344Restricted
                cash
            
            
            240,000
            
            
            -Intellectual
                property - held for sale
            
            
            1,146,668
            
            
            -Intellectual
                property
            
            
            44,715
            
            
            1,191,238Total
                other assets
            
            
            1,444,848
            
            
            1,218,582Total
                assets
            
            $
            5,100,435
            
            $
            4,929,761




See
      notes
      to financial statements.


3


**EAU
      TECHNOLOGIES, INC.**





***BALANCE
      SHEETS (Continued)***





March
                31,
            
            December
                31,2007
            
            2006(Unaudited)
            
            (Audited)LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)CURRENT
              LIABILITIESAccounts
                payable
            
            $
            667,192
            
            $
            738,666Accrued
                expenses
            
            
            509,736
            
            
            560,166Warranty
                reserve
            
            
            102,362
            
            
            102,362Advance
                deposits on machine orders - related party
            
            
            697,500
            
            
            697,500Advance
                deposits on machine orders
            
            
            13,600
            
            
            -Current
                portion of long-term debt
            
            
            17,778
            
            
            17,778Total
                current liabilities
            
            
            2,008,168
            
            
            2,116,472LONG
                TERM LIABILITIESLong
                term debt, net of current portion
            
            
            73,746
            
            
            79,424Senior
                convertible note payable - related party, net of discounts of$1,458,333
                and $1,708,333
            
            
            1,541,667
            
            
            1,291,667Deferred
                licensing revenue - related party
            
            
            691,667
            
            
            741,667Derivative
                liability - related party
            
            
            4,617,875
            
            
            4,639,312Total
                long term liabilities
            
            
            6,924,955
            
            
            6,752,070Total
                Liabilities
            
            
            8,933,123
            
            
            8,868,542STOCKHOLDERS’
                EQUITY (DEFICIT)Common
                stock, $.0001 par value; 50,000,000 shares authorized;13,467,187and12,313,341issued and outstanding, respectively
            
            
            1,347
            
            
            1,232Additional
                paid in capital
            
            
            28,803,386
            
            
            27,151,279Accumulated
                deficit
            
            
            (32,637,421
            )
            
            (31,091,292
            )Total
                stockholders’ equity (deficit)
            
            
            (3,832,688
            )
            
            (3,938,781
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            5,100,435
            
            $
            4,929,761




See
      notes
      to financial statements.


4


**EAU
      TECHNOLOGIES, INC.**





***UNAUDITED
      STATEMENTS OF OPERATIONS***




**Three
                Months Ended****March
                31,****2007**
            
            **2006**NET
                SALES - RELATED PARTY
            
            $
            58,448
            
            $
            284,619NET
                SALES
            
            
            158,992
            
            
            232,772TOTAL
                SALES
            
            
            217,440
            
            
            517,391COST
                OF GOODS SOLD
            
            
            73,057
            
            
            319,746GROSS
                PROFIT
            
            
            144,383
            
            
            197,645OPERATING
                EXPENSESDepreciation
                and amortization
            
            
            57,247
            
            
            54,880Research
                and development
            
            
            73,600
            
            
            34,779General
                and administrative
            
            
            1,302,316
            
            
            1,967,403Total
                operating expenses
            
            
            1,433,163
            
            
            2,057,062LOSS
                BEFORE OTHER INCOME (EXPENSE)
            
            
            (1,288,780
            )
            
            (1,859,417
            )OTHER
                INCOME (EXPENSE)Interest
                expense
            
            
            (284,244
            )
            
            (289,106
            )Interest
                income
            
            
            6,174
            
            
            4,164Gain
                (loss) on derivative liability
            
            
            21,437
            
            
            22,407Other
                income (expense)
            
            
            (716
            )
            
            -Total
                other income (expense)
            
            
            (257,349
            )
            
            (262,535
            )LOSS
                BEFORE PROVISION FOR INCOME TAXES
            
            
            (1,546,129
            )
            
            (2,121,952
            )PROVISION
                FOR INCOME TAXES
            
            
            -
            
            
            -LOSS
                FROM CONTINUING OPERATIONS
            
            
            (1,546,129
            )
            
            (2,121,952
            )DISCONTINUED
                OPERATIONS:Income
                from operations of discontinued operations (Net of $0 in income
                taxes)
            
