UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


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 September 30,
  2010





or





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




000-51807(Commission
      File No.)


EAU
TECHNOLOGIES, INC.


(exact
name of registrant as specified 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes  ̈  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  o  No x





As of November 11, 2010, the Registrant
had 20,006,168 shares of Common Stock, $0.0001 par value
outstanding.








EAU
TECHNOLOGIES, INC.


QUARTERLY
REPORT ON FORM 10-Q


September
30, 2010





INDEX





PagePART
      I. FINANCIAL INFORMATIONITEM
      1.
                  Financial
      StatementsBalance
      Sheets – September 30, 2010 and December 31, 2009
                  3Statements
      of Operations – Three and Nine months ended September 30, 2010 and
      2009
                  5Statement
      of Stockholders’ Equity (Deficit)
                  6Statements
      of Cash Flows – Nine months ended September 30, 2010 and
    2009
                  7Notes
      to Financial Statements
                  9ITEM
      2.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  18ITEM
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  24ITEM
      4T.
                  Controls
      and Procedures
                  24PART
      II. OTHER INFORMATIONITEM
      1.
                  Legal
      Proceedings
                  24ITEM
      1A.
                  Risk
      Factors
                  24ITEM
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  24ITEM
      3.
                  Defaults
      Upon Senior Securities
                  25ITEM
      4.
                  Reserved
                  25ITEM
      5.
                  Other
      Information
                  25ITEM
      6.
                  Exhibits
                  25SIGNATURES
                  26




2





PART I -
FINANCIAL INFORMATION





EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS




ASSETS





September 30,
                                              
                                              
                                              December 31,2010
                                              
                                              
                                              2009(Unaudited)
                                              
                                              
                                              (Restated)CURRENT
      ASSETSCash
      and cash equivalents
                                              
                                              $
                                              245,996
                                              
                                              
                                              $
                                              181,481Accounts
      receivable, net
                                              
                                              
                                              51,495
                                              
                                              
                                              
                                              42,995Other
      receivable – related party
                                              
                                              
                                              5,500
                                              
                                              
                                              
                                              6,248Pre-paid
      expense
                                              
                                              
                                              29,500
                                              
                                              
                                              
                                              45,419Inventory,
      net
                                              
                                              
                                              1,855,809
                                              
                                              
                                              
                                              2,022,462Total
      current assets
                                              
                                              
                                              2,188,300
                                              
                                              
                                              
                                              2,298,605PROPERTY
      AND EQUIPMENT, net ofaccumulated
      depreciation of $144,456 and $133,821
                                              
                                              
                                              15,548
                                              
                                              
                                              
                                              26,183LEASED
      EQUIPMENT, net ofaccumulated
      depreciation of $449,067 and $406,952
                                              
                                              
                                              679,105
                                              
                                              
                                              
                                              721,221OTHER
      ASSETSDeposits
                                              
                                              
                                              37,115
                                              
                                              
                                              
                                              10,496Restricted
      cash
                                              
                                              
                                              -
                                              
                                              
                                              
                                              240,000Intellectual
      property, net
                                              
                                              
                                              116,673
                                              
                                              
                                              
                                              111,265Total
      other assets
                                              
                                              
                                              153,788
                                              
                                              
                                              
                                              361,761Total
      assets
                                              
                                              $
                                              3,036,741
                                              
                                              
                                              $
                                              3,407,770





See notes
to financial statements.


3


EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS (Continued)





LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)


September 30,
                        
                        
                        December 31,2010
                        
                        
                        2009(Unaudited)
                        
                        
                        (Restated)CURRENT
      LIABILITIESAccounts
      payable
                        
                        $
                        389,195
                        
                        
                        $
                        401,663Accrued
      expenses
                        
                        
                        375,421
                        
                        
                        
                        351,215Accrued
      interest
                        
                        
                        882,269
                        
                        
                        
                        572,892Warranty
      reserve
                        
                        
                        81,879
                        
                        
                        
                        92,160Current
      portion of deferred licensing revenue – related party
                        
                        
                        -
                        
                        
                        
                        141,667Advance
      deposits on machine orders
                        
                        
                        404,800
                        
                        
                        
                        -Advance
      deposits on machine orders – related party
                        
                        
                        329,630
                        
                        
                        
                        349,986Current
      portion of long-term debt
                        
                        
                        57,344
                        
                        
                        
                        50,832Current
      portion of convertible notes payable – related party
                        
                        
                        -
                        
                        
                        
                        3,600,000Derivative
      liability – related party
                        
                        
                        -
                        
                        
                        
                        5,333,401Total
      current liabilities
                        
                        
                        2,520,538
                        
                        
                        
                        10,893,816LONG
      TERM LIABILITIESConvertible
      notes payable – related party
                        
                        
                        4,505,000
                        
                        
                        
                        -Derivative
      liability – related party
                        
                        
                        103,374
                        
                        
                        
                        -Long
      term debt, net of current portion
                        
                        
                        -
                        
                        
                        
                        6,512Total
      long term liabilities
                        
                        
                        4,608,374
                        
                        
                        
                        6,512Total
      liabilities
                        
                        
                        7,128,912
                        
                        
                        
                        10,900,328STOCKHOLDERS’
      EQUITY (DEFICIT)Common
      stock, $.0001 par value; 50,000,000 shares authorized; 20,006,168 and
      19,886,168 issued and outstanding, respectively
                        
                        
                        2,001
                        
                        
                        
                        1,989Additional
      paid in capital
                        
                        
                        41,559,471
                        
                        
                        
                        41,311,512Accumulated
      deficit
                        
                        
                        (45,653,643
                        )
                        
                        
                        (48,806,059
                        )Total
      stockholders’ equity (deficit)
                        
                        
                        (4,092,171
                        )
                        
                        
                        (7,492,558
                        )Total
      liabilities and stockholders’ equity (deficit)
                        
                        $
                        3,036,741
                        
                        
                        $
                        3,407,770





See notes
to financial statements.


