UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended September 30,
  2009





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
      companyx(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 November 16, 2009, the Registrant
had 19,661,168 shares of Common Stock, $0.0001 par value
outstanding.








EAU
TECHNOLOGIES, INC.


QUARTERLY
REPORT ON FORM 10-Q


September
30, 2009





INDEX




PagePART
      I. FINANCIAL INFORMATIONITEM
      1.
                                    Financial
      StatementsBalance
      Sheets – September 30, 2009 and December 31, 2008
                                    3Statements
      of Operations – Three and Nine months ended September 30, 2009 and
      2008
                                    5Statement
      of Stockholders’ Equity (Deficit)
                                    6Statements
      of Cash Flows – Nine months ended September 30, 2009 and
    2008
                                    7Notes
      to Financial Statements
                                    9ITEM
      2.
                                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                    16ITEM
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    23ITEM
      4T.
                                    Controls
      and Procedures
                                    23PART
      II. OTHER INFORMATIONITEM
      1.
                                    Legal
      Proceedings
                                    23ITEM
      1A.
                                    Risk
      Factors
                                    24ITEM
      2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                    24ITEM
      3.
                                    Defaults
      Upon Senior Securities
                                    24ITEM
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    24ITEM
      5.
                                    Other
      Information
                                    24ITEM
      6.
                                    Exhibits
                                    24SIGNATURES
                                    
                                    25




2





PART I -
FINANCIAL INFORMATION





EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS





ASSETS





September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008(Unaudited)
                      
                      
                      (Audited)CURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      137,825
                      
                      
                      $
                      494,612Accounts
      receivable, net
                      
                      
                      31,710
                      
                      
                      
                      8,710Accounts
      receivable – related party, net
                      
                      
                      355,656
                      
                      
                      
                      358,656Accrued
      interest
                      
                      
                      13,125
                      
                      
                      
                      1,875Pre-paid
      expense
                      
                      
                      48,075
                      
                      
                      
                      52,468Note
      receivable, current portion
                      
                      
                      150,000
                      
                      
                      
                      150,000Inventory,
      net
                      
                      
                      2,169,053
                      
                      
                      
                      3,014,503Total
      current assets
                      
                      
                      2,905,444
                      
                      
                      
                      4,080,824PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $129,716 and
      $113,359
                      
                      
                      30,288
                      
                      
                      
                      46,644LEASED
      EQUIPMENT, net of accumulated depreciation of $117,593 and
      $15,156
                      
                      
                      1,010,580
                      
                      
                      
                      200,253OTHER
      ASSETSDeposits
                      
                      
                      10,496
                      
                      
                      
                      10,496Restricted
      cash
                      
                      
                      240,000
                      
                      
                      
                      240,000Intellectual
      property, net
                      
                      
                      91,134
                      
                      
                      
                      87,561Total
      other assets
                      
                      
                      341,630
                      
                      
                      
                      338,057Total
      assets
                      
                      $
                      4,287,942
                      
                      
                      $
                      4,665,778





See notes
to financial statements.


3


EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS (Continued)





LIABILITIES AND
STOCKHOLDERS’ EQUITY (DEFICIT)





September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)CURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    387,585
                    
                    
                    $
                    373,206Accrued
      expenses
                    
                    
                    871,492
                    
                    
                    
                    658,608Warranty
      reserve
                    
                    
                    92,160
                    
                    
                    
                    100,000Current
      portion of deferred licensing revenue – related party
                    
                    
                    191,667
                    
                    
                    
                    200,000Advance
      deposits on machine orders – related party
                    
                    
                    697,500
                    
                    
                    
                    697,500Current
      portion of long-term debt
                    
                    
                    39,892
                    
                    
                    
                    23,581Convertible
      notes payable – related party, net of discounts of $0 and
      $76,754
                    
                    
                    -
                    
                    
                    
                    2,923,246Total
      current liabilities
                    
                    
                    2,280,296
                    
                    
                    
                    4,976,141LONG
      TERM LIABILITIESLong
      term debt, net of current portion
                    
                    
                    17,452
                    
                    
                    
                    39,150Convertible
      notes payable – related party, net of discounts of $0 and
      $76,754
                    
                    
                    3,200,000
                    
                    
                    
                    -Deferred
      licensing revenue – related party
                    
                    
                    -
                    
                    
                    
                    141,667Derivative
      liability – related party
                    
                    
                    11,762,027
                    
                    
                    
                    8,621,940Total
      long term liabilities
                    
                    
                    14,979,479
                    
                    
                    
                    8,802,757Total
      liabilities
                    
                    
                    17,259,775
                    
                    
                    
                    13,778,898STOCKHOLDERS’
      EQUITY (DEFICIT)Common
      stock, $.0001 par value; 50,000,000 shares authorized; 19,886,168 and
      18,285,918 issued and outstanding, respectively
                    
                    
                    1,989
                    
                    
                    
                    1,829Additional
      paid in capital
                    
                    
                    41,363,255
                    
                    
                    
                    39,594,894Accumulated
      deficit
                    
                    
                    (54,337,077
                    )
                    
                    
                    (48,709,843
                    )Total
      stockholders’ equity (deficit)
                    
                    
                    (12,971,833
                    )
                    
                    
                    (9,113,120
                    )Total
      liabilities and stockholders’ equity (deficit)
                    
                    $
                    4,287,942
                    
                    
                    $
                    4,665,778





See notes
to financial statements.


