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 June 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   ̈  No
x





As of August 12, 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


June 30,
2010





INDEX





PagePART
      I. FINANCIAL INFORMATIONITEM
      1.
                  Financial
      StatementsBalance
      Sheets – June 30, 2010 and December 31, 2009
                  3Statements
      of Operations – Three and Six months ended June 30, 2010 and
      2009
                  5Statement
      of Stockholders’ Equity (Deficit)
                  6Statements
      of Cash Flows – Six months ended June 30, 2010 and 2009
                  7Notes
      to Financial Statements
                  9ITEM
      2.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  17ITEM
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  23ITEM
      4T.
                  Controls
      and Procedures
                  23PART
      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
                  24ITEM
      4.
                  Reserved
                  24ITEM
      5.
                  Other
      Information
                  24ITEM
      6.
                  Exhibits
                  24SIGNATURES
                  25




2





PART I -
FINANCIAL INFORMATION




EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS





ASSETS





June 30,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)
                      
                      
                      (Restated)CURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      51,162
                      
                      
                      $
                      181,481Accounts
      receivable, net
                      
                      
                      43,420
                      
                      
                      
                      42,995Other
      receivable – related party
                      
                      
                      5,500
                      
                      
                      
                      6,248Pre-paid
      expense
                      
                      
                      34,840
                      
                      
                      
                      45,419Inventory,
      net
                      
                      
                      1,929,187
                      
                      
                      
                      2,022,462Total
      current assets
                      
                      
                      2,064,109
                      
                      
                      
                      2,298,605PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $140,911 and
      $133,821
                      
                      
                      19,092
                      
                      
                      
                      26,183LEASED
      EQUIPMENT, net of accumulated depreciation of $435,774 and
      $406,952
                      
                      
                      692,399
                      
                      
                      
                      721,221OTHER
      ASSETSDeposits
                      
                      
                      10,496
                      
                      
                      
                      10,496Restricted
      cash
                      
                      
                      -
                      
                      
                      
                      240,000Intellectual
      property, net
                      
                      
                      115,240
                      
                      
                      
                      111,265Total
      other assets
                      
                      
                      125,736
                      
                      
                      
                      361,761Total
      assets
                      
                      $
                      2,901,336
                      
                      
                      $
                      3,407,770





See notes
to financial statements.


3


EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS (Continued)





LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)





June 30,
                      
                      
                      December 31,2010
                      
                      
                      2009(Unaudited)
                      
                      
                      (Restated)CURRENT
      LIABILITIESAccounts
      payable
                      
                      $
                      451,124
                      
                      
                      $
                      401,663Accrued
      expenses
                      
                      
                      368,145
                      
                      
                      
                      351,215Accrued
      interest
                      
                      
                      770,940
                      
                      
                      
                      572,892Warranty
      reserve
                      
                      
                      83,297
                      
                      
                      
                      92,160Current
      portion of deferred licensing revenue – related party
                      
                      
                      41,667
                      
                      
                      
                      141,667Advance
      deposits on machine orders – related party
                      
                      
                      329,630
                      
                      
                      
                      349,986Current
      portion of long-term debt
                      
                      
                      57,344
                      
                      
                      
                      50,832Convertible
      notes payable – related party
                      
                      
                      4,150,000
                      
                      
                      
                      3,600,000Derivative
      liability – related party
                      
                      
                      319,839
                      
                      
                      
                      5,333,401Total
      current liabilities
                      
                      
                      6,571,986
                      
                      
                      
                      10,893,816LONG
      TERM LIABILITIESLong
      term debt, net of current portion
                      
                      
                      -
                      
                      
                      
                      6,512Total
      liabilities
                      
                      
                      6,571,986
                      
                      
                      
                      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
                      
                      
                      41,510,214
                      
                      
                      
                      41,311,512Accumulated
      deficit
                      
                      
                      (45,182,865
                      )
                      
                      
                      (48,806,059
                      )Total
      stockholders’ equity (deficit)
                      
                      
                      (3,670,650
                      )
                      
                      
                      (7,492,558
                      )Total
      liabilities and stockholders’ equity (deficit)
                      
                      $
                      2,901,336
                      
                      
                      $
                      3,407,770





See notes
to financial statements.