4


EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENTS OF OPERATIONS





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(Restated)
                  
                  
                  
                  
                  
                  (Restated)NET
      SALES – RELATED PARTY
                  
                  $
                  41,667
                  
                  
                  $
                  50,000
                  
                  
                  $
                  166,294
                  
                  
                  $
                  150,000NET
      SALES
                  
                  
                  70,560
                  
                  
                  
                  155,025
                  
                  
                  
                  247,966
                  
                  
                  
                  413,650TOTAL
      SALES
                  
                  
                  112,227
                  
                  
                  
                  205,025
                  
                  
                  
                  414,260
                  
                  
                  
                  563,650COST
      OF GOODS SOLD
                  
                  
                  13,293
                  
                  
                  
                  40,611
                  
                  
                  
                  78,070
                  
                  
                  
                  102,436GROSS
      PROFIT
                  
                  
                  98,934
                  
                  
                  
                  164,414
                  
                  
                  
                  336,190
                  
                  
                  
                  461,214OPERATING
      EXPENSESDepreciation
      and amortization
                  
                  
                  3,884
                  
                  
                  
                  4,778
                  
                  
                  
                  11,653
                  
                  
                  
                  16,580Research
      and development
                  
                  
                  73,443
                  
                  
                  
                  103,391
                  
                  
                  
                  160,151
                  
                  
                  
                  220,396General
      and administrative
                  
                  
                  596,832
                  
                  
                  
                  855,379
                  
                  
                  
                  1,928,751
                  
                  
                  
                  2,454,008Total
      operating expenses
                  
                  
                  674,159
                  
                  
                  
                  963,548
                  
                  
                  
                  2,100,555
                  
                  
                  
                  2,690,984LOSS
      BEFORE OTHER INCOME (EXPENSE)
                  
                  
                  (575,225
                  )
                  
                  
                  (799,134
                  )
                  
                  
                  (1,764,365
                  )
                  
                  
                  (2,229,770
                  )OTHER
      INCOME (EXPENSE)Interest
      expense
                  
                  
                  (112,054
                  )
                  
                  
                  (81,049
                  )
                  
                  
                  (313,307
                  )
                  
                  
                  (268,851
                  )Interest
      income
                  
                  
                  36
                  
                  
                  
                  3,829
                  
                  
                  
                  62
                  
                  
                  
                  11,474Gain
      (Loss) on derivative liability
                  
                  
                  216,465
                  
                  
                  
                  (1,431,438
                  )
                  
                  
                  5,230,026
                  
                  
                  
                  (905,604
                  )Total
      other income (expense)
                  
                  
                  104,447
                  
                  
                  
                  (1,508,658
                  )
                  
                  
                  4,916,781
                  
                  
                  
                  (1,162,981
                  )INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  (470,778
                  )
                  
                  
                  (2,307,792
                  )
                  
                  
                  3,152,416
                  
                  
                  
                  (3,392,751
                  )PROVISION
      FOR INCOME TAXES
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      INCOME (LOSS)
                  
                  $
                  (470,778
                  )
                  
                  $
                  (2,307,792
                  )
                  
                  $
                  3,152,416
                  
                  
                  $
                  (3,392,751
                  )EARNINGS
      PER SHAREBASIC
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.12
                  )
                  
                  $
                  0.16
                  
                  
                  $
                  (0.18
                  )DILUTED
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  $
                  0.16
                  
                  
                  
                  N/AWEIGHTED
      AVERAGE OF SHARES OUTSTANDING
                  
                  
                  20,006,168
                  
                  
                  
                  19,621,494
                  
                  
                  
                  19,980,014
                  
                  
                  
                  19,074,059





See notes
to financial statements.


5


EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)





ADDITIONALCOMMON STOCK
                  
                  
                  PAID IN
                  
                  
                  ACCUMULATEDSHARES
                  
                  
                  AMOUNT
                  
                  
                  CAPITAL
                  
                  
                  DEFICIT
                  
                  
                  TOTALBalance,
      December 31, 2009  (Restated)
                  
                  
                  19,886,168
                  
                  
                  $
                  1,989
                  
                  
                  $
                  41,311,512
                  
                  
                  $
                  (48,806,059
                  )
                  
                  $
                  (7,492,558
                  )Exercise
      of warrants for cash of $200, or $0.01 per share
                  
                  
                  20,000
                  
                  
                  
                  2
                  
                  
                  
                  198
                  
                  
                  
                  -
                  
                  
                  
                  200Issuance
      of shares for $100,000, or $1.00 per share, to Theodore Jacoby, a
      director
                  
                  
                  100,000
                  
                  
                  
                  10
                  
                  
                  
                  99,990
                  
                  
                  
                  -
                  
                  
                  
                  100,000Vesting
      of options for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  147,771
                  
                  
                  
                  -
                  
                  
                  
                  147,771Net
      gain for the nine months ended September 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,152,416
                  
                  
                  
                  3,152,416Balance,
      September 30, 2010
                  
                  
                  20,006,168
                  
                  
                  $
                  2,001
                  
                  
                  $
                  41,559,471
                  
                  
                  $
                  (45,653,643
                  )
                  
                  $
                  (4,092,171
                  )




See notes
to financial statements.


6


EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENTS OF CASH FLOWS





For the Nine MonthsEnded September 30,2010
                    
                    
                    2009(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                    
                    $
                    3,152,416
                    
                    
                    $
                    (3,392,751
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                    
                    
                    53,769
                    
                    
                    
                    119,015Bad
      debt expense
                    
                    
                    -
                    
                    
                    
                    22,500Warrants
      and options vested or issued for services
                    
                    
                    147,771
                    
                    
                    
                    69,750Shares
      issued for services
                    
                    
                    -
                    
                    
                    
                    248,771Discount
      of note payable
                    
                    
                    -
                    
                    
                    
                    76,754Changes
      in operating assets and liabilities:Decrease
      in restricted cash
                    
                    
                    240,000
                    
                    
                    
                    -(Increase)
      in accounts receivable
                    
                    
                    (8,500
                    )
                    
                    
                    (45,500
                    )Decrease
      in accounts receivable – related party
                    
                    
                    748
                    
                    
                    
                    3,000Decrease
      (increase) in pre-paid expense
                    
                    
                    15,919
                    
                    
                    
                    4,393(Increase)
      in accrued interest
                    
                    
                    -
                    
                    
                    
                    (11,250
                    )(Increase)
      decrease in inventory
                    
                    
                    166,653
                    
                    
                    
                    40,266(Increase)
      in deposits
                    
                    
                    (26,619
                    )
                    
                    
                    -Increase
      (decrease) in accounts payable
                    
                    
                    (12,468
                    )
                    
                    
                    14,379(Decrease)
      in warranty reserve
                    
                    
                    (10,281
                    )
                    
                    
                    (7,840
                    )Increase
      in advance deposits for machine orders
                    
                    
                    404,800
                    
                    
                    
                    -(Decrease)
      in advance deposits for machine orders – related party
                    
                    
                    (20,356
                    )
                    