            
            -
            
            
            9,937(Loss)
                on disposal of discontinued operations (Net of $0 in income
                taxes)
            
            
            -
            
            
            -GAIN
                FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            9,937NET
                LOSS
            
            $
            (1,546,129
            )
            $
            (2,112,015
            )NET
                LOSS PER SHARE CONTINUING OPERATIONS
            
            $
            (0.12
            )
            $
            (0.23
            )NET
                INCOME PER SHARE DISCONTINUED OPERATIONS
            
            $
            -
            
            $
            0.00WEIGHTED
                AVERAGE OF SHARES OUTSTANDING
            
            
            13,338,982
            
            
            9,322,825




See
      notes
      to financial statements.




5




**EAU
      TECHNOLOGIES, INC.**





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




**ADDITIONAL****COMMON
                STOCK**
            
            **PAID
                IN**
            
            **ACCUMULATED****SHARES**
            
            **AMOUNT**
            
            **CAPITAL**
            
            **DEFICIT**
            
            **TOTAL**Balance,
                December 31, 2006
            
            
            12,313,341
            
            $
            1,232
            
            $
            27,151,279
            
            $
            (31,091,292
            )
            $
            (3,938,781
            )Issuance
                of 1,153,846 shares for cash of $1,500,000
            
            
            1,153,846
            
            
            115
            
            
            1,499,885
            
            
            -
            
            
            1,500,000Issuance
                and vesting of options and warrants for services
            
            
            -
            
            
            -
            
            
            152,222
            
            
            -
            
            
            152,222Net
                loss for the three months ended March 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,546,129
            )
            
            (1,546,129
            )Balance,
                March 31, 2007
            
            
            13,467,187
            
            $
            1,347
            
            $
            28,803,386
            
            $
            (32,637,421
            )
            $
            (3,832,688
            )




See
      notes
      to financial statements.




6




**EAU
      TECHNOLOGIES, INC.**





***UNAUDITED
      STATEMENTS OF CASH FLOWS***








For
                the Three Months
              Ended
                March 31,**2007**
            
            **2006**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (1,546,129
            )
            $
            (2,112,015
            )Adjustments
                to reconcile net loss to net cashused
                in operating activities:Depreciation
            
            
            57,247
            
            
            54,880Warrants
                and options issued for services
            
            
            152,222
            
            
            323,786Discount
                of note payable
            
            
            250,000
            
            
            250,000Loss
                on disposal of assets
            
            
            716
            
            
            73,291Changes
                in operating assets and liabilities:(Increase)
                decrease in accounts receivable
            
            
            40,221
            
            
            (63,635
            )(Increase)
                decrease in accounts receivable - related party
            
            
            13,877
            
            
            (1,139
            )Decrease
                in pre-paid expense
            
            
            1,685
            
            
            -(Increase)
                in inventory
            
            
            (13,328
            )
            
            (245,742
            )(Increase)
                decrease in deposits
            
            
            13,879
            
            
            (11,169
            )(Increase)
                in restricted cash
            
            
            (240,000
            )
            
            -Increase
                (decrease) in accounts payable
            
            
            (70,431
            )
            
            (129,526
            )Increase
                (decrease) in accrued expenses
            
            
            (50,430
            )
            
            48,738Increase
                in advance deposits on machine orders - related party
            
            
            -
            
            
            697,500Increase
                in advance deposits on machine orders
            
            
            13,600
            
            
            -(Decrease)
                in deferred revenue
            
            
            (50,000
            )
            
            (50,000
            )(Decrease)
                in derivative liability
            
            
            (21,437
            )
            
            (22,407
            )Net
                cash used in operating activities
            
            
            (1,448,308
            )
            
            (1,187,438
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of property and equipment
            
            
            (42,629
            )
            
            (9,749
            )Payments
                received from notes receivable
            
            
            -
            
            
            9,425Payments
                (Advances to) notes receivable - related party
            
            
            -
            
            
            11,173Intellectual
                property disbursements
            
            
            (145
            )
            
            (2,505
            )Net
                cash provided (used) in investing activities
            
            
            (42,774
            )
            
            8,344CASH
                FLOWS FROM FINANCING ACTIVITIESPayments
                on notes payable
            
            
            (5,678
            )
            
            (9,178
            )Proceeds
                from advance on sale of stock - related party
            
            
            -
            
            
            1,000,000Proceeds from issuance of common stock - related party
            
            
            1,500,000
            
            
            -Net
                cash provided by financing activities
            
            
            1,494,322
            
            
            990,822NET
                INCREASE (DECREASE) IN CASH
            
            
            3,240
            
            
            (188,272
            )CASH
                and cash equivalents, beginning of period
            
            
            206,094
            
            
            681,348CASH
                and cash equivalents, end of period
            
            $
            209,334
            
            $
            493,076




See
      notes
      to financial statements.


