THE
UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)


x           ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
fiscal year ended: December 31, 2008




o           TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the
transition period from _________________ to _________________




Commission
File Number: 000-51807




EAU
      TECHNOLOGIES, INC.Delaware
                (Name
      of Registrant in Our Charter)
                87-0654478(State
      of Incorporation )
                2842
                (I.R.S.
      Employer Identification No.)(Primary
      Standard Industrial
                  Classification
      Code Number)Wade
      R. Bradley1890
      Cobb International Blvd
                
                1890
      Cobb International BlvdSuite
      A
                
                Suite
      AKennesaw,
      Georgia 30152
                
                Kennesaw,
      Georgia 30152(678)
      388-9492
                
                (678)-388-9492(Address
      and telephone number
                  of
      Principal Place of Business)
                
                (Name,
      address and telephone
                  number
      of agent for service)




Securities
      registered under Section 12(b) of the Act:Title
      of each class
                Name
      of each exchange on which registeredNone
                None
  Securities
      registered under Section 12(g) of the Act:Common Stock, $0.0001
      par value(Title
      of class)




Indicate
by check mark if the Registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act).


Yes o  No x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o  No x





Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, 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 o









Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer”  “accelerated
filer” and smaller reporting company” in Rule 12b-2 of the Act (Check
one):





Large
      accelerated filer o
              
              Accelerated
      filer oNon-accelerated
      filer o
              
              Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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





At
March 26, 2009, 18,785,918 shares of the Registrant’s common stock, $0.0001
par value per share, were outstanding.  The aggregate market value of
shares of common stock held by nonaffiliates as of June 30, 2008, was
$8,130,605.




Documents
Incorporated By Reference: None







TABLE OF
CONTENTS
  Page
  PART
I
 
 ITEM
      1.
                              BUSINESS.
                              
                              2ITEM
      1A
                              RISK
      FACTORS.
                              
                              9ITEM
      2.
                              PROPERTY.
                              
                              16ITEM
      3.
                              LEGAL
      PROCEEDINGS.
                              
                              16ITEM
      4.
                              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS.
                              
                              16
  PART
II
 ITEM
      5.
                                      MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES.
                                      
                                      17ITEM
      6
                                      SELECTED
      FINANCIAL DATA.
                                      
                                      19ITEM
      7.
                                      MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
                                      
                                      19ITEM
      7A
                                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                                      
                                      24ITEM
      8.
                                      FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA
                                      
                                      24ITEM
      9.
                                      CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.
                                      
                                      24ITEM
      9A.
                                      CONTROLS
      AND PROCEDURES.
                                      
                                      24ITEM
      9B
                                      OTHER
      INFORMATION
                                      
                                      26
  PART
III
 ITEM
      10.
                                DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION
      16(a) OF THE EXCHANGE ACT.
                                
                                27ITEM
      11.
                                EXECUTIVE
      COMPENSATION.
                                
                                31ITEM
      12.
                                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.
                                
                                36ITEM
      13.
                                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTO
      INDEPENDENCE.
                                
                                38ITEM
      14.
                                PRINCIPAL
      ACCOUNTING FEES AND SERVICES.
                                
                                41
 
 PART
IV
 
 ITEM
      15.
                          EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
                          
                          42SIGNATURES
                          
                          
                          45









CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS




THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A “SAFE HARBOR” FOR
FORWARD LOOKING STATEMENTS.  This Form 10-K contains statements that
are not historical facts. These statements are called “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934.  These statements
involve important known and unknown risks, uncertainties and other factors and
can be identified by phrases using “estimate,” “anticipate,” “believe,”
“project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should”
and similar expressions or words.  Our future results, performance or
achievements may differ materially from the results, performance or achievements
discussed in the forward-looking statements.  There are numerous
factors that could cause actual results to differ materially from the results
discussed in forward-looking statements, including:





·
            Our
      ability to receive previously committed funds and to raise investment
      capital necessary to continue to fund our operations and product
      development activities.





·
            Our
      ability to adequately manage and fund the development of our
      business.





·
            The
      introduction of new laws, regulations or policies that could affect our
      products or our business practices.  These laws, regulations or
      policies could impact our industry as a whole, or could impact only those
      portions in which we are currently
active.





·
            Our
      ability to continue to develop our products and to develop products and
      services that will be accepted by our
customers.





·
            Changes
      in economic conditions, including changes in interest rates, financial
      market performance and our industry.  These types of changes can
      impact the economy in general, resulting in a downward trend that impacts
      not only our business, but all companies with which we compete; or, the
      changes can impact only those parts of the economy upon which we rely in a
      unique manner.





·
            Changes
      in relationships with major customers and/or suppliers: an adverse change
      in our relationships with major customers and/or suppliers would have a
      negative impact on our earnings and financial
  position.





·
            Our
      ability to protect our intellectual property and trade secrets in order to
      maintain an advantage over our
competitors.





·
            Our
      failure to achieve and maintain effective internal control over financial
      reporting.





·
            Factors
      that we have discussed in previous public reports and other documents
      filed with the Securities and Exchange
  Commission.





This list
provides examples of factors that could affect the results described by
forward-looking statements contained in this Form 10-K.  However, this
list is not intended to be exhaustive; many other factors could impact our
business, and it is impossible to predict with any accuracy which factors could
result in which negative impacts. Although we believe that the forward-looking
statements contained in this Form 10-K are reasonable, we cannot provide you
with any guarantee that the anticipated results will be achieved. All
forward-looking statements in this Form 10-K are expressly qualified in their
entirety by the cautionary statements contained in this section, and you are
cautioned not to place undue reliance on the forward-looking statements
contained in this Form 10-K.  In addition to the risks listed above,
other risks may arise in the future, and we disclaim any obligation to update
information contained in any forward-looking statement.