                    
                    -Increase
      in accrued expenses
                    
                    
                    24,206
                    
                    
                    
                    24,634Increase
      in accrued interest
                    
                    
                    309,377
                    
                    
                    
                    188,250(Decrease)
      in deferred revenue
                    
                    
                    (141,667
                    )
                    
                    
                    (150,000
                    )(Decrease)
      in derivative liability
                    
                    
                    (5,230,027
                    )
                    
                    
                    905,604Net
      cash (used) in operating activities
                    
                    
                    (934,259
                    )
                    
                    
                    (1,890,025
                    )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                    
                    
                    -
                    
                    
                    
                    (107,580
                    )Intellectual
      property disbursements
                    
                    
                    (6,426
                    )
                    
                    
                    (3,795
                    )Net
      cash (used) in investing activities
                    
                    
                    (6,426
                    )
                    
                    
                    (111,375
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on notes payable
                    
                    
                    -
                    
                    
                    
                    (5,387
                    )Proceeds
      from issuance of note payable – related party
                    
                    
                    905,000
                    
                    
                    
                    200,000Proceeds
      from issuance of common stock – related party
                    
                    
                    100,200
                    
                    
                    
                    1,450,000Net
      cash provided by financing activities
                    
                    
                    1,005,200
                    
                    
                    
                    1,644,613NET
      INCREASE (DECREASE) IN CASH
                    
                    
                    64,515
                    
                    
                    
                    (356,787
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    181,481
                    
                    
                    
                    494,612Cash
      and cash equivalents, end of period
                    
                    $
                    245,996
                    
                    
                    $
                    137,825





See notes
to financial statements.


7


EAU
TECHNOLOGIES, INC.





UNAUDITED STATEMENTS OF CASH
FLOWS


(Continued)





For the Nine MonthsEnded September 30,2010
                    
                    
                    2009(Restated)Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for:Interest
                    
                    $
                    3,930
                    
                    
                    $
                    3,613Income
      Taxes
                    
                    $
                    -
                    
                    
                    $
                    -Supplemental
      Disclosures of Non-cash Investing and Financing
Activities:Reclass
      inventory to Property and Equipment
                    
                    $
                    -
                    
                    
                    $
                    805,184





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-K for the year ended December 31, 2009.





Certain
prior period amounts have been reclassified in the condensed financial
statements to conform to current period presentation.





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.  In February 2010, the
Company and the Chief Executive Officer entered into an agreement to terminate
the escrow agreement and closed the account.





NOTE
3 - INVENTORIES





The
composition of inventories is as follows at:





September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009Finished
      goods
                    
                    $
                    769,122
                    
                    
                    $
                    894,488Raw
      materials
                    
                    
                    1,486,687
                    
                    
                    
                    1,527,974Allowance
      for obsolete inventory
                    
                    
                    (400,000
                    )
                    
                    
                    (400,000
                    )$
                    1,855,809
                    
                    
                    $
                    2,022,462





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 nine months ended September 30, 2010 are as
follows:





Warranty
      reserve at beginning of period
                  
                  $
                  92,160Costs
      accrued for additional warranties
                  
                  
                  -Service
      obligations honored
                  
                  
                  (10,281
                  )Warranty
      reserve at end of period
                  
                  $
                  81,879


9




EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
5 - 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 was
initially 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.  In March 2009, the Company and Water
Science agreed to extend the maturity date to September 16, 2009 and increase
the interest rate to 10%.  No principal or interest payments need to
be paid during the loan period.  In October 2008, as part of a new
financing agreement, the Company amended the Note and changed the conversion
rate from $3.00 per share to $1.00 per share.  The Note may be
converted into 3,000,000 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 $1.00 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
original issuance of the Note, the Company 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 August
2009, the Company entered into the Second Amendment (the “Amendment”) to the
Second Amended and Restated Senior Secured Convertible Promissory Note (the
“Promissory Note”) with Water Science, a related party.  The Amendment
extends the maturity date of the Promissory Note from September 16, 2009 to
November 1, 2010.  In all other material respects, the Promissory Note
remains unchanged.  During October 2010, the Company extended the
maturity date to December 1, 2011.





In May
2007, the Company entered into a termination agreement related to the
cancellation and reissuance of the existing 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 was given a right to require Water Science to exercise warrants for up
to 3,230,769 shares.  During the year ended December 31, 2008, the
Company required Water Science to exercise all of the warrants for the 3,230,769
shares.





The
remaining warrants and the conversion rate contain “round down” provisions where
the exercise price is to be adjusted if the Company should issue stock for less
than the original exercise price.  Due to this feature the Company
accounts for the warrants and convertible feature as a derivative liability with
changes in fair value being recorded in the income statement.  The
liability was valued using the Binomial model with the following assumptions:
risk free rate between 0.15% and 0.24%, volatility between 247% and 384% and the
stock price between $0.31 and $1.00,which represents the
market value of the Company’s common stock as determined by management and an
independent third party.As of December 31, 2009, the value of the derivative liability was
$5,333,401.  On May 9, 2010, the remaining warrants for 5,169,231
shares of common stock expired unexercised.  As of September 30, 2010,
the value of the derivative liability was $103,374.  The Company
recorded a gain of $5,230,027 in the change of the derivative liability to fair
market value for the nine month period ended September 30, 2010 in part due to
the expiration of the warrants.  The Company recorded a loss of
$905,604 in the change of the derivative liability for the nine months ended
September 30, 2009.


10





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
5 - CONVERTIBLE DEBT (continued)





On August
27, 2009, the Company entered into a Loan Agreement with Mr. Peter Ullrich, a
related party, whereby he agreed to loan $600,000 to the Company, funded in
three installments, as follows, $200,000 payable on September 15, 2009, $200,000
payable on October 15, 2009, and $200,000 payable on November 15,
2009.  Simple interest accrues at a rate of 10% per annum on the
unpaid principal amount outstanding and the loan will mature on November 1,
2010, at which time accrued interest and the outstanding principal balance shall
be due.   This date was extended to December 1, 2011 with the new note
entered into during October 2010.  The agreement contains an optional
conversion right, whereby the Lender may convert all or any portion of the
outstanding principal and interest due into shares of the Company’s common stock
at a price per share equal to $1.00 per share.





In March
2010, the Company obtained an unsecured short term loan of $250,000 from Peter
Ullrich a member of the Board of Directors of the Company.  This is in
addition to an advance of $100,000 from Mr. Ullrich which occurred on February
18, 2010, as previously reported on the Company Form 8-K filed on February 24,
2010.   The Company received additional funding of $50,000 in May
2010, $150,000 in June 2010 and $155,000 in July 2010.