7


**EAU
      TECHNOLOGIES, INC.**





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


**(Continued)**


Three
                  Months EndedMarch
                  31,2007
              
              2006Supplemental
                  Disclosures of Cash Flow Information:Cash
                  paid during the period for:Interest
              
              $
              8,934
              
              $
              7,962Income
                  Taxes
              
              $
              -
              
              $
              -Supplemental
                  Disclosures of Non-cash Investing and Financing
                  Activities:Common
                  stock issued for services
              
              $
              -
              
              $
              -Warrants
                  and stock options issued for services
              
              $
              152,222
              
              $
              323,786




See
      notes
      to financial statements.




8




**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,
      2006.





**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 has deposited
      $240,000 with an escrow agent. The Company has recognized this amount as
      restricted cash on the Company’s financial statements.





**NOTE
      3 - INVENTORIES**





The
      composition of inventories is as follows at:





March
                31,
            
            
            December
                31,2007
            
            
            2006Finished
                goods
            
            $
            638,978
            
            $
            543,336Raw
                materials
            
            
            2,292,748
            
            
            2,375,062Allowance
                for obsolete inventory
            
            
            (416,135
            )
            
            (416,135
            )$
            2,515,591
            
            $
            2,502,263





**NOTE
      4 - SENIOR CONVERTIBLE DEBT**





In
      September 2006, the Company entered into a Senior Convertible Note with a third
      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. 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. In connection with the issuance of
      the
      Note, the Company also granted a three year warrant to purchase up to two (2)
      million shares of the Company’s $0.0001 par value common stock for a purchase
      price of $2.76 per share. The exercise price of these warrants is to be adjusted
      if the Company should issue stock for less than the original exercise price.





Because
      of the 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. The
      fair
      value of the derivative liability is estimated using the Black-Scholes pricing
      model, with the following assumptions at March 31, 2007: risk-free interest
      rate
      of 4.0%, expected dividend yield of zero, expected life of 2.96 years and
      expected volatility of 71.08%. As
      of
      March 31, 2007, the value of the derivative liability is
      $4,617,875.


9


**EAU
      TECHNOLOGIES, INC.**





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





**NOTE
      5 - RELATED PARTY TRANSACTIONS**





***Sales
      to Affiliates -*** Water
      Science, who has exclusive rights to sell our products in South America and
      Mexico, is a major shareholder of the Company. Water Science is controlled
      by
      Peter Ullrich, who was appointed to the Company’s Board of Directors in April
      2007. Water Science by agreement may purchase machinery from the Company at
      cost
      plus 25 percent. During
      the three months ended March 31, 2007, the Company sold approximately $8,448
      in
      products and services related to the installation of machines to Water Science.
      During the three months ended March 31, 2006, the Company sold
      approximately $234,219 in products to an entity related to Water Science.
      Further, the Company has received and recorded $697,500 in advance deposits
      from
      Water Science on machine orders at March 31, 2007. In connection with the sales
      of the machines and products, the Company has recorded approximately $205,602
      in
      accounts receivable at March 31, 2007.





***Senior
      Note Payable -*** In
      September 2006, the Company entered into a Senior Convertible Note with Water
      Science in exchange for $3,000,000 (see Note 3). For the three months ended
      March 31, 2007, the Company recognized $22,500 in interest expense related
      to
      the Senior Note. The Company also recognized $250,000 in interest expense due
      to
      the discount of this note and the beneficial conversion feature. The Company
      has
      recorded a gain of approximately $21,437 in the change of the derivative
      liability to fair market value for the three months ended March 31, 2007.





***Licensing
      Fee -*** In
      September 2006, 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 $50,000 for the three months ended March
      31,
      2007.