PART
I




ITEM
1.  BUSINESS




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 processingand 4) agricultural grow-out and
processing (“Primary
Markets”).  As of
the date of thisReport, 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 trialsand
completing commercial installationsthat will lead to partnerships with
industry leaders who can assist in rolling the technology out on a large
scale.





We have obtained patent protection on
threeseparateusesof electrolyzed fluids(cleaning and disinfecting eggs, carpet
cleaning and mold remediation).  Those patents are related
to how the fluids are used and how they are stabilized for use in different
applications. Additionally, we haveapatent pending onthe electrolysis equipment
andseveral provisional
patent pending applications filed to protect new processes and products, as
described herein.





2




Products
and Related Markets




EW
Technology





We intend
to lease generators that create electrolyzed fluids that are produced on-site at
commercial processing facilities (“CIP Systems”), particularly in the food
products sectors that require high volumes of non-toxic cleaning fluids. This
market niche should allow us to exploit the fact that our non-toxic products are
more effective than most toxic chemical treatments at typically used
concentration levels.  Lease rates will be based on volumes needed as
well as the complexity of the system needed for different
applications.  As of the date of this Report, generators have been
sold on a commercial basis as well as continuing trials in multiple new
commercial applications.  Other than existing agreements in place, EAU
does not intend to sell its equipment to the markets it is
entering.





Dairy
Cattle.The
Company commenced hydration and production tests on dairy cattle in
2006.  Initial results indicate a possible increase in milk production
and milk fat while maintaining the protein content.In August 2008, we reached an agreement
with a dairy located inGeorgiato begin paying for the use of our
equipment.EAU is currently receiving minimal
revenues from three separate dairies in a commercial
capacity.We
will continue to do more clinical research and field testing in thedairy market.





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 ABCResearch, Inc., inGainesville,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.  EAU has submitted results obtained from its installation in
upstate New York for phase II of the OLR Certification to the USDA and is
awaiting approval of those results. The same regulatory body has approved our
third installation as the site where our phase III data will be
gathered.  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 incentives to invest in new technologies to
improve the safety and cleanliness of food products.





In
February 2008, a regulatory change occurred that may increase those
incentives.  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 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.




3




In July 2008, we installed our pathogen
remediation equipmenton a
test basisat a poultry
processor in upstateNew
Yorkandwe were able to gather the necessary
data for OLR certification. In 2008,EAU signed an agreement with a large
poultry producer in northernGeorgiato install our equipment at their
facility.We
have completed the installation of our system andhave shown positive results.We began receiving revenues
of approximately $27,500 per month from this facility in February
2009.  We are currently awaiting approval from the USDA to begin the
final OLR certification testing.  We anticipate that it will be
several months before we will have the OLR testing complete.





Clean in
Place.Inthe third quarter of
2008we installed our
equipment to test a clean-in-place (CIP) application.  This test is
currently under way with a
major international beverage bottling company. There are three stages of this
trial that are ongoing simultaneously: 1) Syrup tanks; 2) Bag in box; 3)
Bottling. The purpose of the trial is to identify whether EAU’s non-toxic ambient temperature
Empowered Waters can replace current 3-5
step CIP processes. In order to become an approved technology as well as an
approved vendor, EAU will have to continue to show good antimicrobial efficacy,
water savings, and improved CIP efficiency. This installationdoes not generate any
revenues.  We expect it will be several months before results of all
phases of the tests are completed. The customer is not obligated to any
payments, and a final agreement would need to be negotiated.





Environmental
remediation.  Environmental remediation is a multi-billion
dollar industry that consists of home and commercial cleanup and reconstruction,
generally following disasters such as floods or fires.  The Company
believes that its technology can be used for mold remediation.  The
Company’s electrolyzed fluids can be employed to kill mold spores and break down
associated mycotoxins.  Early in 2009 EAU received an issued patent
for the use of Empowered WaterTM in mold remediation.





EW Fluids.EW
Fluids can have varying strength and properties.  We have created
products by researching and testing the cleaning and sanitizing characteristics
of EW Fluids with varying electrical charges, pH levels and ppm (parts per
million) of hypochlorous acid and sodium hydroxide.  We are able to
create new applications for electrolyzed water by producing various models of
our electrolyzing machines, which can create electrolyzed water to meet the
needs of specific markets and their application requirements.





The versatility of ourEWequipmentis unique in the
marketplace.  Beyond our initial focus in ourfourPrimary Markets, ourEWFluids have potential uses inmany other
areas.The
Company produces its electrolyzed fluids through an advanced continuous-flow
electrolysis process using the basic raw materials of water, electricity, and
sodium chloride (salt).  EAU’s generators produce the followingEWFluids:





·
            Primacide A is a
      disinfecting and sanitizing fluid that kills bacteria; yeast; molds;
      viruses, including e-coli, salmonella, staphylococcus, streptococcus,
      lysteria, campylobacter, vibrio vulnificus; and hundreds of other
      organisms.  It is highly oxidative and acidic due to its pH of
      2.4 and positive 1150 millivolt (one thousandth of a volt) ORP (oxidative
      reduction potential) and hypochlorous acid concentration of 10 to 200
      ppm.  Primacide A can be applied to a wide variety of
      surfaces.  Hands sprayed with Primacide A and then wiped with a
      micro fiber cloth were found to have less residual bacteria and other
      microbes than hands cleaned using 62% alcohol.  Tests performed
      by the University of Georgia Food Science Department indicated that
      Primacide A can be used to sanitize and wash meat carcasses, strawberries,
      lettuce, cabbage, carrots and other vegetables.  Surfaces such
      as floors in hospital operating rooms, bench tops, treatment tables,
      cutting boards and other surfaces can be effectively sanitized by cleaning
      with Primacide A.  Further tests performed at the University of
      Georgia Poultry Science Department have established successful and
      dramatic log reductions of organisms in chicken chillers and also in
      in-line spraying. We have filed and received patent protection for the
      washing and sanitizing of eggs and mold remediation and expect to receive
      additional patent protection for other uses of Primacide A.  EAU
      has completed successful commercial installations as well as trials in the
      field to further validate the use of Primacide A as a
      disinfectant.