In
October, 2010, the Company entered into a loan agreement with Peter Ullrich, a
related party, which consolidates all but the two convertible promissory notes
into one note.  The principal amount of the Note is $1,200,000
(“Note”), with Mr. Ullrich having already advanced $705,000 to the
Company.  On September 21, 2010, Peter Ullrich paid an additional
$200,000 installment on the Note.  The remaining balance of $295,000
on the Note will be paid by WS in two installments; the first installment
required $100,000 to be paid of which $150,000 was received during October 31,
2010 and $145,000 to be paid no later than November 30, 2010.  The
Note bears interest at a rate of 10% annually and will mature on December 1,
2011.  The Note is convertible into shares of the Company’s common
stock at $1.00 per share and no principal or interest payments are due until
maturity.





In
October 2010, the Company also entered into an amendment of certain terms of the
Company’s $3,000,000 Second Amended and Restated Senior Secured Convertible
Promissory Note dated October 6, 2008 (the “Promissory Note”) with WS and the
Company’s $600,000 Loan Agreement dated August 27, 2009 (the “Loan Agreement”)
with Peter Ullrich.  The Promissory Note and the Loan Agreement will
be amended to (1) extend the maturity dates of each to coincide with the
maturity date of the Note, as described in the preceding paragraph, (2) delete
the anti-dilution protection for subsequent equity offerings contained in the
Promissory Note and the Loan Agreement, and (3) terminate the registration
rights agreement contained in both agreements.





Also, in
conjunction with the Note, the Company issued a warrant to Peter Ullrich to
purchase 6,969,231 shares of the Company’s common stock at $0.31 per share (the
“Warrant”).  The Warrant has a term of five years.





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 $141,667 and $150,000 in each of
the periods ended September 30, 2010 and 2009.  This agreement also
gives Water Science the rights to purchase machinery from the Company at cost
plus 25 percent.  The Company had sales of $24,627 during the nine
months ended September 30, 2010 and did not have any sales to Water Science for
the same period in 2009.  The Company has received and recorded
$329,630 in advance deposits from Water Science on machine orders at September
30, 2010.


11





EAU TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
6 – RELATED PARTY TRANSACTIONS (continued)





Convertible Note
Payable -In September 2005, the Company entered into a Senior
Convertible Note with Water Science in exchange for $3,000,000.  The
Company accounts for the warrants and convertible debt feature as a derivative
liability with changes in fair value being recorded in the income
statement.  (See Note 5)





On August
27, 2009, the Company entered into a Convertible Note with Mr. Peter Ullrich, a
related party, whereby he agreed to loan $600,000 to the Company, funded in
three installments, as follows, $200,000 payable on September 15, 2009, $200,000
payable on October 15, 2009, and $200,000 payable on November 15,
2009.  (See Note 5)





In
October, 2010, the Company entered into a loan agreement with Peter Ullrich, a
related party.  The principal amount of the Note is $1,200,000
(“Note”), with Mr. Ullrich having already advanced $705,000 to the
Company.  On September 21, 2010, Peter Ullrich paid an additional
$200,000 installment on the Note.  The remaining balance of $295,000
on the Note will be paid by WS in two installments; the first installment
required $100,000 to be paid of which $150,000 was received during October 31,
2010 and $145,000 to be paid no later than November 30, 2010.  The
Note bears interest at a rate of 10% annually and will mature on December 1,
2011.  The Note is convertible into shares of the Company’s common
stock at $1.00 per share and no principal or interest payments are due until
maturity.  (See Note 5)





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 $141,667 and $150,000 in the nine months ended September 30,
2010 and 2009, respectively.





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 deposited
$240,000 in cash with an escrow agent.  In February 2010, the
Company and the Chief Executive Officer entered into an agreement to terminate
the escrow agreement and closed the account.





Advances–
Periodically throughout the year, the Company advances employees cash for
certain reimbursable expenses.  As of September 30, 2010 and December
31, 2009, the Company had advances to employees in the amount of $5,500 and
$5,500, respectively.





Employee Options– 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 options were valued using the Binomial
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
option is approximately $1.13 per option.  The Company recognized
$56,032 in stock option expense related to the options for the nine months ended
September 30, 2010.





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 options were valued using the Binomial
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
option is approximately $0.85 per option.  The Company recognized
$52,068 during the period ended September 30, 2010.


12




EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
7 – CAPITAL STOCK





In
October, 2010, the Company entered into a loan agreement with Peter Ullrich, a
related party.  The principal amount of the Note is $1,200,000
(“Note”), with Mr. Ullrich having already advanced $705,000 to the
Company.  On September 21, 2010, Peter Ullrich paid an additional
$200,000 installment on the Note.  The remaining balance of $295,000
on the Note will be paid by WS in two installments, with $195,000 to be paid no
later than October 31, 2010 and $100,000 to be paid no later than November 30,
2010.  The Note bears interest at a rate of 10% annually and will
mature on December 1, 2011.  The Note is convertible into shares of
the Company’s common stock at $1.00 per share and no principal or interest
payments are due until maturity.





Also, in
conjunction with the Note, the Company issued a warrant to Peter Ullrich to
purchase 6,969,231 shares of the Company’s common stock at $0.31 per share (the
“Warrant”).  The Warrant has a term of five years.





In March
2010, Theodore Jacoby, a director of the Company, purchased 100,000 shares of
common stock of the Company for $100,000 at a price of $1.00 per
share.





In
January 2010, a consultant exercised 20,000 warrants for $200, or $0.01 per
share.  The warrants were granted in 2005 for services.





In July
2009, the Company granted 25,000 shares of EAU common stock to Larry Earle, a
consultant to the Company, pursuant to the Company’s 2007 Stock Incentive
Plan.





In May
2009, the Compensation Committee of the Board of Directors of the Company
granted 30,000 shares of restricted stock for each director, effective on May
14, 2009. 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.





In
October 2008, the Board of Directors approved a transaction with Water Science,
LLC (“WS”), a related party, pursuant to (1) a Stock Purchase Agreement (the
“Purchase Agreement”) and (2) a Second Amended and Restated Senior Secured
Convertible Promissory Note (the “Second Amended Convertible Note”). The
Purchase Agreement provides for the purchase of 2.5 million shares of common
stock of the Company at a price of $1.00 per share and the amendment of the
original Amended and Restated Senior Secured Convertible Promissory Note dated
as of May 8, 2008, to change the conversion rate from $3.00 per share to $1.00
per share, as reflected in the Second Amended Convertible Note. The purchase of
the common stock was to occur in nine monthly installments of $350,000 beginning
October 14, 2008 plus a final installment of $400,000 on April 15,
2009.  The Company received all payments under this
agreement.