***Amended
      Licensing Agreement -*** On
      January 10, 2007, the Company entered into an Amended and Restated License
      Agreement (the “Amended License Agreement”) with Zerorez
      Franchising Systems, Inc., a Nevada corporation (“Zerorez”). Zerorez
      is an affiliated entity having similar shareholders and who was founded by
      the
      same individuals who founded the Company. John Hopkins, William Warwick and
      Jay
      Potter are shareholders of Zerorez. Mr. Hopkins is also a board member and
      franchisee of Zerorez. Until January 2007, Mr. Hopkins was a director of the
      Company. Messrs. Warwick and Potter are directors of the Company. The Company
      has had a license agreement with Zerorez since March, 2001, as disclosed in
      the
      Company’s previous reports as filed with the SEC. As revised, the Amended
      License Agreement provides a licensing arrangement whereby Zerorez and its
      franchisees may use the Company’s equipment and technology to produce
      electrolyzed fluids for use in carpet cleaning and related applications, at
      rates that are set forth in the agreement. The Amended License Agreement has
      a
      term of five years with automatic renewal clauses for three additional five-year
      terms. Generally, neither party may terminate the agreement unless there is
      a
      breach by, or consent from, the other party. During the quarter ended March
      31,
      2007, Zerorez paid $0 to the Company under the agreement.





***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.




10




**EAU
      TECHNOLOGIES, INC.**





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





**NOTE
      6 - CAPITAL STOCK**





On
      October 25, 2006, the Company entered into a stock purchase agreement with
      Peter
      F. Ullrich, a shareholder of the Company, whereby Mr. Ullrich agreed to purchase
      a total of 2,307,692 newly issued shares of $0.0001 par value common stock
      of
      the Company for a purchase price of $1.30 per share in a private transaction,
      for total consideration of $3,000,000. Under the terms of the agreement, Mr.
      Ullrich purchased 1,153,846 shares on October 25, 2006 and the remaining
      1,153,846 shares on January 2, 2007.





**NOTE
      7 - GOING CONCERN**




The
      Company has incurred significant losses and has had negative cash flows from
      operations. As a result, at March 31, 2007, 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. 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 consolidated financial statements for the fiscal year ended
      December 31, 2006 with an explanatory paragraph regarding the Company's ability
      to continue as a going concern. The consolidated 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 consolidated financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.





**NOTE
      8 - 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).





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 three month period ended March 31, 2007 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 three month period
      ended March 31, 2007 and 2006 was $152,222 and $323,786, respectively, related
      to employee stock options issued and vesting during the period.




11





**EAU
      TECHNOLOGIES, INC.**





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





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





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 EndedMarch
                31,2007
            
            2006Loss
                (numerator)
            
            $
            (1,546,129
            )
            $
            (2,112,015
            )Shares
                (denominator)
            
            
            13,338,982
            
            
            9,322,825Per
                share amount
            
            $
            (0.12
            )
            $
            (0.23
            )





The
      Company’s outstanding stock options have been excluded from the basic net loss
      per share calculation for the three month period ended March 31, 2007 and 2006,
      because they are anti-dilutive.





The
      following table is a summary of the status of the warrants and options granted
      for the three months ended March 31, 2007:


Number
              
              Weightedof
                  Options
              
              Average
                  Exerciseand
                  Warrants
              
              PriceOutstanding
                  at beginning of period
              
              
              11,925,793
              
              $
              2.57Granted
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Forfeited
              
              
              (7,500
              )
              
              3.50Expired
              
              
              (438,251
              )
              
              3.17Outstanding
                  at end of period
              
              
              11,480,042
              
              $
              2.51


A
      summary
      of the status of the warrants outstanding at March 31, 2007 is presented
      below:




Warrants
                  Outstanding
              
              
              Warrants
                  ExercisableRange
                  ofExercisePrices
              
              
              Number
                Outstanding
              
              
              Weighted-Average
                  Remaining
                Contractual
                  Life
              