4


EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENTS OF OPERATIONS





Three Months Ended
                    
                    
                    Six Months EndedJune 30,
                    
                    
                    June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Restated)
                    
                    
                    
                    
                    
                    (Restated)NET
      SALES – RELATED PARTY
                    
                    $
                    50,000
                    
                    
                    $
                    50,000
                    
                    
                    $
                    124,627
                    
                    
                    $
                    100,000NET
      SALES
                    
                    
                    89,631
                    
                    
                    
                    153,975
                    
                    
                    
                    177,406
                    
                    
                    
                    258,625TOTAL
      SALES
                    
                    
                    139,631
                    
                    
                    
                    203,975
                    
                    
                    
                    302,033
                    
                    
                    
                    358,625COST
      OF GOODS SOLD
                    
                    
                    23,962
                    
                    
                    
                    36,345
                    
                    
                    
                    64,777
                    
                    
                    
                    61,825GROSS
      PROFIT
                    
                    
                    115,669
                    
                    
                    
                    167,630
                    
                    
                    
                    237,256
                    
                    
                    
                    296,800OPERATING
      EXPENSESDepreciation
      and amortization
                    
                    
                    3,885
                    
                    
                    
                    4,778
                    
                    
                    
                    7,769
                    
                    
                    
                    11,802Research
      and development
                    
                    
                    19,957
                    
                    
                    
                    42,938
                    
                    
                    
                    86,708
                    
                    
                    
                    117,005General
      and administrative
                    
                    
                    581,587
                    
                    
                    
                    848,598
                    
                    
                    
                    1,331,919
                    
                    
                    
                    1,598,629Total
      operating expenses
                    
                    
                    605,429
                    
                    
                    
                    896,314
                    
                    
                    
                    1,426,396
                    
                    
                    
                    1,727,436LOSS
      BEFORE OTHER INCOME (EXPENSE)
                    
                    
                    (489,760
                    )
                    
                    
                    (728,684
                    )
                    
                    
                    (1,189,140
                    )
                    
                    
                    (1,430,636
                    )OTHER
      INCOME (EXPENSE)Interest
      expense
                    
                    
                    (104,988
                    )
                    
                    
                    (76,184
                    )
                    
                    
                    (201,253
                    )
                    
                    
                    (187,802
                    )Interest
      income
                    
                    
                    -
                    
                    
                    
                    3,840
                    
                    
                    
                    26
                    
                    
                    
                    7,645Gain
      (Loss) on derivative liability
                    
                    
                    4,441,213
                    
                    
                    
                    579,242
                    
                    
                    
                    5,013,561
                    
                    
                    
                    525,835Other
      income (expense)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      other income (expense)
                    
                    
                    4,336,225
                    
                    
                    
                    506,898
                    
                    
                    
                    4,812,334
                    
                    
                    
                    345,678INCOME
      (LOSS) BEFORE PROVISION FOR INCOME TAXES
                    
                    
                    3,846,465
                    
                    
                    
                    (221,786
                    )
                    
                    
                    3,623,194
                    
                    
                    
                    (1,084,958
                    )PROVISION
      FOR INCOME TAXES
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -NET
      INCOME (LOSS)
                    
                    $
                    3,846,465
                    
                    
                    $
                    (221,786
                    )
                    
                    $
                    3,623,194
                    
                    
                    $
                    (1,084,958
                    )EARNINGS
      PER SHAREBASIC
                    
                    $
                    0.19
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.18
                    
                    
                    $
                    (0.06
                    )DILUTED
                    
                    $
                    0.19
                    
                    
                    
                    N/A
                    
                    
                    $
                    0.18
                    
                    
                    
                    N/AWEIGHTED
      AVERAGE OF SHARES OUTSTANDING
                    
                    
                    20,006,168
                    
                    
                    
                    19,126,553
                    
                    
                    
                    19,966,720
                    
                    
                    
                    18,796,483





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
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    98,514
                    
                    
                    
                    -
                    
                    
                    
                    98,514Net
      gain for the six months ended June 30, 2010
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,623,194
                    
                    
                    
                    3,623,194Balance,
      June 30, 2010
                    
                    
                    20,006,168
                    
                    
                    $
                    2,001
                    
                    
                    $
                    41,510,214
                    
                    
                    $
                    (45,182,865
                    )
                    
                    $
                    (3,670,650
                    )





See notes
to financial statements.