In March
2009, the Company and Water Science amended the payment schedule of the Purchase
Agreement on the final $950,000.  The Second Amended Convertible Note
included an interest rate of 3% and a maturity date of March 16, 2009. In March
2009, the Company and Water Science agreed to extend the maturity date to
September 16, 2009 and increase the interest rate to 10%.  In August
2009, the note was again extended until November 1, 2010.  WS is
controlled by Peter Ullrich, a member of the Board of Directors of the
Company.


13




EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
8 – GOING CONCERN





The
Company has incurred significant losses and has had negative cash flows from
operations.  As a result, at September 30, 2010, 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.  We currently do not have
sufficient funds to operate our business without additional
funding.  Other than one more advance due under the note for $145,000
in November 2010, we do not have any written agreements in place for additional
funding.Management will continue to seek 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 $1,500,000 for the upcoming
twelve months to execute our business plan and an additional $4,800,000, plus
interest, in order to satisfy our notes payable with a related party, which were
extended to December 1, 2011, if the note is not converted into common
stock.  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, 2009
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





Stock-based
compensation is calculated according to FASB ASC Topic 718, Compensation — Stock
Compensation, which requires a fair-value-based measurement method to
account for stock-based compensation. The Company uses the Binomial valuation
formula, which is a closed-form model that uses an equation to determine the
estimated fair value of stock options.  Stock-based compensation
expense recognized for the nine month period ended September 30, 2010 and 2009
was $147,771 and $248,771, respectively, related to employee stock options
issued and vesting during the period.


14





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Net
Income (Loss) Per Share





Basic and
Fully Diluted net income per share is computed using the weighted-average number
of common shares outstanding during the period.  Diluted shares were
not calculated for the periods ended in 2009, because their inclusion would have
been anti-dilutive.





For the Three Months Ended
                
                
                For the Nine Months EndedSeptember 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009(Restated)
                
                
                
                
                
                (Restated)Net
      Income (loss) (numerator)
                
                $
                (470,778
                )
                
                $
                (2,307,792
                )
                
                $
                3,152,416
                
                
                $
                (3,392,751
                )Shares
      (denominator)Basic
                
                
                20,006,168
                
                
                
                19,621,494
                
                
                
                19,980,014
                
                
                
                19,074,059Diluted
                
                
                N/A
                
                
                
                N/A
                
                
                
                19,980,014
                
                
                
                N/APer
      share amountBasic
                
                $
                (0.02
                )
                
                $
                (0.12
                )
                
                $
                0.16
                
                
                $
                (0.18
                )Dilutive
                
                
                N/A
                
                
                
                N/A
                
                
                $
                0.16
                
                
                
                N/A





Warrants
and Options





The
following table is a summary of the status of the warrants and options granted
and outstanding at September 30, 2010:


Number
                  
                  
                  Weightedof Options
                  
                  
                  Average Exerciseand Warrants
                  
                  
                  PriceOutstanding
      at beginning of period
                  
                  
                  7,817,291
                  
                  
                  $
                  1.46Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (20,000
                  )
                  
                  
                  0.01Forfeited
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  (5,580,531
                  )
                  
                  
                  1.34Outstanding
      at end of period
                  
                  
                  2,216,760
                  
                  
                  $
                  1.79




A summary
of the status of the warrants outstanding at September 30, 2010 is presented
below:





Warrants Outstanding
                      
                      
                      Warrants ExercisableRange of
                      
                      
                      
                      Weighted-Average
                      
                      Weighted-Average
                      
                      
                      
                      
                      
                      Weighted-AverageExercise
                      
                      Number
                      
                      Remaining
                      
                      Exercise
                      
                      
                      Number
                      
                      
                      ExercisePrices
                      
                      Outstanding
                      
                      Contractual Life
                      
                      Price
                      
                      
                      Exercisable
                      
                      
                      Price1.00-1.99
                      
                      
                      1,499,260
                      
                      6.7
      years
                      
                      $
                      1.31
                      
                      
                      
                      912,130
                      
                      
                      $
                      1.312.00-2.99
                      
                      
                      625,000
                      
                      5.4
      years
                      
                      
                      2.68
                      
                      
                      
                      625,000
                      
                      
                      
                      2.683.00-3.99
                      
                      
                      92,500
                      
                      4.7 years
                      
                      
                      3.50
                      
                      
                      
                      92,500
                      
                      
                      
                      3.50$.01-5.50
                      
                      
                      2,216,760
                      
                      6.2 years
                      
                      $
                      1.79
                      
                      
                      
                      1,629,630
                      
                      
                      $
                      2.00


15





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





The
Company estimated the fair value of the stock warrants at the date each warrant
or option was granted using the Binomial pricing model, with the following
assumptions:





Risk-free interest rate
                
                4.6% - 4.99%Expected
      life
                
                3 to 5 yearsExpected volatility
                
                59.76% - 89.54%Dividend
      yield
                
                0.00%





Fair
Value Measurements





In
January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures
about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new
disclosures for (i) transfers of assets and liabilities in and out of
levels one and two fair value measurements, including a description of the
reasons for such transfers and (ii) additional information in the
reconciliation for fair value measurements using significant unobservable inputs
(level three). This guidance also clarifies existing disclosure requirements
including (i) the level of disaggregation used when providing fair value
measurement disclosures for each class of assets and liabilities and
(ii) the requirement to provide disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements for level two and three assets and liabilities. ASU 2010-06
is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about activity in the roll
forward for level three fair value measurements, which is effective for fiscal
years beginning after December 15, 2010. The adoption of this guidance has
not had a material impact on our financial position and results of
operations.





NOTE
10 – RESTATEMENT





The
Company has restated its financial statements for the periods ended September
30, 2009 and December 31, 2009. The Company determined that certain inputs into
the binomial valuation model used to calculate the derivative liability were not
correct.  The Company determined that the current stock price used in
the calculation was not being changed from the time the liability was
recorded.  While the restatement is significant, all of the issues
were non-cash items.