4


EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENTS OF OPERATIONS





Three
      Months Ended
                
                
                Nine
      Months EndedSeptember 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008NET
      SALES – RELATED PARTY
                
                $
                50,000
                
                
                $
                50,000
                
                
                $
                150,000
                
                
                $
                192,620NET
      SALES
                
                
                155,025
                
                
                
                45,625
                
                
                
                413,650
                
                
                
                136,516TOTAL
      SALES
                
                
                205,025
                
                
                
                95,625
                
                
                
                563,650
                
                
                
                329,136COST
      OF GOODS SOLD
                
                
                40,611
                
                
                
                8,958
                
                
                
                102,436
                
                
                
                76,026GROSS
      PROFIT
                
                
                164,414
                
                
                
                86,667
                
                
                
                461,214
                
                
                
                253,110OPERATING
      EXPENSESDepreciation
      and amortization
                
                
                4,778
                
                
                
                17,632
                
                
                
                16,580
                
                
                
                60,055Research
      and development
                
                
                103,391
                
                
                
                67,945
                
                
                
                220,396
                
                
                
                98,734General
      and administrative
                
                
                855,379
                
                
                
                958,554
                
                
                
                2,454,008
                
                
                
                3,095,996Total
      operating expenses
                
                
                963,548
                
                
                
                1,044,131
                
                
                
                2,690,984
                
                
                
                3,254,785LOSS
      BEFORE OTHER INCOME (EXPENSE)
                
                
                (799,134
                )
                
                
                (957,464
                )
                
                
                (2,229,770
                )
                
                
                (3,001,675
                )OTHER
      INCOME (EXPENSE)Interest
      expense
                
                
                (81,049
                )
                
                
                (117,907
                )
                
                
                (268,851
                )
                
                
                (623,526
                )Interest
      income
                
                
                3,829
                
                
                
                800
                
                
                
                11,474
                
                
                
                12,281Gain
      (Loss) on derivative liability
                
                
                (1,310,744
                )
                
                
                298,810
                
                
                
                (3,140,087
                )
                
                
                127,014Other
      income (expense)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                140Total
      other income (expense)
                
                
                (1,387,964
                )
                
                
                181,703
                
                
                
                (3,397,464
                )
                
                
                (484,091
                )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                
                
                (2,187,098
                )
                
                
                (775,761
                )
                
                
                (5,627,234
                )
                
                
                (3,485,766
                )PROVISION
      FOR INCOME TAXES
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -NET
      LOSS
                
                $
                (2,187,098
                )
                
                $
                (775,761
                )
                
                $
                (5,627,234
                )
                
                $
                (3,485,766
                )NET
      LOSS PER SHARE
                
                $
                (0.11
                )
                
                $
                (0.05
                )
                
                $
                (0.30
                )
                
                $
                (0.22
                )WEIGHTED
      AVERAGE OF SHARES OUTSTANDING
                
                
                19,621,494
                
                
                
                16,947,956
                
                
                
                19,074,059
                
                
                
                15,847,466





See notes
to financial statements.


5





EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)





COMMON STOCK
                  
                  
                  ADDITIONALPAID
      IN
                  
                  
                  ACCUMULATEDSHARES
                  
                  
                  AMOUNT
                  
                  
                  CAPITAL
                  
                  
                  DEFICIT
                  
                  
                  TOTALBalance,
      December 31, 2008 (Audited)
                  
                  
                  18,285,918
                  
                  
                  $
                  1,829
                  
                  
                  $
                  39,594,894
                  
                  
                  $
                  (48,709,843
                  )
                  
                  $
                  (9,113,120
                  )Issuance
      of shares for cash at $1.00 per share, to Water Science, a related
      party.
                  
                  
                  1,450,000
                  
                  
                  
                  145
                  
                  
                  
                  1,449,855
                  
                  
                  
                  -
                  
                  
                  
                  1,450,000Issuance
      and vesting of options and warrants for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  248,771
                  
                  
                  
                  -
                  
                  
                  
                  248,771Cancellation
      of shares
                  
                  
                  (24,750
                  )
                  
                  
                  (2
                  )
                  
                  
                  2
                  
                  
                  
                  
                  
                  
                  
                  -Issuance
      of shares of restricted stock to members of the Board of
      Directors
                  
                  
                  150,000
                  
                  
                  
                  15
                  
                  
                  
                  59,985
                  
                  
                  
                  
                  
                  
                  
                  60,000Issuance
      of shares for consulting services
                  
                  
                  25,000
                  
                  
                  
                  2
                  
                  
                  
                  9,748
                  
                  
                  
                  
                  
                  
                  
                  9,750Net
      loss for the nine months ended September 30, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,627,234
                  )
                  
                  
                  (5,627,234
                  )Balance,
      September 30, 2009
                  
                  
                  19,886,168
                  
                  
                  $
                  1,989
                  
                  
                  $
                  41,363,255
                  
                  
                  $
                  (54,337,077
                  )
                  
                  $
                  (12,971,833
                  )





See notes
to financial statements.