4




·
            Primacide B is an
      alkaline based cleaner.  Primacide B is created in the
      electrolysis process with a sodium hydroxide ion attached to the oxygen
      and hydrogen molecules.  It emulsifies oils, fats and other
      lipids, but has no surfactant base and therefore leaves no residue when
      used to clean surfaces.  It has a pH of 11.0 to 11.5, and is
      therefore very alkaline.  Its alkaline nature and its negative
      (960) millivolt ORP result in a product that is effective in emulsifying
      oil and grease.  Primacide B is primarily a cleaner with some
      bacteria killing properties, but is significantly slower and less
      effective as an anti-bacterial agent than Primacide A.  We have
      submitted provisional patent applications to the United States Patent and
      Trademark Office to approve Primacide B for many uses.  We have
      received a patent for using Primacide B in carpet cleaning.  We
      recently applied to the U.S. Patent and Trademark Office for a utility
      patent relating to Primacide A and Primacide B as cleaners and sanitizers
      of all hard surfaces.





·
            Primacide C is a product
      that was developed by the University of Georgia by Dr. Yen Con Hung and
      Company executives to stabilize acid water (Primacide A). This process has
      been submitted for patent protection and is currently
      pending.  We license this technology from the University of
      Georgia.  This product is useful in applications ranging from
      spraying on produce in grocery stores to consumer products requiring a
      longer shelf life.  Recently we have modified the license
      agreement to reflect the current state of our business relationship with
      the University of Georgia Research Foundation, the department that
      commercializes UGA’s technologies.  This agreement allows EAU to
      continue to aggressively market and develop uses of Primacide C for
      numerous applications.  Early in 2009 EAU
      received an issued patent for the use of Empowered WaterTM (both Primacide
      A and C) in mold
remediation.







·
            Dairy Drinking
      Water– The Company
      commenced hydration and production tests on dairy cattle in
      2006.  Initial results indicate a
      possible increase in milk production and milk fat while maintaining the
      protein content.    The Company has expanded its
      investment into the application of its technology in the dairy
      channel.  Multiple trials and University studies arebeing either
      planned or implemented to validate early results. EAUis currently inthreecommercial
      installations.





Agriculture





In 2006
we made initial sales to Water Science, LLC, a Florida
limited liability
company  (“Water
Science”)for the Latin American
markets.  Water Science is a major shareholder of the Company and its
managing member, Peter Ullrich, is a director of our company.  We have
shipped a total of  five P-1200s to Ecuador, Mexico, Columbia, Costa Rica
and Holland for trials and Water Science internal use.  Water Science
is utilizing the technology for its own flower and agricultural
endeavors.  As of December 31, 2008, EAU had four completed P-1200
Systems in inventory ready to ship upon receiving destination orders from Water
Science. EAU received deposits on these systems in 2006.  Further
studies are being done as each country that has the Empowered WaterTM technology
ramps up for their own outside sales efforts.





Additional Agricultural
Markets





While the majority of our efforts and
all of our sales in agriculture have been in connection with Water Science,
we are investigating the
potential to enterotheragricultural marketssuch asgreen house and grow out of vegetable
plants and vegetable packing facilities.





5




Other Markets, Products and
Industries





Some of the other markets and industries
that are attractive channels for ourEWTechnology and other products and
servicesare listed below.
We intend to focusmore
effortson these markets
after we attainour
business planin our
current market channels.





Medical– The medical industry is in
dire need of new and more effective sanitizing and disinfecting solutions. We
believe that our EW Technology will work well in many facets of the medical
industry. However, the regulatory, environmental and governmental restrictions
and requirements to operate in the market will require significant capital and
personnel expenditures.  We intend to look for appropriate joint
venture partners to assist in this market.





Fish
Processing – We
believe that our EW Fluids are an excellent sanitizer in seafood processing
houses as earlier studies conducted on fish in the Cook Islands proved
effective.  We intend to further research this area at an undetermined
future date.







Grocery Store
Produce and Meat Departments- We are currently installed in four Whole
Foods Market (WFM) stores in the South Region. These stores are using the
Empowered WaterTM in three areas of the store: floral, fresh cut produce and
leafy vegetable rinse area.   Empowered WaterTM may also be used
by grocery store meat departments as a cleaning agent and disinfectant on
cutting surfaces where multiple products, such as beef, poultry and seafood are
cut and packaged, and where cross contamination commonly
occurs.  Using our electrolyzed fluids, a store’s processing machinery
and floor surfaces can be cleaned and sanitized without the use of toxic
chemicals.  We are currently attempting to transition these
installations into longer term service contracts.




Markets and
Distribution





We
presently market our existing products in our identified market channels (dairy
production and processing, meat and poultry processing, food and beverage
processing clean in place (“CIP”), environmental remediation and agricultural
grow-out).  Future plans include enhancing our current products, and
introducing new products and features to meet changing customer requirements and
evolving industry standards, as opportunities arise and are fiscally
reasonable.  Our present products are based on the use of EW
Technology, to kill bacteria, viruses and fungus and to clean the living
environment without the use of harsh chemicals.  Our agricultural
products manage pathogens, stimulate plant growth and animal
productivity.