              
              Weighted-Average
                  Exercise Price
              
              
              Number
                Exercisable
              
              
              Weighted-Average
                  Exercise Price$.01-.50
              
              
              810,000
              
              
              2.7
                  years
              
              $
              0.08
              
              
              810,000
              
              $
              0.081.00-1.99
              
              
              815,000
              
              
              3.5
                  years
              
              
              1.38
              
              
              415,000
              
              
              1.452.00-2.99
              
              
              8,975,000
              
              
              2.1
                  years
              
              
              2.76
              
              
              8,975,000
              
              
              2.763.00-3.99
              
              
              361,666
              
              
              6.7
                  years
              
              
              3.44
              
              
              361,666
              
              
              3.444.00-4.99
              
              
              255,000
              
              
              2.5
                  years
              
              
              4.00
              
              
              255,000
              
              
              4.005.00-5.50
              
              
              263,376
              
              
              2.7
                  years
              
              
              5.15
              
              
              263,376
              
              
              5.15$.01-5.50
              
              
              11,480,042
              
              
              2.4
                  years
              
              $
              2.51
              
              
              11,080,042
              
              $
              2.62


12





**EAU
      TECHNOLOGIES, INC.**





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





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





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 %.





**NOTE
      9 - SALE OF DIVISION**




In
      March
      2007, the Company signed a non-binding Letter of Intent with an unrelated third
      party to explore the possible sale of the Company’s Consumer Products division.
      In accordance with SFAS 144, the related assets, which consist of property
      and
      equipment and intellectual property, have been reclassified as held-for-sale.





**NOTE
      10 - SUBSEQUENT EVENTS**





In
      April
      2007, we received a $1 million advance from Water Science, a related party.





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 one of the
      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.




13




**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 non-organic
      agricultural products that clean, disinfect, remediate, hydrate and moisturize.
      The processes for which these fluids may be used are referred to in this Report
      (this “Report”) as the “EOW 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, 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”. 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. In addition, our internal studies show no residual active ingredient
      in the gray water of the facilities that we have tested in. We believe that
      this
      will allow our future customers to fall within the regulations of the National
      Organic Program to use the term “organic processor”. Further studies are in
      progress to make more specific claims.





We
      also
      develop, manufacture and market consumer products that support a healthy
      lifestyle, such as our Perfect Empowered Drinking WaterTM and Perfect Oxygenated
      EssentialsTM products. At the levels employed, the fluids and products are
      environmentally safe and non-toxic and do not contain or leave harmful residues
      associated with chemical-based supplements, disinfecting and cleaning agents.
      The electrolyzed fluids created by the EOW 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) meat and poultry processing, 2) agricultural grow-out and processing and
      3)
      bottled drinking water and consumer products the ( **“Primary
      Markets”** ).
      As of
      the date of this Report, the Company was focused on these markets because it
      believes that it has a competitive advantage, a leading strategic industry
      partner, and/or 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. Those facets 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 several provisional patent
      pending applications filed to protect new processes and products, as described
      herein. Previously, the Company’s revenues had been primarily generated 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 which were to Water Science, LLC, a related party, 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 Latin America
      to
      the United States. We will continue to seek to derive future EOW Technology
      revenues from leasing the technology as well as from recurring fees charged
      to
      customers based on per-unit or per-gallon of fluid used after equipment is
      installed. EAU does not intend to sell the equipment outright to unrelated
      customers. Additionally, we will seek to introduce our technology to meat and
      poultry processing by leveraging the development and trials that we concluded
      here in the United States.




14





We
      have
      shipped and installed four of the nine units ordered from Water Sciences, LLC.
      The units have been installed in 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 5 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
      2005,
      we entered into an agreement with Tyson Foods, Inc., to test our EOW Technology
      and EO Fluids (the **“EOW
      System”** )
      in its
      Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EOW System
      trial was completed. The trial yielded significant results in
      killing salmonella on the processed poultry. Independent testing analysis
      conducted by ABC Research, Inc., in Gainesville, Florida, revealed
      pre-chill microbial reduction was significantly below the Food Safety Inspection
      Service (the enforcement arm of the USDA; “FSIS”) allowable limit. From these
      results we have successfully completed phase I of our USDA Online Reprocessing
      (OLR) Certification. The EAU Technologies OLR intervention also tested well
      showing a statistically significant difference between control and test groups.
      EAU plans to move forward into the second phase of USDA testing with two
      unidentified processors. According to the USDA rules EAU can charge for the
      next
      two facilities which would double as further test sites for On-line Reprocessing
      approval. Once EAU receives similar results in these two subsequent trial sites
      EAU may commence a full sales effort in this channel.