There was
no tax effect for the prior period adjustments for the year ending December 31,
2009.  The impact of the 2009 restatement of the balance sheet
accounts and income statement items are as follows:





2009
Balance Sheet




As previously
                    reported, December
                    31, 2009
                  
                  
                  Restated,
                    December 31,
                    2009
                  
                  
                  ChangeTotal
      assets
                  
                  $
                  3,407,770
                  
                  
                  $
                  3,407,770
                  
                  
                  $
                  0Derivative
      liability
                  
                  $
                  8,662,893
                  
                  
                  $
                  5,333,401
                  
                  
                  $
                  (3,329,492
                  )Total
      liabilities
                  
                  $
                  14,229,820
                  
                  
                  $
                  10,900,328
                  
                  
                  $
                  (3,329,492
                  )Accumulated
      deficit
                  
                  $
                  52,135,551
                  
                  
                  $
                  48,806,059
                  
                  
                  $
                  (3,329,492
                  )Total
      Stockholders deficit
                  
                  $
                  10,822,050
                  
                  
                  $
                  7,492,558
                  
                  
                  $
                  (3,329,492
                  )




16




EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
10 – RESTATEMENT (continued)





September
30, 2009 Income Statement


As previously
                    reported,
                    September 30,
                    2009
                  
                  
                  Restated,
                    September 30,
                    2009
                  
                  
                  ChangeGross
      profit
                  
                  $
                  296,800
                  
                  
                  $
                  296,800
                  
                  
                  $
                  0Gain
      (loss) on derivative liability
                  
                  $
                  (3,140,087
                  )
                  
                  $
                  (905,604
                  )
                  
                  $
                  2,234,483Net
      loss
                  
                  $
                  (5,627,234
                  )
                  
                  $
                  (3,392,751
                  )
                  
                  $
                  2,234,483Net
      loss per share
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.18
                  )
                  
                  $
                  0.12





NOTE
11 – SUBSEQUENT EVENTS





In
October 2010, the Company entered into a loan agreement with Peter Ullrich, a
related party.  The principal amount of the Note is $1,200,000, with
Mr. Ullrich having already advanced $705,000 to the Company.  The Note
bears interest at a rate of 10% annually and will mature on December 1,
2011.  The Note is convertible into shares of the Company’s common
stock at $1.00 per share and no principal or interest payments are due until
maturity.





In
October 2010, Peter Ullrich paid an installment payment of $150,000 on the
Note.  The remaining balance of $145,000 on the Note will be paid by
WS no later than November 30, 2010.





In
conjunction with the new loan agreement, the Company issued a warrant to Peter
Ullrich to purchase 6,969,231 shares of the Company’s common stock at $0.31 per
share (the “Warrant”).  The Warrant has a term of five
years.





Management
evaluated events subsequent to the period end and concluded there were no
other events or transactions during this period that required recognition or
disclosure in its financial statements


17


Item
2.   Management's Discussion and
Analysis of Financial Condition and Results of Operations





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-K, 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 non-toxic cleaning and
disinfecting fluids as well as dairy drinking water. These fluids have various
commercial applications and may be used in commercial food processing and
agricultural products that clean, disinfect, remediate, hydrate and moisturize.
The processes for which these fluids may be used are referred to in this Report
(the “Report”) as the “EW Technology.”  For example, we believe that
our food and agricultural treatment products potentially may be used to
systemically treat various 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.  Further studies are in progress to
make more specific claims.  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 or disinfecting and
cleaning agents. The electrolyzed water fluids created by the EW Technology
(referred to herein sometimes as the “EW Fluids” or “Empowered WaterTM”)
generated by our specialized equipment can be used in place of many of the
traditional products used in commercial, industrial and residential disinfecting
and cleaning.





Our focus
is on our three core competencies which are, producing high volumes of
electrolyzed water, controlling the properties of the water and using our
application knowledge.  Because of our ability to produce high volumes
of water and control the water properties, our target market is in commercial
applications where we believe we can add value by generating measurable
productivity and efficiency gains.  We will continue to use a
disciplined stage gate development process that drives ideas to commercial test
installations that turn into revenues.  Once we have developed an
application we will attempt to find strategic partners that would be able to
assist us with a large scale commercial roll-out of the
technology.  Our goal is to generate streams of revenues through
pricing contracts that let us participate in the on-going added
value.





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, the potential ability to attract
a leading strategic industry partner, or we can provide an attractive
value-added proposition.  To penetrate these markets, EAU is
conducting trials and completing commercial installations that will lead to
partnerships with enterprises that can assist in rolling the technology out on a
large scale.





Dairy Cattle.The
Company commenced hydration and production tests on dairy cattle in
2006.  Initial results indicate an increase in milk production and
milk fat while maintaining the protein content.  In August 2008, we
reached an agreement with a dairy located in Georgia to begin paying for the use
of our equipment.    During the first quarter of 2009, the
Company installed a second unit at the dairy located in Georgia to provide our
fluids to all of the cows on the dairy.  EAU is currently receiving
minimal revenues in a commercial capacity.  We will continue to do
more clinical research and field testing in the dairy market in order to support
a full industry rollout.


18





Poultry.In 2005,
we began testing of our EW Technology and EW Fluids (the “EW System”) in Tyson Food’s
Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EW 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
Services (the enforcement arm of the USDA) allowable limit.





From
these results we 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.





The
Company has experienced some sales resistance from the multiple industries
including the poultry industry, because operators did not have sufficient
motivation to invest in new technologies to improve the safety and cleanliness
of food products.  In February 2008, a regulatory change occurred that
we believe may increase the motivation.  The Food Safety Inspection
Service (“FSIS”), a division of the USDA, sets the public heath performance
standards for all raw and processed meat, poultry and egg- processing standard
for the United States.  The FSIS has implemented a process called the
“Public Health Risk Based Inspection” platform to regulate these industries
based on the relative risk a processing facility imposes to the human health
index.  The new system allows the FSIS to allocate and prioritize its
resources at processing plants based on the risk each plant presents. The new
categorization platform lists processors in three categories, Category 1: 10%
positive and below; Category 2: 10%-20% positive for Salmonella and other
pathogens; Category 3: 20%-22% positive for Salmonella and other pathogens. For
processors with strong processes and intervention systems meeting the Category 1
criteria, there would be far less FSIS inspectors on site, thus reducing the
cost incurred by the plant. We believe that with the success that we have
achieved in field trials and commercial installations, in conjunction with the
new FSIS policies and regulations, may make EAU’s products more appealing to the
industry.