6





EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENTS OF CASH FLOWS





For the Six MonthsEnded June 30,2010
                      
                      
                      2009(Restated)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                      
                      $
                      3,623,194
                      
                      
                      $
                      (1,084,958
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                      
                      
                      36,591
                      
                      
                      
                      73,626Bad
      debt expense
                      
                      
                      -
                      
                      
                      
                      15,000Warrants
      and options vested or issued for services
                      
                      
                      98,514
                      
                      
                      
                      166,153Discount
      of note payable
                      
                      
                      -
                      
                      
                      
                      76,754Changes
      in operating assets and liabilities:Decrease
      in restricted cash
                      
                      
                      240,000
                      
                      
                      
                      -(Increase)
      in accounts receivable
                      
                      
                      (426
                      )
                      
                      
                      (28,925
                      )Decrease
      in accounts receivable – related party
                      
                      
                      748
                      
                      
                      
                      3,000Decrease
      (increase) in pre-paid expense
                      
                      
                      10,579
                      
                      
                      
                      (4,390
                      )(Increase)
      in accrued interest
                      
                      
                      -
                      
                      
                      
                      (7,500
                      )(Increase)
      decrease in inventory
                      
                      
                      93,275
                      
                      
                      
                      (18,581
                      )(Increase)
      in deposits
                      
                      
                      -
                      
                      
                      
                      (6,473
                      )Increase
      (decrease) in accounts payable
                      
                      
                      49,461
                      
                      
                      
                      (5,553
                      )(Decrease)
      in warranty reserve
                      
                      
                      (8,863
                      )
                      
                      
                      (4,985
                      )Decrease
      in advance deposits for machine orders – related party
                      
                      
                      (20,356
                      )
                      
                      
                      -Increase
      in accrued expenses
                      
                      
                      16,930
                      
                      
                      
                      17,592Increase
      in accrued interest
                      
                      
                      198,048
                      
                      
                      
                      109,863(Decrease)
      in deferred revenue
                      
                      
                      (100,000
                      )
                      
                      
                      (100,000
                      )(Decrease)
      in derivative liability
                      
                      
                      (5,013,561
                      )
                      
                      
                      (525,835
                      )Net
      cash (used) in operating activities
                      
                      
                      (775,866
                      )
                      
                      
                      (1,325,212
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                      
                      
                      -
                      
                      
                      
                      (107,580
                      )Intellectual
      property disbursements
                      
                      
                      (4,653
                      )
                      
                      
                      (5,754
                      )Net
      cash (used) in investing activities
                      
                      
                      (4,653
                      )
                      
                      
                      (113,334
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on notes payable
                      
                      
                      -
                      
                      
                      
                      (7,891
                      )Proceeds
      from issuance of note payable – related party
                      
                      
                      550,000
                      
                      
                      
                      -Proceeds
      from issuance of common stock – related party
                      
                      
                      100,200
                      
                      
                      
                      1,250,000Net
      cash provided by financing activities
                      
                      
                      650,200
                      
                      
                      
                      1,242,109NET
      INCREASE (DECREASE) IN CASH
                      
                      
                      (130,319
                      )
                      
                      
                      (196,437
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      181,481
                      
                      
                      
                      494,612Cash
      and cash equivalents, end of period
                      
                      $
                      51,162
                      
                      
                      $
                      298,175





See
notes to financial statements.


7


EAU
TECHNOLOGIES, INC.





UNAUDITED STATEMENTS OF CASH
FLOWS


(Continued)





For the Six MonthsEnded June 30,2010
                
                
                2009(Restated)Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for:Interest
                
                $
                2,262
                
                
                $
                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:


June 30,
                    
                    
                    December 31,2010
                    
                    
                    2009Finished
      goods
                    
                    $
                    819,992
                    
                    
                    $
                    894,488Raw
      materials
                    
                    
                    1,509,195
                    
                    
                    
                    1,527,974Allowance
      for obsolete inventory
                    
                    
                    (400,000
                    )
                    
                    
                    (400,000
                    )$
                    1,929,187
                    
                    
                    $
                    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 six months ended June 30, 2010 are as follows:





Warranty
      reserve at beginning of period
                  
                  $
                  92,160Costs
      accrued for additional warranties
                  
                  
                  -Service
      obligations honored
                  
                  
                  (8,863
                  )Warranty
      reserve at end of period
                  
                  $
                  83,297




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.