6





EAU
TECHNOLOGIES, INC.





UNAUDITED
STATEMENTS OF CASH FLOWS




For the Nine MonthsEnded September 30,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                    
                    $
                    (5,627,234
                    )
                    
                    $
                    (3,485,766
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                    
                    
                    119,015
                    
                    
                    
                    65,708Bad
      debt expense
                    
                    
                    22,500
                    
                    
                    
                    5,092Shares
      issued for services
                    
                    
                    69,750
                    
                    
                    
                    157,373Warrants
      and options issued for services
                    
                    
                    248,771
                    
                    
                    
                    488,910Discount
      of note payable
                    
                    
                    76,754
                    
                    
                    
                    539,473Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                    
                    
                    (45,500
                    )
                    
                    
                    13,315(Increase)
      decrease in accounts receivable – related party
                    
                    
                    3,000
                    
                    
                    
                    (182
                    )(Increase)
      in pre-paid expense
                    
                    
                    4,393
                    
                    
                    
                    4,559(Increase)
      in accrued interest
                    
                    
                    (11,250
                    )
                    
                    
                    -(Increase)
      decrease in inventory
                    
                    
                    40,266
                    
                    
                    
                    (23,717
                    )(Increase)
      decrease in deposits
                    
                    
                    -
                    
                    
                    
                    (66,935
                    )Increase
      (decrease) in accounts payable
                    
                    
                    14,379
                    
                    
                    
                    (301
                    )Increase
      (decrease) in warranty reserve
                    
                    
                    (7,840
                    )
                    
                    
                    (14,000
                    )Increase
      in accrued expenses
                    
                    
                    212,884
                    
                    
                    
                    28,688(Decrease)
      in deferred revenue
                    
                    
                    (150,000
                    )
                    
                    
                    (150,000
                    )Increase
      (decrease) in derivative liability
                    
                    
                    3,140,087
                    
                    
                    
                    (127,014
                    )Net
      cash (used) in operating activities
                    
                    
                    (1,890,025
                    )
                    
                    
                    (2,564,797
                    )CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisition
      of property and equipment
                    
                    
                    (107,580
                    )
                    
                    
                    -Intellectual
      property disbursements
                    
                    
                    (3,795
                    )
                    
                    
                    (16,081
                    )Net
      cash (used) in investing activities
                    
                    
                    (111,375
                    )
                    
                    
                    (16,081
                    )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on notes payable
                    
                    
                    (5,387
                    )
                    
                    
                    (7,851
                    )Proceeds
      from issuance of note payable – related party
                    
                    
                    200,000
                    
                    
                    
                    -Proceeds
      from issuance of common stock – related party
                    
                    
                    1,450,000
                    
                    
                    
                    1,701,500Net
      cash provided by financing activities
                    
                    
                    1,644,613
                    
                    
                    
                    1,693,649NET
      INCREASE (DECREASE) IN CASH
                    
                    
                    (356,787
                    )
                    
                    
                    (887,229
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    494,612
                    
                    
                    
                    1,413,744Cash
      and cash equivalents, end of period
                    
                    $
                    137,825
                    
                    
                    $
                    526,515





See notes
to financial statements.


7


EAU
TECHNOLOGIES, INC.





UNAUDITED STATEMENTS OF CASH
FLOWS


(Continued)





Nine Months EndedSeptember 30,2009
                
                
                2008Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for:Interest
                
                $
                3,613
                
                
                $
                16,550Income
      Taxes
                
                $
                -
                
                
                $
                -Supplemental
      Disclosures of Non-cash Investing and Financing
Activities:Common
      stock issued for services
                
                $
                69,750
                
                
                $
                157,373Reclass
      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, 2008.





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.





NOTE
3 - INVENTORIES





The
composition of inventories is as follows at:





September 30,
                        
                        
                        December 31,2009
                        
                        
                        2008Finished
      goods
                        
                        $
                        977,981
                        
                        
                        $
                        1,828,984Raw
      materials
                        
                        
                        1,591,072
                        
                        
                        
                        1,585,519Allowance
      for obsolete inventory
                        
                        
                        (400,000
                        )
                        
                        
                        (400,000
                        )$
                        2,169,053
                        
                        
                        $
                        3,014,503





NOTE
4 – WARRANTY RESERVE





The
Company warrants its products against defects in materials and workmanship for a
period of three years.  The Company reviews the historical experience
of failure rates and estimates the rate of warranty claims that will be made and
has accrued a warranty reserve for these anticipated future warranty
costs.  If actual results differ from the estimates, the Company would
adjust the estimated warranty liability.  Changes in the warranty
reserve for the nine months ended September 30, 2009 are as
follows:





Warranty
      reserve at beginning of period
                  
                  $
                  100,000Costs
      accrued for additional warranties
                  
                  
                  -Service
      obligations honored
                  
                  
                  (7,840
                  )Warranty
      reserve at end of period
                  
                  $
                  92,160


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 (“Original Warrants”) to
purchase a total of 8.4 million shares of $0.0001 par value common stock of the
Company, at a price of $2.76 per share, held by Water Science.  The
Company granted to Water Science replacement warrants to purchase 8.4 million
shares of common stock at a price of $1.30 per share, with an expiration date of
May 9, 2010.  The Company had a right to require Water Science to
exercise warrants for up to 3,230,769 shares.  During the year ended
2008, the Company required Water Science to exercise all of the options under
the put rights.