Our products meet the growing demand for
safe foods and environmentally friendly, non-toxic disinfectants and cleaning
fluids. Consumers are becoming more aware of the detrimental effects of toxic
products, chemicals, and biocides (as evidenced by the preponderance of
anti-microbial agents). There are numerous companies attempting to enter theEWmarket with their own versions of
electrolysis or plasma generators that create similar fluids as Empowered
WaterTM. EAU has focused much of its time and energy in developing high volume
systems that meet the needs of a commercial marketplace. As a result, we havean opportunity to penetrate and lease our systems in these markets
because our equipment is better suited for larger applications.





Our
agricultural products also provide an organic alternative at a reasonable price.
Our solutions provide an
ecologically safe alternative to toxic cleaning chemicals and pesticides. We
have identified a large number of potential markets for our products within
specific industry channels, but will focus initially on developing and marketing
in the dairy production and processing, meat and poultry processing,clean in place (CIP)
applications initially in liquid food and beverage processing,environmental remediationand agricultural grow-out
industries.




6




The safe food, sanitizing, disinfecting,
agricultural and cleaning industries are currently using products and
methodologies that have increasingly expensive environmental and social
consequences as compared to our Fluids.  We believe that our products
provide an attractive alternative to the chemicals and other toxic
substancesand
technologiescurrently
being used.





Manufacturing
and Sources of Supply





We
manufacture and assemble contractually manufactured specialized parts in our
Kennesaw, Georgia facility.  We utilize contract labor both internally
as well as externally for certain aspects of the manufacturing and assembly
process until demand for our technology increases to a level necessary for
further investment.  Eventually we expect to outsource to third
parties the majority of manufacturing and assembly of electrolyzed water
generator components that comprise our EW Technology.  In the future,
outsourcing more of the Empowered Generator manufacture and assembly will enable
us to benefit from the manufacturing capabilities of those who can accommodate
significant increases in production volume as necessary.  We have been
in discussions with a major international food technology equipment manufacturer
to assist us in rolling out our technology. However, as of the date of this
Report, we do not have any definitive agreements in place.





Production
and Distribution





As of the
date of this Report, the Company maintained an inventory of several EW
generators sufficient to meet demand.  We have established
relationships with independent manufacturing facilities to assure that we are
able to meet any dramatic increase in demand for our products. Using components
supplied by reliable third parties, we believe that our generator technology is
not exposed to any problems related to using a single source
supplier.  EAU markets the high volume equipment developed primarily
for installation on dairies and in poultry, beef and produce processing
facilities and in other high use areas.





Our
current product line consists of several different commercial generators varying
in volume capacity and active ingredient concentrations. The volume and
concentration levels vary widely by industry and
application.  Commercial generators have an expected lifespan of
approximately five to seven years.  This may lead to recurring sales,
creating additional and ongoing revenues.





We
assemble and distribute our Empowered WaterTM generators from our company
facility plant in Kennesaw, Georgia.  However, in the future, as
generator sales volume increases and our electrolyzed fluid product lines are
launched, we intend to partner with industry leaders with established
distribution channels to assist with the marketing of our products.




Competition




There is broad competition in the
market for disinfecting, sanitizing, and surface cleaning products as well as
agricultural products. Many of our competitors are extremely large, financially
healthy companies, which have substantial market share and name recognition, and
easy access to marketing outlets and capital markets.  Many of these
companies are able to frequently update and expand their products, introduce new
products, and diversify product offerings.  These other companies with
substantially greater financial, creative and marketing resources, and proven
histories, may decide to enter and effectively compete in some or all of our
markets, which could adversely affect our operations.





We
believe our products are unique because of their volume capabilities,
effectiveness and price, and because they are environmentally safe and non-toxic
at the levels we employ.  There have been many companies in the EW
marketplace for many years. Application and volume constraints have contributed
to slow growth in the market. We believe that we have more usable application
knowledge with the technology on a commercial scale as compared to most
competitors using other EW technologies. We believe that we will be able to
capture a portion of the market for environmentally safe and non-toxic cleaning
products and for our Agricultural Products, although there can be no guarantee
that we will be successful in these plans.




7




Governmental
Regulation





Because
many of our products are sanitizing products and have applications related to
the food industry, existing governmental regulation have a large potential
effect on our new products.  We frequently will be required to obtain
approval or favorable designations from governmental agencies, such as the FDA,
USDA, FSIS, EPA, NOP, and others, in order to bring new products to
market.  We believe that
our current applications for electrolyzed water products are subject to specific
sections in theUnited States Code
of Federal Regulations,
which contain regulations created by the aforementioned government
agencies.  In addition, commercial laboratories such as
National American Medical Science Association (NAMSA) have performed several
toxicity tests. At the concentrations analyzed, the electrolyzed water solutions
show no toxicity.  Further approvals will be required when we advance
our products into the medical and certain health care
industries.  These approvals can be costly and time
consuming.  We intend to approach each sector based on market demand
and capital availability.





The
active ingredient in our Primacide A and C fluid is electrolytically generated
hypochlorous acid.  This, in addition to the oxidation-reduction
potential of positive 1,150 millivolts plus, and a low pH makes Primacide A and
C effective disinfectants.   We have established that our
particular method of creatinghypochlorous acid at the
level we employ through the electrolysis process is safe for indirect food
contact and food contact surfaces based on scientific data, trials and
commercial installations.