In 2008,
EAU signed a lease agreement with Fieldale Farms, a large poultry producer in
northern Georgia, to install our equipment at their facility.  We
began receiving revenues of approximately $27,500 per month from this facility
in February 2009.  Per the terms of the agreement, we were to help the
plant achieve Category 1 status.  The plant completed a USDA test set
October 2009 with the result that it complied with Category 1
status.  The plant has indicated that it intends to terminate the
agreement as of November 23, 2009.  We currently are not receiving
monthly rent payments, while management is in negotiations to continue
operations.  We completed the OLR data gathering stage and submitted
our findings to the USDA for OLR approval.  EAU received a letter from
the USDA approving our fluids for use in the plant for OLR
applications.





Clean in Place.In
the third quarter of 2008 we installed our equipment to test a clean-in-place
(CIP) application with an international beverage bottling company for use with
cold beverages.  This test is complete and was a success. There were
three stages of this trial that were conducted simultaneously: 1) Syrup tanks;
2) Bag in box; 3) Bottling. The purpose of the trial was to identify whether
EAU’s non-toxic ambient temperature Empowered Waters could replace current 3-5
step CIP processes. In order to become an approved technology for this bottling
company, EAU had to show good antimicrobial efficacy, water savings, and
improved CIP efficiency. At this time, this installation does not generate any
revenues.  With the positive results of all phases of the tests being
completed for carbonated beverages in 2010, EAU began marketing our systems
within the bottling company.  We are expanding our CIP capabilities
and have plans to work with the bottling company on a hot fill application for
pasteurized beverages.  In August 2010 we received our first purchase
orders for the CIP application at a bottling plant.  EAU will continue
to test other CIP applications to manage all beverage and food products as the
technology is introduced.





We have
obtained patent protection on four separate uses of electrolyzed fluids
(cleaning and disinfecting eggs, carpet cleaning, mold remediation and poultry
processing).  Those applications are how the fluids are used and how
they are stabilized for use in different applications. Additionally, we have a
patent pending on the electrolysis equipment and several provisional patent
pending applications filed to protect new processes and products, as described
herein.


19





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 $245,996 in cash as of September 30, 2010, compared to $181,481 at
December 31, 2009.  The Company has received and recorded $329,630 in
advance deposits from Water Science on machine orders at September 30,
2010.  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, and by agreement may purchase machinery from us at cost plus 25
percent.  Long term debt decreased slightly from $6,512 at December
31, 2009 to $0 at September 30, 2010 as all our debt is now due within one
year.  At September 30, 2010, our stockholders’ deficit was
$4,065,171.





Results of
Operationsfor
the Three months ended September 30, 2010 and 2009





Revenues
and Net Income





The Company had total
revenues of $112,227 for the three months ended September 30, 2010, which
represents a decrease from the $205,025 in total revenues for the same period
one year earlier.The majority of the revenues are from
leasing revenues from our EW water systems in the dairy market.  We
also recognized $41,667 and $50,000 in licensing revenues related to the
exclusive license granted to Water Science, a related party during the period
ended September 30, 2010 and 2009, respectively.





The
Company had net losses of $470,778 from continuing operations for the three
months ended September 30, 2010, or a loss of $0.02 per share, compared with a
net loss from continuing operations of $2,307,792, or $0.12 per share for the
same period in 2009.  For the three months ended September 30, 2010,
the Company recognized a gain of $216,465 as compared to a loss of $1,431,438
for the three months ended September 30, 2009 on the derivative
liability.  Prior to October 2010, the warrants included a “round
down” provision that required the Company to account for the warrants as a
derivative liability, with changes to the fair market value recorded in the
income statement.  Excluding the gain on the derivative liability the
Company would have had a net loss of $687,243, or $0.03 per share in 2010 as
compared to a loss of $876,354, or $0.04 per share in 2009.  The
change in the derivative liability is calculated using the binomial method to
determine fair market value.  The current period results also include
$112,054 in interest expense, compared to $81,049 in 2009.  This is
due to interest expense related to the additional notes payable entered into in
2009 and 2010.





General
and Administrative Expenses





The
Company’s general and administrative expenses were lower as compared to the
prior year.  Expenses totaled $596,832 during the three months ended
September 30, 2010, compared to $855,379 during the three months ended September
30, 2009.  General and administrative expense for 2010 consists
primarily of payroll and other compensation expense of $320,131, legal and
professional fees of $49,995, expense related to granting and vesting of stock
and options of $49,257 and insurance expense of $80,862.





Research
and Development





Research
and development expenses incurred during the three month period ended September
30, 2010 decreased $29,948, from $103,391 in 2009 to $73,443 in
2010.  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.


20




Results of
Operationsfor
the Nine months ended September 30, 2010 and 2009





Revenues
and Net Income





The Company had total
revenues of $414,260 for the nine months ended September 30, 2010, which
represents a 27% decrease from the $563,650 in total revenues for the same
period one year earlier.The majority of the revenues are from
leasing revenues from our EW water systems in the poultry and dairy
market.  We also recognized $141,667 and $150,000 in licensing
revenues related to the exclusive license granted to Water Science, a related
party during the period ended September 30, 2010 and 2009,
respectively.





Due to
the change in fair market value of the derivative liability, the Company had net
income of $3,152,416 from continuing operations for the nine months ended
September 30, 2010, or a gain of $0.16 per share, compared with a net loss from
continuing operations of $3,392,751, or $0.18 per share for the same period in
2009.  For the nine months ended September 30, 2010, the Company
recognized a gain of $5,230,026 as compared to a loss of $905,604 for the nine
months ended September 30, 2009.  The significant change in the value
of the derivative was due to the expiration of approximately 5,100,000
warrants.  The warrants included a “down-round” provision that
required the Company to account for the warrants as a derivative
liability.  Excluding the gain on the derivative liability the Company
would have had a net loss of $2,077,610, or $0.10 per share in 2010 as compared
to a loss of $4,298,355, or $0.23 per share in 2009.  The current
period results also include $313,307 in interest expense, compared to $268,851
in 2009.  This is due to interest expense related to the various notes
payable entered into in 2009 and 2010.





General
and Administrative Expenses





The
Company’s general and administrative expenses decreased for the nine months
ended September 30, 2010 as compared to the prior year.  Expenses
totaled $1,928,751 during the nine months ended September 30, 2010, compared to
$2,454,008 during the nine months ended September 30, 2009.  General
and administrative expense for 2010 consists primarily of payroll and other
compensation expense of $1,077,201, legal and professional fees of $173,537,
expense related to granting and vesting of stock and options of $147,771 and
insurance expense of $242,652.