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 will accrue 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;
however, if the Lender fails to make any of the installment payments on the
dates set forth above, the conversion price will increase to $3.00 per
share.





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, and pursuant
to SEC guidance, the Company accounts for the warrants and convertible feature
as a derivative liability with changes in fair value being recorded in the
income statement.  As of September 30, 2009 and December 31, 2008, the
value of the derivative liability was $11,762,027 and $8,621,940,
respectively.  The Company recorded a loss of $3,140,087 and a gain of
$127,014 in the change of the derivative liability to fair market value for the
nine month period ended September 30, 2009 and 2008,
respectively.


10





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





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 $150,000 in each of the periods
ended September 30, 2009 and 2008.  This agreement also gives Water
Science the rights to purchase machinery from the Company at cost plus 25
percent.  The Company did not have any sales to Water Science during
the nine months ended September 30, 2009 and had sales of $42,620 for the same
period in 2008.  The Company has received and recorded $697,500 in
advance deposits from Water Science on machine orders at September 30, 2009 and
2008.  In connection with the sales of the machines and products, the
Company has recorded approximately $350,156 in accounts receivable at September
30, 2009.





Convertible Note
Payable -In September 2005, the Company entered into a Senior
Convertible Note with Water Science in exchange for $3,000,000 (see Note
5).  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.  The Company recorded a loss of $3,140,087 and a
gain of $127,014 due to the change in the fair market value for the nine months
ended September 30, 2009 and 2008, respectfully.





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)





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 $150,000 in each of the nine months ended September 30, 2009
and 2008.





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.





Advances–
Periodically throughout the year, the Company advances employees cash for
certain reimbursable expenses.  As of September 30, 2009 and 2008, the
Company had advances to employees in the amount of $5,500 and $8,500,
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 Black-Scholes
model with the following assumptions:  risk free rate of 4.64%,
volatility at 87.06% and the stock price at $1.30.  The value of each
warrant is approximately $1.13 per warrant.  The Company recognized
$102,708 in stock option expense related to the options for the nine months
ended September 30, 2009.





In
November 2007, the Company granted 530,000 options to Douglas Kindred, in
connection with the appointment of Mr. Kindred as Chief Technology
Officer.  The options are for a term of ten (10) years and have an
exercise price of $1.30 per share.  The options vest over a period of
four (4) years.   The warrants were valued using the
Black-Scholes model with the following assumptions:  risk free rate of
4.28%, volatility at 85.99% and the stock price at $1.01.  The value
of each warrant is approximately $0.85 per warrant.  The Company
recognized $91,508 during the period ended September 30, 2009.


11





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
7 – CAPITAL STOCK





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





In May
2009, the Compensation Committee of the Board of Directors of the Company
granted 30,000 shares of restricted stock for each director, effective on May
14, 2009. The restricted stock will vest ratably over a period of two years from
the date of grant. These grants were made pursuant to the annual directors’
compensation program approved by the Board in December 2007.





In
November 2008, 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
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. As of
December 31, 2008, the Company had received $1,050,000 under the
agreement.  As of September 30, 2009, the Company received the
remaining payments of $1,450,000 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 purchase of the common stock was
scheduled to occur in four monthly installments of $250,000 on April 15, 2009,
$250,000 on May 15, $250,000 on June 15 and a final installment of $200,000 on
July 15, 2009.  As of the date of this report, the Company has
received payment of all of these installments.  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.





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





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


12





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
8 – GOING CONCERN





The
Company has incurred significant losses and has had negative cash flows from
operations.  As a result, at September 30, 2009, 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.  The Company is currently seeking
additional short-term funding to provide liquidity through the first half of
2010.  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 $2,000,000 for the upcoming
twelve months to execute our business plan and an additional $3,000,000, plus
interest, in order to satisfy our senior note payable with Water Science, which
becomes 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, 2008
with an explanatory paragraph regarding the Company's ability to continue as a
going concern. The financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. However, as a
result of recurring operating losses, such realization of assets and
satisfaction of liabilities are subject to uncertainty, which raises substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Stock
Based-Compensation Expense





Stock-based
compensation is calculated according to FASB ASC Topic 718, Compensation — Stock
Compensation, which requires a fair-value-based measurement method to
account for stock-based compensation. The Company uses the Black-Scholes
valuation formula, which is a closed-form model that uses an equation to
determine the estimated fair value of stock options.  Stock-based
compensation expense recognized for the nine month period ended September 30,
2009 and 2008 was $248,771 and $488,910, respectively, related to employee stock
options issued and vesting during the period.