The
active ingredient in our Primacide B is electrolytically generated sodium
hydroxide.  This, in addition to the negative oxidative-reduction
potential of approximately -400 and a high pH, makes Primacide B a very
effective emulsifier or cleaner.  We have established that our
particular method of creating sodium hydroxide through electrolysis is GRAS
(generally regarded as safe) for most surfaces.





The EPA
indicated that even though our generator is exempt from an antimicrobial type
registration, we are required to register it with the EPA
annually.  We utilize our internal regulatory specialists as well as
outside consultants to ensure this process is completed properly and
competently.





Trademarks
& Proprietary Rights





The name
Primacide is registered with the U.S. Patent and Trademark
Office.  The names “Empowered Water,” “EAU Technologies, Inc.” and
“Electric Aquagenics Unlimited,” are some of our trademarks.





We have filed several provisional
utility patent applications with the U.S. Patent and Trademark Office.
Threepatents have been issued (for carpet cleaning,egg
sanitizationand mold
remediation) while others
are in pending or application status.  We have entered intoanexclusive license for certain stabilized
acid water (Primacide C) technology developed by theUniversityofGeorgia.  Two other patent
applications that have been filed by us involve stabilizing our Primacide C
product and a process application for poultry processing.





We retain patent counsel, Bracewell and
Giuliani, LLP located inHouston,Texas, to prepare other patent applications
related to the use of Primacide A, B and C in various cleaning and disinfecting
applications.  In addition to several utility applications, a process
patent application has been filed for the water generator and stabilization
processes, including Primacide A, B and C.  We retain Clayton, Howarth
& Cannon, P.C. located inSalt Lake City,Utahto prepare and handle our Trademark
applications and Trademark related issues.





8





Research
and Development




The goal of our research and
development activities is to further the introduction of environmentally safe
products for our customers that address the limitations and dangers caused by
chemical sanitizers.  Our efforts are focused on researching and
testing the cleaning and sanitizing characteristics of electrolyzed water with
varying electrical charges and pH levels.  Our research focuses on the
ability and range of efficacy of our electrolyzed water to kill specific
microorganisms.  We are attempting to develop new technologies,
applications and products that will:




·
            generate
      electrolyzed water that has a longer shelf
life;


·
            show
      value add propositions through commercial
  installations;


·
            sanitize
      agricultural products;


·
            enhance
      current products for further use in carpet
  cleaning;


·
            sanitize
      and disinfect hard and soft
surfaces;


·
            find
      more efficient ways to apply our effective
  solutions;


·
            provide a superior drinking and
      commercial-use water
product.





Our research and development
expenditures totaled $228,031for the year ended December 31,
2008,and$140,944in 2007.




Employees




As of December 31, 2008 we had 10
full-time employees and 3 consultants.  As our business grows, we
anticipate that we will need to employ additional project managers, field
technicians, salaried clerical staff and sales personnel.  We believe
that our relationships with our employees are good.




ITEM1A.RISK FACTORS





We are subject to various risks that may
materially harm our business, financial condition and results of operations. You
should carefully consider the risks and uncertainties described below and the other information in
this filing before deciding to purchase our common stock. If any of these risks
or uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our common stock could
decline and you could lose all or part of your investment.




Risks Related To Our
Business




An
investment in the Company's securities involves a high degree of risk,
including, but not necessarily limited to, the risk factors described below.
Each prospective investor should carefully consider the following risk factors
inherent in and affecting the Company and its business before making an
investment decision to purchase the Company's securities.





We
cannot guarantee that we will continue as a going concern because we have not
yet been successful in establishing profitable operations.





We have
received a report from our independent auditors on our financial statements for
fiscal years ended December 31, 2008 and 2007. The footnotes to our financial
statements list factors, including recurring losses since incorporation, which
raise some doubt about our ability to continue as a going concern.




9




We
will need substantial additional funds that we may not be able to
acquire.





We
currently do not have sufficient funds to operate our business for more than a
few months without additional funding, although we have a funding commitment in
place which would allow us to continue our operations for up to 5 months. We
expect to receive enough funding from this commitment to support our operations
over the next several months.  However, we may not receive all the
funding that has been committed.  We may not have enough funding for
operations to fund our business until it is developed enough to bring the
business plan to maturity.  Our cash requirements may vary materially
from those now planned as a result of marketing efforts, relationships with
suppliers, changes in the direction of our business strategy, and/or competitive
and technical advances for electrolyzed water as a sanitizer. We may not be able
to continue to improve or develop successful electrolyzed water products. In
addition, it may be more costly than we have anticipated developing new
products. We may incur costs that are necessary to comply with governmental
requirements. For example, we may be required to obtain approval from the U.S.
Food and Drug Administration for our current or planned products. We may require
substantial additional funding for our operating expenses and for marketing and
sales programs. We may not be able to obtain adequate funds for these purposes
when we need them or on acceptable terms.





It
is difficult for third parties to evaluate our likely future performance because
we are an early stage company without long operating history.





Since our
incorporation in March 2000, we have been engaged in start-up and development
activities. We have operated at a loss, and we expect losses to continue. We
have little operating history upon which a third party may base an evaluation of
our likely future performance.





We
may not be able to successfully develop our business because our products and
market are evolving.





There can
be no assurance that our business strategies will lead to any profits. We face
risks and uncertainties relating to our ability to successfully implement our
strategies. We face expenses and uncertainties related to operating with a
little known product, with an unproven business model, and a new and rapidly
evolving market. Our business model is based on an expectation that demand for
ecologically friendly disinfecting and cleaning products will increase
materially. However, the demand may never materialize.