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 June 30, 2010, the
value of the derivative liability was $319,839.  The Company recorded
a gain of $5,013,561 in the change of the derivative liability to fair market
value for the six month period ended June 30, 2010 in part due to the expiration
of the warrants.  The Company recorded a gain of $525,835 in the
change of the derivative liability for the six months ended June 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.   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.  The final
agreements to document the loan have not been signed, and the material terms are
not final. The material terms of the final agreement will be disclosed in
subsequent filings with the Securities and Exchange Commission.





NOTE
6 – RELATED PARTY TRANSACTIONS





Sales to
Affiliates – In September 2005, Water Science, a related party, paid to
the Company $1,000,000 for the exclusive rights to sell our products in South
America and Mexico.  The agreement allows for a pro-rated refund
during the first 5 years under certain circumstances.  The Company
recognizes income from this agreement over the first 5 years of the
agreement.  The Company recognized $100,000 in each of the periods
ended June 30, 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 six months ended
June 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 June 30, 2010.





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 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.  The final
agreements to document the loan have not been signed, and the material terms are
not final. The material terms of the final agreement will be disclosed in
subsequent filings with the Securities and Exchange Commission.





Licensing Fee
–In September 2005, the Company received $1,000,000 in exchange for
providing Water Science exclusive licensing and distribution rights for a
five-year term for a specified market area. The agreement provides termination
rights by Water Sciences and a pro rata refund of the fee. The Company
recognizes the fee on a pro rata basis over the life of the agreement. The
Company recognized $100,000 in each of the six months ended June 30, 2010 and
2009.


11





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
6 – RELATED PARTY TRANSACTIONS (continued)




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 June 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
$37,355 in stock option expense related to the options for the six months ended
June 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
$34,712 during the period ended June 30, 2010.





NOTE
7 – CAPITAL STOCK





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.




12





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE 7 – CAPITAL STOCK (continued)





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 six 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.




NOTE
8 – GOING CONCERN





The
Company has incurred significant losses and has had negative cash flows from
operations.  As a result, at June 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.  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 $4,150,000, plus
interest, in order to satisfy our notes payable with a related party, which
become due in November 2010, 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.




13





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





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 six month period ended June 30, 2010 and 2009 was
$98,514 and $166,153, respectively, related to employee stock options issued and
vesting during the period.





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 Six Months EndedJune 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009(Restated)
                
                
                
                
                
                (Restated)Net
      Income (loss) (numerator)
                
                $
                3,846,465
                
                
                $
                (221,786
                )
                
                $
                3,623,194
                
                
                $
                (1,084,958
                )Shares
      (denominator)Basic
                
                
                20,006,168
                
                
                
                19,126,553
                
                
                
                19,966,720
                
                
                
                18,796,483Diluted
                
                
                20,102,168
                
                
                
                N/A
                
                
                
                20,063,272
                
                
                
                N/APer
      share amountBasic
                
                $
                0.19
                
                
                $
                (0.01
                )
                
                $
                0.18
                
                
                $
                (0.06
                )Dilutive
                
                $
                0.19
                
                
                
                N/A
                
                
                $
                0.18
                
                
                
                N/A





Warrants
and Options





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




Number
                            
                            
                            Weightedof Options
                            
                            
                            Average Exerciseand Warrants
                            
                            
                            PriceOutstanding
      at beginning of period
                            
                            
                            7,817,291
                            
                            
                            $
                            1.46Granted
                            
                            
                            -
                            
                            
                            
                            -Exercised
                            
                            
                            (20,000
                            )
                            
                            
                            0.01Forfeited
                            
                            
                            -
                            
                            
                            
                            -Expired
                            
                            
                            (5,480,531
                            )
                            
                            
                            1.36Outstanding
      at end of period
                            
                            
                            2,316,760
                            
                            
                            $
                            1.71




14





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





A summary
of the status of the warrants outstanding at June 30, 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
                            
                            
                            Price$
                            .01-.50
                            
                            
                            
                            100,000
                            
                            0.1
      years
                            
                            $
                            0.01
                            
                            
                            
                            100,000
                            
                            
                            $
                            0.011.00-1.99
                            
                            
                            
                            1,499,260
                            
                            7.0
      years
                            
                            
                            1.31
                            
                            
                            
                            912,130
                            
                            
                            