13





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
9 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





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





FortheThreeMonthsEnded
                
                
                FortheNineMonthsEndedSeptember 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      Loss (numerator)
                
                $
                (2,187,098
                )
                
                $
                (775,761
                )
                
                $
                (5,627,234
                )
                
                $
                (3,485,766
                )Shares
      (denominator)
                
                
                19,621,494
                
                
                
                16,947,956
                
                
                
                19,074,059
                
                
                
                15,847,466Per
      share amount
                
                $
                (0.11
                )
                
                $
                (0.05
                )
                
                $
                (0.30
                )
                
                $
                (0.22
                )





The
Company’s outstanding stock options have been excluded from the basic net loss
per share calculation for the three month period ended September 30, 2009 and
2008, because they are anti-dilutive.





The
following table is a summary of the status of the warrants and options granted
and outstanding at September 30, 2009:


Number
                      
                      
                      Weightedof Options
                      
                      
                      Average Exerciseand Warrants
                      
                      
                      PriceOutstanding
      at beginning of period
                      
                      
                      8,387,867
                      
                      
                      $
                      1.60Granted
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      -
                      
                      
                      
                      -Expired
                      
                      
                      (209,095
                      )
                      
                      
                      2.80Outstanding
      at end of period
                      
                      
                      8,178,772
                      
                      
                      $
                      1.56





A summary
of the status of the warrants outstanding at September 30, 2009 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
                                              
                                              
                                              210,000
                                              
                                              0.7
      years
                                              
                                              $
                                              0.06
                                              
                                              
                                              
                                              210,000
                                              
                                              
                                              $
                                              0.061.00-1.99
                                              
                                              
                                              6,724,491
                                              
                                              1.8
      years
                                              
                                              
                                              1.30
                                              
                                              
                                              
                                              5,766,796
                                              
                                              
                                              
                                              1.302.00-2.99
                                              
                                              
                                              720,000
                                              
                                              4.9
      years
                                              
                                              
                                              2.56
                                              
                                              
                                              
                                              720,000
                                              
                                              
                                              
                                              2.563.00-3.99
                                              
                                              
                                              115,000
                                              
                                              5.3
      years
                                              
                                              
                                              3.46
                                              
                                              
                                              
                                              115,000
                                              
                                              
                                              
                                              3.464.00-4.99
                                              
                                              
                                              255,000
                                              
                                              0.1
      years
                                              
                                              
                                              4.00
                                              
                                              
                                              
                                              255,000
                                              
                                              
                                              
                                              4.005.00-5.50
                                              
                                              
                                              154,281
                                              
                                              0.4 years
                                              
                                              
                                              5.00
                                              
                                              
                                              
                                              154,281
                                              
                                              
                                              
                                              5.00$.01-5.50
                                              
                                              
                                              8,178,772
                                              
                                              2.1 years
                                              
                                              $
                                              1.56
                                              
                                              
                                              
                                              7,221,077
                                              
                                              
                                              $
                                              1.60


The fair
value of each warrant granted is estimated on the date granted using the
Black-Scholes pricing model, with the following assumptions for warrants issued
in 2007: risk-free interest rate of between 4.6% and 4.99%, expected dividend
yield of zero, expected lives of 3 and 5 years and expected volatility of
between 59.76% and 89.54%.  No options or warrants were granted in
2008 or 2009.


14





EAU
TECHNOLOGIES, INC.





CONDENSED
NOTES TO UNAUDITED FINANCIAL STATEMENTS





NOTE
10 – SUBSEQUENT EVENTS





In
October 2009, the Company received $200,000 in cash from a related party on the
next installment of the note payable to Peter Ullrich.





In 2008,
EAU signed an 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 results that it complied with Category 1
status.  The plant has indicated that it intends to terminate the
agreement as of November 23, 2009.  Management is currently in
negotiations to continue operations.  Should the negotiations fail to
produce an ongoing relationship, management estimates that the loss on removing
the equipment from the plant to be approximately $150,000 to
$200,000.  However, at this time the system is still being utilized by
the plant.





Management
evaluated events through November 16, 2009, for consideration as a subsequent
event to be included in our September 30, 2009 financial statements issued
November 16, 2009.


15


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. These fluids have various commercial applications and may
be used in commercial food processing and organic or non-organic agricultural
products that clean, disinfect, remediate, hydrate and moisturize. The processes
for which these fluids may be used are referred to in this Report (the “Report”)
as the “EW Technology.”  For example, we believe that our food and
agricultural treatment products potentially may be used to systemically treat
all facets and phases of the food chain, from soil to animal feed to meat
processing, 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 a strategic partner 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, 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 industry leaders who 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.  We recently engaged the University of
Georgia to perform additional tests on dairy cows.


16


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
Service (the enforcement arm of the USDA; “FSIS”) 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.  On April 29, 2009, EAU received a letter of “no objection”
from the USDA for our installation at Fieldale Farms to be our Phase II
facility. Assuming that we are able to duplicate earlier results, which is not
guaranteed, we expect to receive approval for full commercialization of
Empowered WaterTM as an OLR option. With this approval there will be no
limitations to leasing our technology as an OLR agent.