We
have a history of losses, and we will need additional capital to continue our
operations. If we are unable to obtain additional capital, we will have to
curtail our operations.





We have
generated limited revenues and incurred significant losses. We have never been
profitable and continue to incur losses from operations. We may never generate
sufficient revenue, income and cash flows to support our operations. We expect
to incur losses because we anticipate incurring significant expenses in
connection with developing our generators and products, expanding markets, and
building brand awareness. Our future revenues could decline by reason of factors
beyond our control such as technological changes and developments, downturns in
the economy and decreases in demand for sanitizing electrolyzed fluid related
products. If we continue to incur losses, if our revenues decline or grow at a
slower rate, or if our expenses increase without commensurate increases in
revenues, our operating results will suffer and the value of our common stock
may decline.





Our
management may not have adequate time and resources to conduct our distribution
activities, which could hinder our ability to sell products.





Currently
we do not use independent parties to distribute or place our
generators.  We may not be able to sell our products effectively if
our management does not have adequate time and resources to conduct our
distribution activities. Moreover, as our sales grow, the strain on our
management to sell and distribute products may increase. In the event that we
decide to retain distributors, we may not be able to establish relationships
with distributors. In addition, we may incur additional costs and business
delays and interruptions in sourcing distributors.




10




It
may be difficult to assess our future income performance as a number of factors
may cause fluctuations in operating results.





We
believe that period-to-period comparisons of our operating results are not a
good indication of our future performance because of variables which
include:





-
            Growth
      rate of the market for environmentally friendly sanitizing
      products;




-
            Our
      ability to attract and retain
customers;





-
            Our
      ability to upgrade, develop and maintain our systems and
      infrastructure;





-
            Amount
      and timing of operating costs and capital expenditures relating to
      business expansion and
infrastructure;





-
            Delays
      in developing and introducing new
products;





-
            Announcement,
      introduction and market acceptance of new or enhanced sanitizing products
      by competitors;





-
            Governmental
      regulation of our products by agencies such as the FDA, USDA, EPA, or
      others.





Failure
to successfully develop and introduce new products would harm our
business.





Our
future success depends in large part on our ability to develop new or enhanced
uses for our products. We may fail to identify new product opportunities
successfully or develop and timely bring new products to market. We may also
experience delays in completing development of enhancements to, and new versions
of, our products. We may be unable to develop or acquire marketable products in
a timely manner. In addition, product innovations may not achieve the market
penetration or price stability necessary for profitability. As the market and
technology related to environmentally friendly sanitizing products grows, we may
change our business model to take advantage of new business opportunities,
including business areas in which we do not have extensive experience. Failure
to develop these or other businesses successfully would be harmful to our
business.





We
may be unable to protect our intellectual property and proprietary rights, which
could harm our business.





Our
success depends in part upon our ability to protect our intellectual property.
We rely on a combination of trade secret, trademark, and contractual protection
to establish and protect our proprietary rights.  We have been
assigned rights to applications submitted to the U.S. Patent and Trademark
Office for a utility patent relating to the use of our electrolyzed acidic fluid
to sanitize eggs, and a second patent relating to the use of our electrolyzed
alkaline fluid to clean and sanitize carpets and hard surfaces.  We
are also applying for patent protection from the United States government, but
do not own patents on products that we intend to launch in the next 12 months.
We may enter into confidentiality agreements with employees and consultants
involved in product development or distribution. Despite efforts to protect
proprietary rights through confidentiality and license agreements, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Precautions may not prevent someone from misappropriating or
infringing our intellectual property, or an independent third-party from
developing competitive products.





11




Our
products are not patented which creates vulnerability to
competitors.





The
active ingredient in the sanitizing fluids that are created by our generator
products is electrolyzed water that kills bacteria, viruses and molds shortly
after contact. Our patents and patent applications apply only to certain aspects
of our technology and products.  We did not create the concept of
electrolyzed water as a sanitizer and cleaner and other companies may purchase
machines to create electrolyzed water or develop machines to create electrolyzed
water and compete with us. Such competition could have a harmful effect on our
business.





If
our services and technologies are used in defective products or include
defective parts, we may be subject to product liability or other
claims.





If we
market products that are defectively manufactured, used in defective or
malfunctioning products or contain defective components, we could be subject to
product liability claims and product recalls, safety alerts or advisory notices.
While we have product liability insurance coverage, we cannot assume that it
will be adequate to satisfy claims made against us in the future or that we will
be able to obtain insurance in the future at satisfactory rates or in adequate
amounts. Product liability claims or product recalls in the future, regardless
of their ultimate outcome, could have a material adverse effect on our business,
financial condition, results of operations and reputation, and on our ability to
attract and retain licensees and customers.





Failure
to achieve and maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse
effect on our business and stock price.





Section 404
of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”) requires that we
establish and maintain an adequate internal control structure and procedures for
financial reporting and include a report of management on our internal control
over financial reporting in our annual report on Form 10-K. That report
must contain an assessment by management of the effectiveness of our internal
control over financial reporting and must include disclosure of any material
weaknesses in internal control over financial reporting that we have
identified.





The
requirements of Section 404 of the Sarbanes-Oxley Act are ongoing and also
apply to future years.  We expect that our internal controls over
financial reporting will continue to evolve as we continue in our efforts to
grow and expand our business. Although we intend to continue to improve our
internal control processes in order to ensure compliance with the
Section 404 requirements, any control system, regardless of how well
designed, operated and evaluated, can provide only reasonable, not absolute,
assurance that its objectives will be met. Therefore, we cannot assure you that
in the future additional material weaknesses or significant deficiencies will
not exist or otherwise be discovered.