                            1.312.00-2.99
                            
                            
                            
                            625,000
                            
                            5.6
      years
                            
                            
                            2.68
                            
                            
                            
                            625,000
                            
                            
                            
                            2.683.00-3.99
                            
                            
                            
                            92,500
                            
                            4.9
      years
                            
                            
                            3.50
                            
                            
                            
                            92,500
                            
                            
                            
                            3.50$
                            .01-5.50
                            
                            
                            
                            2,316,760
                            
                            6.2 years
                            
                            $
                            1.71
                            
                            
                            
                            1,825,930
                            
                            
                            $
                            2.00





The fair
value of each warrant granted is estimated on the date granted using the
Binomial pricing model, with the following assumptions for warrants issued in
2007: risk-free interest rate of between 4.6% and 4.99%, expected dividend yield
of zero, expected lives of 3 and 5 years and expected volatility of between
59.76% and 89.54%.  No options or warrants were granted in 2009 or
2010.





NOTE
10 – RESTATEMENT





The
Company has restated its financial statements for the periods ended June 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
                    )




15




EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
10 – RESTATEMENT (continued)





June
30, 2009 Income Statement


As previously
                    reported, June 30,
                    2009
                  
                  
                  Restated, June 30,
                    2009
                  
                  
                  ChangeGross
      profit
                  
                  $
                  296,800
                  
                  
                  $
                  296,800
                  
                  
                  $
                  0Gain
      (loss) on derivative liability
                  
                  $
                  (1,829,343
                  )
                  
                  $
                  525,835
                  
                  
                  $
                  2,355,178Net
      loss
                  
                  $
                  (3,440,136
                  )
                  
                  $
                  (1,084,958
                  )
                  
                  $
                  2,355,178Net
      loss per share
                  
                  $
                  (0.18
                  )
                  
                  $
                  (0.06
                  )
                  
                  $
                  0.12





NOTE
11 – SUBSEQUENT EVENTS





In July
2010, the Company obtained an advance of $155,000 from Peter Ullrich a member of
the Board of Directors of the Company.





In July
2010, the Company received its first purchase orders from an international
beverage company.  The Company will install its CIP systems at three
bottling plants.





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




16


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.


17





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, EAU is now in a position to begin 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.  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.


18





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 $51,162 in cash as of June 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 June 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 June 30, 2010 as all our debt is now due within one
year.  At June 30, 2010, our stockholders’ deficit was
$5,718,721.





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





Revenues
and Net Income





The Company had total
revenues of $139,631 for the three months ended June 30, 2010, which represents
a decrease from the $203,975 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 $50,000 in licensing revenues related to
the exclusive license granted to Water Science, a related party during each
period.





Due to
the change in fair market value of the derivative liability, the Company had net
income of $3,846,465 from continuing operations for the three months ended June
30, 2010, or a gain of $0.19 per share, compared with a net loss from continuing
operations of $221,786, or $0.01 per share for the same period in
2009.  For the three months ended June 30, 2010, the Company
recognized a gain of $4,441,213 as compared to a gain of $579,242 for the three
months ended June 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 “round down” 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 $594,748, or $0.03 per share in 2010 as compared to
a loss of $801,028, 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 include $104,988 in interest
expense, compared to $76,184 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 $581,587 during the three months ended
June 30, 2010, compared to $848,598 during the three months ended June 30,
2009.  General and administrative expense for 2010 consists primarily
of payroll and other compensation expense of $303,360, legal and professional
fees of $53,222, expense related to granting and vesting of stock and options of
$49,257 and insurance expense of $78,361.





Research
and Development





Research
and development expenses incurred during the three month period ended June 30,
2010 decreased $22,981, from $42,938 in 2009 to $19,957 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.


19




Results of
Operationsfor
the Six months ended June 30, 2010 and 2009





Revenues
and Net Income





The Company had total
revenues of $302,033 for the six months ended June 30, 2010, which represents a
slight decrease from the $358,625 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 $100,000 in licensing revenues related to
the exclusive license granted to Water Science, a related party during each
period.