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, will make EAU’s products appealing to the
industry. While it will take time for the poultry industry to fall into
compliance with this new rating system, EAU now has a tangible reason for
poultry plants to seriously consider our EW technology for its pathogen
remediation process.





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 results that it complied with Category 1
status.  The plant has indicated that it intends to terminate the
agreement as of November 23, 2009.  Management is currently in
negotiations to continue operations.  Should the negotiations fail to
produce an ongoing relationship, management estimates that the loss on removing
the equipment from the plant to be approximately $150,000 to
$200,000.  However, at this time the system is still being utilized by
the plant.  EAU received a letter of “no objection” from the USDA for
our installation at Fieldale Farms to be our Phase II facility.  We
have completed the OLR data gathering stage and have submitted our findings to
the USDA for OLR approval.





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 as well as an
approved vendor 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 are working 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.


17





We have
obtained patent protection on four separate uses of electrolyzed fluids (poultry
processing, cleaning and disinfecting eggs, carpet cleaning and mold
remediation).  The uses are process patents and 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.





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





Financial Position and
Results of Operations





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





Financial
Position





The
Company had $137,825 in cash as of September 30, 2009, compared to $494,612 at
December 31, 2008.  We also had $240,000 in restricted cash related to
an escrow agreement.  The Company has received and recorded $697,500
in advance deposits from Water Science on machine orders at September 30,
2009.  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 $39,150 at December
31, 2008 to $17,452 at September 30, 2009.  At September 30, 2009, our
stockholders’ deficit was $12,971,833.





Results of
Operationsfor
the Three months ended September 30, 2009 and 2008





Revenues
and Net Income





The
Company had total revenues of $205,025 for the three months ended September 30,
2009, which represents an increase of 114% from the $95,625 in total revenues
for the same period one year earlier.  The increase is due to the
increased fees the Company is collecting on its leased systems and maintenance
fees from previously sold machines.  In an effort to streamline our
corporate focus and our business plan, the Company is no longer marketing
products that are not directly related to its core competencies, which is the
development of Empowered WaterTM technologies.





Net loss
from continuing operations for the three months ended September 30, 2009 was
$2,187,098, or a loss of $0.11 per share, compared with a net loss from
continuing operations of $775,761, or $0.05 per share for the same period in
2008.  The majority of the increased net loss is due to the recording
of the derivative liability to fair market value, which is based on calculating
the Black Scholes value for the liability.  For the three months ended
September 30, 2009, the Company recognized a loss of $1,310,744 on the
derivative liability as compared to a gain of $298,810 for the three months
ended September 30, 2008.  The current quarter net loss includes
$81,049 in interest expense, compared to $117,907 in 2008.  This is
due to interest expense related to the senior note payable entered into in
September 2005.  During the current period the discount of the note
was fully expensed.





General
and Administrative Expenses





The
Company’s general and administrative expenses totaled $855,379 during the three
months ended September 30, 2009, compared to $958,554 during the three months
ended September 30, 2008, for a decrease of $103,175.  General and
administrative expense for 2009 consists primarily of payroll and other
compensation expense ($344,910), legal and professional fees ($136,083), expense
related to granting of stock and options ($92,369) and insurance expenses
($74,075).


18


Research
and Development





Research
and development expenses incurred during the three month period ended September
30, 2009 increased $35,446, from $67,945 in 2008 to $103,391 in
2009.  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.





Results of
Operationsfor
the Nine months ended September 30, 2009 and 2008





Revenues
and Net Income





The
Company had total revenues of $563,650 for the nine months ended September 30,
2009, which represents an increase of 71% from the $329,136 in total revenues
for the same period one year earlier.  The increase is due to the
increased fees the Company is collecting on its leased systems and maintenance
fees from previously sold machines.  In an effort to streamline our
corporate focus and our business plan, the Company is no longer marketing
products that are not directly related to its core competencies, which is the
development of Empowered WaterTM technologies.





Net loss
from continuing operations for the nine months ended September 30, 2009 was
$5,627,234, or a loss of $0.30 per share, compared with a net loss from
continuing operations of $3,485,766, or $0.22 per share for the same period in
2008.  The majority of the increased net loss is due to the recording
of the derivative liability to fair market value, which is based on calculating
the Black Scholes value for the liability.  The terms of our
agreements with Water Science and Peter Ullrich were amended in August 2009,
which caused additional accruals.  For the nine months ended September
30, 2009, the Company recognized a loss of $3,140,087 on the derivative
liability as compared to a gain of $127,014 for the nine months ended September
30, 2008.  Excluding the loss on the derivative liability the Company
had a net loss of $2,487,147, or $0.13 per share.  The current quarter
net loss includes $268,851 in interest expense, compared to $623,526 in
2008.  This is due to interest expense related to the senior note
payable entered into in September 2005.  During the current period the
discount of the note was fully expensed.