We will incur
substantial costs to comply with the requirements of the Sarbanes-Oxley Act of
2002.





The Sarbanes-Oxley Act of 2002
(the Act) introduced new
requirements regarding corporate governance and financial reporting. Among the
many requirements is the requirement under Section 404 of the Act for
management to annually assess and report on the effectiveness of our internal
control over financial reporting and for our
registered public accountant to attest to this report. The SEC has modified the
effective date and adoption requirements of Section 404 implementation for
non-accelerated filers, such as us, such that we are first required to issue our management report on
internal control over financial reporting in our annual report on
Form 10-Kfor the fiscal year ending
December 31, 2007. Wehave dedicated significant time and
resources during fiscalyears 2007 and2008and expecttodedicatemoretime and resources during fiscal
2009to ensure compliance. The costs to
comply with these requirements will likely be significant and adversely affect
our operating results. In addition, there can be no assurance that we will be
successful in our efforts
to comply with Section 404. If we fail to comply with Section 404, we could
incur penalties and additional expenditures to meet the requirements, which
could affect the ability of our auditors to issue an unqualified report, which
is currently required to be submitted by
December 31, 2009. If the auditors are unable to issue an
unqualified report, this, in turn, may further adversely affect our business and
operating results.




12




We
may incur additional costs to address federal and state tax compliance
issues.





Management
has determined that the Company owes taxes with respect to certain stock options
and warrants granted for services provided to the Company.  This tax
liability arose because the Company failed to satisfy withholding tax
obligations when options were exercised and to timely amend certain options to
comply with the applicable requirements of Section 409A of the Code during
fiscal year 2005 and the first six months of 2006.  Management has
reviewed all options and warrants with professional tax advisors to determine
the proper treatment.  However, based on the present estimate of this
tax liability, the Company has accrued a liability in its financial statements
of $82,000 for these taxes.  The Company’s estimate assumes that a
significant discount may be utilized in determining the fair market value of the
Company’s stock for purposes of calculating the applicable employment taxes owed
by the Company based on factors such as lack of marketability or restrictions on
trading.  If this position were challenged successfully by the
Internal Revenue Service, the Company’s actual tax liability may be
greater.  The Company has estimated its maximum potential tax
liability attributable to the options to be approximately $184,000.





The
Company has also determined that it may owe additional taxes with respect to
compensation paid to certain former officers in 2005 and the first six months of
2006.  The Company classified these former officers as independent
contractors for federal and state tax purposes.  If the Company’s
classification of these former officers as independent contractors were
challenged successfully, the Company would be liable for underpayment of federal
and state employment taxes.  Based on the present estimate of this tax
liability, the Company has accrued a liability in its financial statements of
approximately $173,000.   This estimate assumes that the Company
may reduce its tax liability for the income and self-employment taxes paid by
these former officers on the compensation received from the
Company.  If the Company is unable to reduce its tax liability for
taxes paid by these former officers, the Company’s actual tax liability
attributable to this issue may be greater.  The Company has estimated
its maximum potential tax liability attributable to this issue to be up to
approximately $390,000.





GENERAL
RISKS RELATING TO THE SANITATION AND CLEANING INDUSTRIES.





Competition
from major companies may decrease our market share, net revenues and gross
margins.





Competition
in the chemical based disinfecting and surface cleaning products market is
intense, and we expect competition to increase. Companies such as SC Johnson,
The Clorox Company, Dow, and Procter & Gamble dominate the market. It is
possible that large companies that sell chemical based disinfecting and surface
cleaning products could develop sanitizers composed of electrolyzed fluids as
the key ingredient. Due to these potential competitors' extreme size and
financial health, they could use their substantial market share and name
recognition, and easy access to marketing outlets and capital markets to compete
with us. These companies have substantially greater financial, creative and
marketing resources, and proven histories, and may decide to enter and
effectively compete in the electrolyzed fluid market, which could adversely
affect our business.





Competitors
currently selling electrolyzed fluid based sanitation and cleaning products may
decrease our market share, net revenues and gross margins.





Many of
the companies that already sell electrolyzed fluid based sanitation and cleaning
products are able to frequently update and expand products and introduce new
products and to diversify product offerings. Many of these competitors are large
and financially strong, and include Hoshizaki, Miox, and Toyo. We compete with
these companies primarily in developing electrolyzed fluid products and
applications and obtaining customers. These companies have substantially greater
financial, creative and marketing resources and proven histories that could make
it difficult to compete or maintain customers in the electrolyzed fluid
sanitizer market.




13




Our
net revenues and gross margins will not improve if the market for
environmentally friendly sanitizing products does not develop.





The
market for environmentally friendly sanitizing products is new and evolving. As
a result, demand and market acceptance for our products is uncertain. If this
new market fails to develop, develops more slowly than expected or becomes
saturated with competitors, or if our products do not achieve or sustain market
acceptance, our business could be harmed.





Our
success will depend on growth in consumer acceptance of environmentally friendly
sanitizing products as an alternative to chemically based products.





Factors
that might influence market acceptance of our products over which we have little
or no control include development of alternative products or methods and
willingness of consumers and businesses to use environmentally friendly
sanitizing products. Our success depends on the increasing demand for
environmentally friendly disinfecting and sanitizing products. If such demand
does not continue to increase, demand for our products will be limited and our
financial results will suffer.





Inability
to manage growth could hinder our success.





We
believe electrolyzed water as a sanitizer has broad applications and due to its
non-toxic nature has advantages over chemical based sanitizers. As a result, we
believe that we have the ability to grow rapidly during the next few years. In
the event we do grow rapidly, we will be in circumstances currently unfamiliar
to us. Our efforts to manage our production and larger scale quality assurance
efforts may not be successful or we may fail to satisfy large demand
requirements on a timely and/or cost-effective basis. A failure to manage our
growth would have an adverse effect on our operations and overall financial
health.