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 $209,334 in cash as of March 31, 2007, compared to $206,094 at
      December 31, 2006. We also had $240,000 in restricted cash related to an escrow
      agreement. Our working capital as of March 31, 2007 was $1,030,319 compared
      to
      $961,230 at December 31, 2006. The Company has received and recorded $697,500
      in
      advance deposits from Water Science on machine orders at March 31, 2007. 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. These deliveries are
      targeted to occur during the second and third quarters of 2007. Long term debt
      increased 18%, from $1,371,091 at December 31, 2006 to $1,615,413 at March
      31,
      2007, or $244,322. The primary increase is a result of the discount of the
      Senior Note Payable, which was $250,000 for the three months ended March 31,
      2007. At March 31, 2007, our stockholders’ deficit was $3,832,688.




15





Summary
      of select balance sheet information follows:


March
                    31,2007
              
              December
                    31,2006Balance
                  Sheet Data:
              
              (Unaudited)Cash
                  and Cash Equivalents
              
              $
              209,334
              
              $
              206,094Total
                  Current Assets
              
              
              3,038,487
              
              
              3,077,702Total
                  Assets
              
              
              5,100,435
              
              
              4,929,761Total
                  Current Liabilities
              
              
              2,008,168
              
              
              2,116,472Long
                  Term Debt
              
              
              1,615,413
              
              
              1,371,091Total
                  liabilities and stockholders’ equity
              
              $
              5,100,435
              
              $
              4,929,761


*Results
      of Operations* *for the Three months ended March 31, 2007 and 2006*





*Revenues
      and Net Income*





The
      Company had total revenues of $217,440 for the three months ended March 31,
      2007, which represents a decrease of 58% from the $517,391 in total revenues
      for
      the same period one year earlier. 45%, or $234,619, of the total revenues for
      the three months ended March 31, 2006 was from products unrelated to the
      Company’s core technology. 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
      for the three months ended March 31, 2007 was $1,546,129, or a loss of $0.12
      per
      share, compared with a net loss of $2,112,015, or $0.23 per share for the same
      period in 2006. The majority of the decrease in the loss per share over the
      comparable period in 2006 was due to decreased general and administrative
      expenses, as discussed below. The current quarter net loss includes $284,244
      in
      interest expense, compared to $289,106 in 2006. This is due to interest expense
      related to the senior note payable entered into in September 2005.





*General
      and Administrative Expenses*





The
      Company’s general and administrative expenses totaled $1,302,316 during the
      three months ended March 31, 2007, compared to $1,967,403 during the three
      months ended March 31, 2006, for a decrease of $665,087, or 34%. General and
      administrative expense for 2007 consist primarily payroll and other compensation
      expense ($712,212), legal and professional fees ($214,949) and travel related
      expenses ($68,421). The Company has implemented tighter controls to reduce
      its
      general and administrative expenses by reducing any unnecessary expenses,
      reducing payroll expense and is challenging all of its expenditures.





*Research
      and Development*





Research
      and development expenses incurred during the three month period ended March
      31,
      2007 increased $38,821 or 111%, from $34,779 in 2006 to $73,600 in 2007. It
      is
      anticipated that the Company’s research and development expenditures will
      continue at approximately this same level or a little higher due to research
      it
      intends to continue in the agriculture markets. While the Company will continue
      to conduct research to improve its products and their performance, it believes
      it has developed proven products that have commercial value in its targeted
      markets.




16




Summary
      of select income statement information follows:




Three
                    months ended
                  March
                    31,2007
            
            2006
            
            Better
                (Worse)
            
            Percent
                ChangeRevenue,
                net
            
            $
            217,440
            
            $
            517,391
            
            $
            (299,951
            )
            
            58
            %Gross
                profit
            
            
            144,383
            
            
            197,645
            
            
            (53,262
            )
            