General
and Administrative Expenses





The
Company’s general and administrative expenses totaled $2,454,008 during the nine
months ended September 30, 2009, compared to $3,095,996 during the nine months
ended September 30, 2008, for a decrease of $641,988.  General and
administrative expense for 2009 consists primarily of payroll and other
compensation expense ($1,050,985), legal and professional fees ($409,575),
expense related to granting of stock and options ($258,522) and insurance
expenses ($219,788).





Research
and Development





Research
and development expenses incurred during the nine month period ended September
30, 2009 increased $121,662, from $98,734 in 2008 to $220,396 in
2009.  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 $137,825 in cash as of September 30, 2009, compared to $494,612 at
December 31, 2008.  We have had continuing operating losses of
$5,627,234 for the nine months ended September 30, 2009, compared with operating
losses of $3,485,766 for the nine months ended September 30,
2008.  The net loss per share for the first nine months of 2009 and
2008 was $0.30 and $0.22 per share, respectively.  The majority of the
decrease is attributable to the recording of the derivative liability to fair
market value as described above.


19


Net cash
used in operating activities in the nine month period ended September 30, 2009
was $1,890,025, a 26% decrease, compared to $2,564,797 for the same period in
2008.  The majority of the cash used was for normal operating
expenses.  The majority of the remaining changes were non-cash
changes, such as a decrease in deferred revenue, increase in accounts receivable
and the recognition of expenses related to stock options.





At
September 30, 2009, the Company’s net inventory was $2,169,053, representing a
decrease of approximately $845,000, or 28% from the $3,014,503 on hand at
December 31, 2008.  The Company is in multiple tests of our equipment
and has included the machines in inventory until they are sold and begin
producing revenues.  During the first nine months of 2009 we completed
the installation of a poultry system and a dairy system and have removed the
systems from inventory and included them in property and equipment.





The
operating outflow of cash was reduced by the Company issuing warrants and stock
options in lieu of cash during the quarter of $248,771.  The Company
recognized a non-cash increase from the discounting of the Company’s note
payable to Water Science, LLC of $76,754.  (See Note 5 to the
Company’s financial statements.)  Further, the Company recognized a
non-cash increase in the derivative liability of $3,140,087, due to changes in
the Black-Scholes value of the liability.





The
Company used $111,375 in cash flows from investing activities during the period
ended September 30, 2009 as compared to $16,081 used in the same period in
2008.  The cash flows from investing activities consisted of
expenditures made for purchase of equipment ($107,580) and expense related to
intellectual property ($3,795).





Cash
flows from financing activities provided the Company $1,644,613 for the period
ended September 30, 2009 compared with $1,693,649 provided the Company during
the same period in 2008.  The Company received proceeds of $1,450,000
from the issuance of stock during the nine months ended September 30,
2009.





We
currently do not have sufficient funds to operate our business without
additional funding.  The Company is currently seeking additional short
term funding to provide liquidity through the first half of 2010.  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 note payable with Water Science, which was extended in August 2009,
will become due in November 2010, which will require cash of $3,000,000, plus
interest, in order to satisfy the debt, if the note is not converted into common
stock.  We anticipate that we may need an additional $2,000,000 or
more in future funding to execute our business plan over the next twelve months.
Moreover, if we able to expand our sale of 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, 2008, 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
2009.




20




Recent Accounting
Pronouncements





Accounting Standards Codification
(ASC 105):In
June 2009, the Financial Accounting Standards Board (FASB) issued Statement
No. 168 –The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles a replacement of FASB Statement No. 162(the
“Codification”).The
Codification, which was launched on July 1, 2009, became the single source
of authoritative non-governmental U.S. generally accepted accounting
principles (GAAP), superseding various existing authoritative accounting
pronouncements. The Codification eliminates the GAAP hierarchy contained in
Statement 162 and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. This Codification is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. There are no changes to our consolidated financial
statements due to the implementation of the Codification other than changes in
reference to various authoritative accounting pronouncements in our consolidated
financial statements.




Business Combinations (ASC
805):In
January 2009, the Company adopted Business Combinationschanging the method of applying the acquisition method in a number of
significant aspects. The standard also amends Income Taxes, such that
adjustments made to valuation allowances on deferred taxes and acquired tax
contingencies associated with acquisitions that closed prior to the effective
date of Business
Combinations would also apply the provisions of Business Combinations. The
standard was effective on a prospective basis for all acquisitions on or after
January 1, 2009 and does not have a significant impact on the Company’s
financial statements.





Fair Value Measurements and
Disclosures (ASC 820):In
September 2009, an update was made toFair Value Measurements and
Disclosures – “Investments in Certain Entities that Calculate Net Asset
Value per Share (or Its Equivalent).” This update permits entities to
measure the fair value of certain investments, including those with fair values
that are not readily determinable, on the basis of the net asset value per share
of the investment (or its equivalent) if such net asset value is calculated in a
manner consistent with the measurement principles inFinancial Services-Investment
Companies as of the reporting entity’s measurement date. The update also
requires enhanced disclosures about the nature and risks of investments within
its scope that are measured at fair value on a recurring or nonrecurring basis.
Effective for interim and annual periods ending after December 15, 2009,
the Company is currently evaluating the effect that adoption of this update will
have, if any, on its financial statements.