Due to
the change in fair market value of the derivative liability, the Company had net
income of $3,623,194 from continuing operations for the six months ended June
30, 2010, or a gain of $0.18 per share, compared with a net loss from continuing
operations of $1,084,958, or $0.06 per share for the same period in
2009.  For the six months ended June 30, 2010, the Company recognized
a gain of $5,013,561 as compared to a gain of $525,835 for the six months ended
June 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 $1,390,367, or
$0.07 per share in 2010 as compared to a loss of $1,610,793, or $0.09 per share
in 2009.  The current period results include $201,253 in interest
expense, compared to $187,802 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 six months ended
June 30, 2010 as compared to the prior year.  Expenses totaled
$1,331,919 during the six months ended June 30, 2010, compared to $1,598,629
during the six months ended June 30, 2009.  General and administrative
expense for 2010 consists primarily of payroll and other compensation expense of
$757,070, legal and professional fees of $123,543, expense related to granting
and vesting of stock and options of $98,514 and insurance expense of
$161,790.





Research
and Development





Research
and development expenses incurred during the six month period ended June 30,
2010 decreased $30,297, from $117,005 in 2009 to $86,708 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 $51,162 in cash as of June 30, 2010, compared to $181,481 at
December 31, 2009.  We had net income of $3,623,194 for the six months
ended June 30, 2010, compared with net losses of $1,084,958 for the six months
ended June 30, 2009.  The net income (loss) per share for the first
six months of 2010 and 2009 was $0.18 and $(0.06) 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 six month period ended June 30, 2010 was
$775,866, a 41% decrease, compared to $1,325,212 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 closing of the escrow account and the increase in accrued
interest.


20





At June
30, 2010, the Company’s net inventory was $1,929,187, representing a decrease of
approximately $93,000, 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
$5,013,561, due to the expiration of 5,169,231 warrants and changes in the
binomial value of the liability.




The
Company only used $4,653 in cash flows from investing activities during the
period ended June 30, 2010 as compared to $113,334 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 $650,200 for the period
ended June 30, 2010 compared with $1,242,109 provided the Company during the
same period in 2009.  The Company received proceeds of $550,000 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 six months ended June 30, 2010.





We currently do not have
sufficient funds to operate our business without additional
funding.  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 November 2010, which will require cash of $4,150,000,
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.


21





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 will 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.


22





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 June 30, 2010, pursuant to
Exchange Act Rule 15d-15.  Based upon that evaluation, the principal
executive and financial officers concluded that, as a result of a material
weakness related to the accounting for our derivative liability, the Company’s
disclosure controls and procedures were not effective at the reasonable
assurance level.





As
indicated in the Company’s Form 8-K filed on May 24, 2010, management concluded
on May 21, 2010, that it was necessary to restate the Company’s previously filed
financial statements as of and for the year ended December 31, 2009, and the
Company’s previously filed quarterly financial statements for the quarters ended
June 30, June 30, and September 30, 2009. During the recent review of the
Company’s financial statements for the quarter ended March 31, 2010, HJ &
Associates LLC, the Company’s registered independent public accounting firm,
discovered and informed the Company of a misstatement that occurred due to an
input error of the valuation calculation related to the derivative liability
that the liability has been incorrectly calculated. The Company's management has
assessed the effect of the restatement on the Company's disclosure controls and
procedures and internal control over financial reporting, and has determined
that a material weakness exists with respect to our reporting of complex and
non-routine transactions.





A
"material weakness" is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company's annual or interim
financial statements will not be prevented or detected on a timely basis. The
material weakness in our internal control over financial reporting as of
December 31, 2009 existed as we had limited staff that did not allow us to
maintain effective processes and controls over the accounting for and reporting
of complex and non-routine transactions.





Because
of this weakness, management has taken additional steps to ensure the
reliability of our financial reporting.  These steps have included our
internal review that identified revisions to our previously issued financial
statements, additional Audit Committee review, efforts to remediate the material
weaknesses and significant deficiencies in internal control over financial
reporting described below, and the performance of additional procedures by
management with respect to the financial statements contained in this
report.




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.


23




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





Item
3. Defaults Upon Senior Securities





None





Item
4. Reserved





Item
5. Other Information





In May,
June and July 2010, the Company obtained unsecured short term loans of $50,000,
$150,000 and $155,000 from Peter Ullrich, a member of the Board of Directors of
the Company, the documents of which have not been signed and the material terms
of which are not final.  The material terms of the final agreement
will be disclosed in subsequent filings with the Securities and Exchange
Commission.





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)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.




24





SIGNATURES





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





Dated:
August 13, 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)




25