            27
            %Operating
                loss
            
            
            1,288,780
            
            
            1,859,417
            
            
            570,637
            
            
            31
            %Net
                loss
            
            
            1,546,129
            
            
            2,112,015
            
            
            565,886
            
            
            27
            %Loss
                per share
            
            
            0.12
            
            
            0.23
            
            
            0.11
            
            
            48
            %





**Liquidity
      and Capital Resources**




At
      March
      31, 2007, we had cash and cash equivalents of $209,334, compared to $206,094
      at
      December 31, 2006. We
      have
      had continuing operating losses of $1,288,780 for the three months ended March
      31, 2007, compared with operating losses of $1,859,417 for the three months
      ended March 31, 2006. The net loss per share for the first quarter of 2007
      was
      $0.12 compared to a loss of $0.23 per share for the same period in 2006. The
      decrease is attributable to reduced operating expenses and a higher
      weighted-average of shares outstanding during 2007. Our working capital as
      of
      March 31, 2007 was $1,270,319 for reasons discussed above under financial
      position.





Net
      cash
      used in operating activities in the three month period ended March 31, 2007
      was
      $1,448,308, a 22% increase, compared to $1,187,438 for the same period in 2006.
      The primary uses of cash were an increase in restricted cash of $240,000, a
      decrease in accrued expenses of $50,430 and a decrease in accounts payable
      of
      $70,431.





At
      March
      31, 2007, the Company’s inventory was $2,515,591, compared to $2,502,263 on hand
      at December 31, 2006. T he
      Company is in the process of building machines for Water Science, LLC, a related
      party, and other customers for expected deliveries in the second half of 2007
      and has increased its inventory over the December 31, 2006 inventory levels
      due
      to ordering components for these machines.





The
      operating outflow of cash was reduced by the Company issuing warrants and stock
      options in lieu of cash during the quarter of $152,222. 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 $250,000. (See Note 4 to the
      Company’s unaudited financial statements.) Further, the Company recognized a
      non-cash decrease in the derivative liability of $21,437, due to changes in
      the
      Black-Scholes value of the liability.





The
      Company used $42,774 in cash flows from investing activities during the period
      ended March 31, 2007 as compared to a cash inflow of $8,344 for the same period
      in 2006. During 2007, the cash flows consisted of $42,629 used to purchase
      equipment and investments in intellectual property and patents of $145. This
      compares to, $20,598 net cash received from notes receivables, $9,749 used
      to
      purchase equipment and $2,505 used to invest in intellectual property and
      patents for the comparable period in 2006.





Cash
      flows from financing activities provided the Company $1,494,322 and $990,822
      for
      the three months ended March 31, 2007 and 2006, respectively. This is primarily
      a result of the Company’s continued sales of its common stock to fund
      operations. The Company raised $1,500,000 and $1,000,000 from the sale of stock
      for the three months ended March 31, 2007 and 2006, respectively. This amount
      was offset by payments made on notes payable in the amount of $5,678 and $9,178
      in 2007 and 2006, respectively.





17




In
      March
      2007, the Company signed a non-binding Letter of Intent with an unrelated third
      party to explore the possible sale of the Company’s Consumer Products division.





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. In April 2007, we received
      a $1 million advance from Water Science. In May 2007, we entered into an
      agreement to cancel and re-issue certain warrants to Water Science. As part
      of
      the agreement, t he
      Company has a right to require Water Science to exercise one of the warrants
      for
      up to 3,230,769 shares at $1.30 per share; the Company may exercise the put
      right from time to time, but not more often than once per month. We
      have
      no commitments to fund any future capital expenditures. We expect that our
      current assets, along with cash generated from anticipated revenues and funds
      from our put right, will provide us with sufficient funding for the next twelve
      months. However, if we able to expand our sale of EO machines as anticipated,
      we
      may need significant additional working capital to fund that expansion. In
      addition ,
      the
      Company continues to experience negative cash flow from operations. If the
      Company is unable to generate positive cash flow the ability of the Company
      to
      continue as a going concern is in substantial doubt.





If
      the
      Company does not raise sufficient funds in the future, we may not be able to
      fund expansion, take advantage of future opportunities, meet our existing debt
      obligations or respond to competitive pressures or unanticipated requirements.





Future
      financing transactions may include the issuance of equity or debt securities,
      obtaining credit facilities, or other financing mechanisms. However, a
      subsequent decline in the trading price of our common stock and the downturn
      in
      the U.S. stock and debt markets could make it more difficult for us to obtain
      financing through the issuance of equity or debt securities. Even if we are
      able
      to raise the funds required, it is possible that we could incur unexpected
      costs
      and expenses, fail to collect significant amounts owed to us, or experience
      unexpected cash requirements that would force us to seek alternative financing.
      Further, if we issue additional equity or debt securities, stockholders may
      experience additional dilution, or the new equity securities may have rights,
      preferences or privileges senior to those of existing holders of our common
      stock.