In August
2009, an update was made to Fair Value Measurements and
Disclosures – “Measuring Liabilities at Fair Value.” This update permits
entities to measure the fair value of liabilities, in circumstances in which a
quoted price in an active market for an identical liability is not available,
using a valuation technique that uses a quoted price of an identical liability
when traded as an asset, quoted prices for similar liabilities or similar
liabilities when traded as assets or the income or market approach that is
consistent with the principles of Fair Value Measurements and
Disclosures. Effective upon issuance, the Company has determined the
update does not currently have an impact on its financial
statements.





In April
2009, the FASB provided additional guidance in Fair Value Measurements and
Disclosuresfor estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased and on
identifying circumstances that indicate a transaction is not orderly. The
guidance emphasizes that the objective of a fair value measurement remains the
same. Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sales) between market participants at the measurement
date under current market conditions. This guidance is effective for interim and
annual reporting periods ending after June 15, 2009. The Company believes
the adoption of this guidance has no impact on its financial
statements.


21


Subsequent Events (ASC
855):In
May 2009, the FASB issued Subsequent Events
establishing general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
Subsequent Events sets
forth the period after the balance sheet date that entities should evaluate
events of transactions that may occur for potential recognition or disclosure in
the financial statements, circumstances under which entities should recognize
and the disclosures that should be made about events or transactions that occur
after the balance sheet date. Effective for interim and annual periods ending
after June 15, 2009, we adopted this standard for our quarter ended
June 30, 2009, and the adoption did not have a material impact on our
results of operations, financial position or cash flows.





Revenue Recognition (ASC
605):In
October 2009, an update was made to Revenue Recognition – “Multiple-Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force” and
the corresponding Software—“Certain Revenue Arrangements That
Include Software Elements – a consensus of the FASB Emerging Issues Task Force.”The update to Revenue
Recognition removes the objective-and-reliable-evidence-of-fair-value
criterion, replaces references to “fair value” with “selling price”, provides a
hierarchy that entities must use to estimate the selling price, eliminates the
use of the residual method for allocation, and expands the ongoing disclosure
requirements. The Software update changes the
accounting model for revenue arrangements and provides guidance on how a vendor
should allocate arrangement consideration to deliverables that includes both
tangible products and software. Both standards are effective prospectively for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. The adoption of this standard is not
expected to have a material impact on our 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.
  22


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, 2008 and our other SEC reports. Based on actual
experience and business development, the Company may alter its marketing,
capital expenditure plans or other budgets, which may in turn affect the results
of operations. In light of the significant uncertainties inherent in the
forward-looking statements included therein, the inclusion of any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans will be achieved.





Item
3.   Quantitative and Qualitative
Disclosures About Market Risk





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





Item
4T.   Controls and
Procedures





Disclosure Controls and
Procedures





The
Company has evaluated, with the participation of the Company’s principal
executive and principal financial officers, the effectiveness of the issuer’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2009,
pursuant to Exchange Act Rule 15d-15.  Based upon that evaluation, the
principal executive and financial officers concluded that the Company’s
disclosure controls and procedures were effective at the reasonable assurance
level.





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





Changes to Internal Control Over
Financial Reporting





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





PART
II – OTHER INFORMATION





Item
1. Legal Proceedings





None


23





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. Submission of Matters to a Vote of Security Holders





There
were no matters submitted to a vote of stockholders during the third quarter of
2009.





Item
5.  Other Information





None





Item
6.  Exhibits





EXHIBIT NO.
                  
                  DESCRIPTION OF EXHIBIT3(i).1
                  
                  Certificate
      of Incorporation (Incorporated by reference from registration statement on
      Form SB-1 filed with the SEC on July 29, 2002 (File No. 333-86830)3(i).2
                  
                  Certificate
      of Amendment of Certificate of Incorporation (Incorporated by reference
      from registration statement on Form SB-1 filed with the Securities and
      Exchange Commission on July 29, 2002 (File No. 333-86830)3(i).3
                  
                  Certificate
      of Amendment of Certificate of Incorporation (Incorporated by reference
      from current report on Form 8-K filed with the Securities and Exchange
      Commission on January 17, 2007)3(ii).1
                  
                  Amended
      and Bylaws (Incorporated by reference from registration statement on
      current report on Form 8-K filed with the Securities and Exchange
      Commission on September 12, 2007)10.1
                  
                  Second
      Amendment to Second Amended and Restated Senior Secured Convertible
      Promissory Note dated August 27, 2009, between the Company and Water
      Science LLC. (Incorporated by reference to Ex. 10.1 to the Company’s Form
      8-K filed with the Securities and Exchange Commission on September 2,
      2009)10.2
                  
                  $600,000
      Loan Agreement dated August 27, 2009, between the Company and Peter
      Ullrich.  (Incorporated by reference to Ex. 10.2 to the
      Company’s Form 8-K filed with the Securities and Exchange Commission on
      September 2, 2009)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:
November 16, 2009





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