Research
and Development





Research
and development expenses incurred during the nine month period ended September
30, 2010 decreased $60,245, from $220,396 in 2009 to $160,151 in
2010.  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.





Liquidity and Capital
Resources




The
Company had $245,996 in cash as of September 30, 2010, compared to $181,481 at
December 31, 2009.  We had net income of $3,152,416 for the nine
months ended September 30, 2010, compared with net losses of $3,392,751 for the
nine months ended September 30, 2009.  The net income (loss) per share
for the first nine months of 2010 and 2009 was $0.16 and $(0.18) per share,
respectively.  The majority of the change is attributable to the
recording of the derivative liability to fair market value as described
above.





Net cash
used in operating activities in the nine month period ended September 30, 2010
was $934,259, a 49% decrease, compared to $1,890,025 for the same period in
2009.  The majority of the change in cash used as compared to the
prior period was the change in the fair market value of the derivative
liability, the increase in advance deposits for machine orders, the closing of
the escrow account and the increase in accrued interest.


21





At
September 30, 2010, the Company’s net inventory was $1,855,809, representing a
decrease of approximately $167,000, from the $2,022,462 on hand at December 31,
2009.  The Company is in multiple tests of our equipment and has
included the machines in inventory until they are sold and begin producing
revenues.





The
Company also recognized a non-cash decrease in the derivative liability of
$5,230,027, due to the expiration of 5,169,231 warrants and changes in the
binomial value of the liability.





The
Company only used $6,426 in cash flows from investing activities during the
period ended September 30, 2010 as compared to $111,375 used in the same period
in 2009.  The cash flows from investing activities consisted of
expenditures related to intellectual property.





Cash
flows from financing activities provided the Company $1,005,200 for the period
ended September 30, 2010 compared with $1,644,613 provided the Company during
the same period in 2009.  The Company received proceeds of $905,000
from the receipt of an advance on an issuance of a convertible note payable to a
related party and received $100,000 from the sale of stock to a director during
the nine months ended September 30, 2010.





We currently do not have
sufficient funds to operate our business without additional
funding.  Other than one more advance due under the note for $145,000
in November 2010, we do not have any written agreements in place for additional
funding.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.  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 notes payable with Water
Science will become due in December 2011, which will require cash of $4,800,000,
plus interest, in order to satisfy the debts, if the note is not converted into
common stock.  We anticipate that we may need an additional $1,500,000
or more in future funding to execute our business plan over the next twelve
months. Moreover, if we able to expand our sale of EW machines as anticipated,
we may need significant additional working capital to fund that
expansion.  We do not have arrangements in place to provide us with
this funding or any additional funding. In light of these circumstances, the
ability of the Company to continue as a going concern is in substantial
doubt.





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-K, dated December 31, 2009, 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 first quarter of
2010.




22


Recent Accounting
Pronouncements





In
January 2010, the FASB issued updated guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. This
update requires new disclosures on significant transfers of assets and
liabilities between Level 1 and Level 2 of the fair value hierarchy
(including the reasons for these transfers) and the reasons for any transfers in
or out of Level 3. This update also requires a reconciliation of recurring
Level 3 measurements about purchases, sales, issuances and settlements on a
gross basis. In addition to these new disclosure requirements, this update
clarifies certain existing disclosure requirements. For example, this update
clarifies that reporting entities are required to provide fair value measurement
disclosures for each class of assets and liabilities rather than each major
category of assets and liabilities. This update also clarifies the requirement
for entities to disclose information about both the valuation techniques and
inputs used in estimating Level 2 and Level 3 fair value measurements.
This update became effective for the Company with the interim and annual
reporting period beginning January 1, 2010, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances, and
settlements on a gross basis, which will become effective for the Company with
the interim and annual reporting period beginning January 1, 2011. The
Company will not be required to provide the amended disclosures for any previous
periods presented for comparative purposes. Other than requiring additional
disclosures, adoption of this update did not have a material effect on the
Company’s consolidated financial statements.





Inflation





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





Precious
Metals





Raw
materials used by the Company in the EW 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 EW 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.  Forward-looking statements, which involve assumptions and
describe our future plans, strategies and expectations, are generally
identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of
these words or other variations on these words or comparable
terminology.  These forward-looking statements include our
expectations regarding working capital requirements and future funding, our expectations regarding our internal
controls,expectations
regarding funding commitments,our expectations regarding reductions
in deposits from Water Science, future inventory levels, future test results,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-K for
the year ended December 31, 2009 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.


23





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
4.   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 September 30, 2010, 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 effective at the reasonable assurance
level.




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





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
1A. Risk Factors





As a
smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), we are not required to provide the
information required by this item.





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





None


24




Item
3. Defaults Upon Senior Securities





None





Item
4. Reserved





Item
5. Other Information





In
October 2010, the Company entered
into a loan agreement with Peter Ullrich, a related party, which consolidates
all the short term loans and advances made by Mr. Ullrich into one
note.  The principal amount of the Note is $1,200,000.  As
per the note, Mr. Ullrich made an additional installment payment of $150,000 in
October 2010.  The remaining payment of $145,000 will be made no later
than November 30, 2010.  The Note
bears interest at a rate of 10% annually and will mature on December 1,
2011.  The Note is convertible into shares of the Company’s common
stock at $1.00 per share and no principal or interest payments are due until
maturity.  Also, in
conjunction with the Note, the Company issued a warrant to Peter Ullrich to
purchase 6,969,231 shares of the Company’s common stock at $0.31 per share (the
“Warrant”).  The Warrant has a term of five years.
  As part
of this financing transaction, the parties agreed to amend an existing
convertible note with Water Science to extend the maturity to December 2011 and
to remove the anti-dilution provision.




Item
6. Exhibits


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
                
                $1.2
      Million Loan Agreement dated October 21, 2010, between the Company and
      Peter Ullrich.10.2
                
                Warrant
      agreement, dated October 21, 2010, between the Company and Peter
      Ullrich.10.3
                
                Third
      Amended and Restated Senior Secured Convertible Promissory Note dated
      October 21, 2010, between the Company and Water Science
    LLC.10.4
                
                Amended
      and Restated $600,000 Loan Agreement dated October 21, 2010, between the
      Company and Peter Ullrich.31.1
                
                Certification
      by Wade R. Bradley under Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                
                Certification
      by Brian D. Heinhold under Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
                
                Certification
      of Wade R. Bradley pursuant 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.


25




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:
November 15, 2010





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)




26