**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, 2006, 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.




**Recent
      Accounting Pronouncements**




18





In
      March
      2006, the FASB issued SFAS No. 156 “Accounting for Servicing of Financial
      Assets, an amendment of FASB No. 140,” which modifies the accounting for and
      reporting of servicing asset and servicing liabilities. This statement is
      effective as of the beginning of our first fiscal year that begins after
      September 15, 2006. SFAS No. 156 is not currently applicable to the company
      and,
      we believe that the adoption of SFAS No. 156 will not have a material impact
      on
      our results of operations.





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. The Company adopted FIN 48 for the
      first quarter of 2007. The adoption of FIN 48 did not have an impact on our
      results of operations.





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.





**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.





**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 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, 2006 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 *.*




19





**Item
      3.** **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
      March 31, 2007, 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.





As
      part
      of its regular evaluation of procedures, management, with the assistance of
      the
      Company’s SEC legal counsel, determined that certain disclosure filings,
      including current reports on Form 8-K, were not made in a timely manner.
      Management is working with its legal counsel to ensure that all filings are
      current and properly filed.





Management
      also determined that certain stock options and warrants granted for services
      may
      not have been properly treated for tax withholding. Management is reviewing
      all
      granted options and warrants with professional tax accountants to resolve this
      matter.





The
      Company’s management does not expect that its disclosure controls will prevent
      all error and all fraud. 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.





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**




20




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





On
      October 25, 2006, the Company entered into a stock purchase agreement with
      Peter
      F. Ullrich, a shareholder of the Company, whereby Mr. Ullrich agreed to purchase
      a total of 2,307,692 newly issued shares of $0.0001 par value common stock
      of
      the Company for a purchase price of $1.30 per share in a private transaction,
      for total consideration of $3,000,000. Under the terms of the agreement, Mr.
      Ullrich purchased 1,153,846 shares on October 25, 2007 and the remaining
      1,153,846 shares on January 2, 2007. The sale of the securities was exempt
      from
      registration with the Securities and Exchange Commission under Section 4(2)
      of
      the Securities Act of 1933 (the “Act”) and Rule 506 of Regulation D promulgated
      thereunder, in that Water Science is an accredited investor and the placement
      occurred without general solicitation .





**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 first quarter
      of
      2007.





**Item
      5. Other Information**





**None**





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





EXHIBIT
                NO.
            
            DESCRIPTION
                OF EXHIBIT3(i).1
            
            Articles
                of Incorporation (Incorporated by reference from registration statement
                on
                Form SB-2 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-2 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
            
            Bylaws
                (Incorporated by reference from registration statement on Form SB-2
                filed
                with the Securities and Exchange Commission on April 24, 2002 (File
                No.333-86830).10.1
            
            Amended
                and Restated License Agreement dated as of January 10, 2007 by and
                between
                Electric Aquagenics Unlimited, Inc. and Zerorez Franchising Systems,
                Inc.(Incorporated by reference from current report on Form 8-K filed
                with the
                Securities and Exchange Commission on January 17, 2007)10.2
            
            Stock
                Purchase Agreementdated
                as of January 10, 2007 by and between Electric Aquagenics Unlimited,
                Inc.
                and Peter Ullrich(Incorporated
                by reference from current report on Form 8-K filed with the Securities
                and
                Exchange Commission on January 17, 2007)10.3
            
            Waiver
                Letter signedJanuary
                10, 2007 by Peter Ullrich(Incorporated
                by reference from current report on Form 8-K filed with the Securities
                and
                Exchange Commission on January 17,
                2007)


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.


21


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:
      May 14, 2007


EAU
              TECHNOLOGIES,
              INC.By:
            /s/ Wade
              R.
              BradleyWade
                R. Bradley
              Chief
                Executive Officer
              (Principal
                Executive Officer)


By:
            /s/ Brian
              D.
              HeinholdBrian
                D. Heinhold
              Chief
                Financial Officer
              (Principal
                Financial Officer)




22