ADDITIONAL
RISKS RELATED TO OUR COMMON STOCK





Continued
control by existing management and a limited number of
shareholders.





The
Company's management and a limited number of shareholders retain significant
control over the Company and its business plans and investors may be unable to
meaningfully influence the course of action of the Company. The existing
management and a limited number of shareholders are able to control
substantially all matters requiring shareholder approval, including nomination
and election of directors and approval or rejection of significant corporate
transactions. There is also a risk that the existing management of the Company
and a limited number of shareholders will pursue an agenda which is beneficial
to themselves at the expense of other shareholders.





There
is no assurance of an active public market for the Company's common stock and
the price of the Company's common stock may be volatile.





Given the
relatively minimal public float and trading activity in the Company's
securities, there is little likelihood of any active and liquid public trading
market developing for its shares. If such a market does develop, the price of
the shares may be volatile. Since the shares do not qualify to trade on any
national securities exchange, if they do actually trade, the only available
market will continue to be through the OTC Bulletin Board or in the "pink
sheets". It is possible that no active public market with significant liquidity
will ever develop. Thus, investors run the risk that investors may never be able
to sell their shares.




14




Possible
future issuances of additional shares that are authorized may dilute the
interests of stockholders.





The
Company's Certificate of Incorporation currently authorizes its Board of
Directors to issue up to 50,000,000 shares of Common Stock. Any additional
issuances of any of the Company's securities will not require the approval of
shareholders and may have the effect of further diluting the equity interest of
shareholders.





Existence
of limited market for the Company's common stock.





There has
been a very limited market for the Company's common stock. Accordingly, although
quotations for the Company's common stock have been, and continue to be,
published on the OTC Bulletin Board and the "pink sheets" published by the
National Quotation Bureau, Inc., these quotations, in light of the Company's
operating history, continuing losses and financial condition, are not
necessarily indicative of the value of the Company. Such quotations are
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.





There are legal restrictions onthe resale of the common
shares, including penny
stock regulations under theU.S.federal securities laws. These
restrictions may adversely affect the ability of investors to resell their
shares.





Our securities are subject to the “penny stock”rules, which apply generally to equity
securities with a price of less than $5.00 per share, other than securities
registered on certain national exchanges or quoted on the NASDAQ Capital Market.
For transactions coveredby these rules, the broker-dealer must
make a special suitability determination for the purchaser of such securities
and have received the purchaser's written consent to the transactions prior to
the purchase. Additionally, for any transaction involving apenny stock, unless exempt, the rules
require the delivery, prior to the transaction, of a disclosure schedule
prepared by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable tothebroker-dealer and the registered
underwriter, current quotations for the securities and, if the broker-dealer is
the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally among other requirements, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. As
such, the "penny stock" rules may restrict the ability of purchasers in this offering to sell the common
stock and warrants offered hereby in the secondary market. The transaction costs
associated with penny stocks are high, reducing the number of broker-dealers
willing to engage in the trading of our shares. This results in reduced liquidity and an increase
in the spread between the bid and ask price. Investors should be aware that the
level of trading activity on the secondary market can be very illiquid and
investors may find it expensive and difficult to sell their shares.





Sales
of a substantial number of restricted shares that will be eligible for sale
could adversely affect the price of our common stock.





We have
issued shares of "restricted" common stock in consideration for proprietary
rights, business plans, organizational services and expenses and cash in private
placements. Many of the shares are held by persons who are officers, directors
and/or control persons of the Company and who hold such shares as "restricted
securities", as that term is defined in Rule 144 promulgated under the
Securities Act of 1933, as amended. These securities held by officers, directors
and/or control persons may be sold in compliance with Rule 144 which provides,
in essence, that officers and directors and others holding restricted securities
may each sell, in brokerage transactions, an amount equal to 1% of the company's
total outstanding common stock every three months. In addition, Rule 144
provides that shares must not be sold until they have been held for a period of
at least one year from the date they were fully paid for. The possible sale of
these restricted securities under Rule 144 may, in the future, have a depressive
effect on the price of the company's Common Stock in any public market which may
develop, assuming there is such a market, of which there can be no
assurance.  Furthermore, persons holding restricted securities for one
year who are not "affiliates" of the company, as that
term is defined in Rule 144, may sell their securities pursuant to Rule 144
without any restrictions
and/or limitations on the number of shares sold.




15




ITEM
2.  PROPERTY





Our
corporate headquarters are located in leased office space at 1890 Cobb
International Blvd, Suite A, B & C, Kennesaw, GA 30152. We believe that our
current offices are adequate for present needs. Office space is leased and will
be increased, as we deem necessary.  We believe that it will not be
difficult to find additional or alternative office space if necessary in the
foreseeable future.





ITEM
3.  LEGAL PROCEEDINGS




None




ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




Our
Annual Meeting of Stockholders was held at the Marriott SpringHill Suites,
located at 3399 Town Point Drive, Kennesaw, Georgia 30144, on Friday, December
12, 2008at 8:00 a.m.
for the following purposes:





1.
            To
      elect seven directors to serve for one-year terms expiring at the annual
      meeting in 2009 and until their successors are elected and
      qualified.





2.
            To
      ratify the appointment of HJ & Associates, LLC as independent auditors
      for the fiscal year ending December 31,
2008.




The
results of the voting were as follows:





PROPOSAL
                
                FOR
                
                WITHHELD01  -
      DIRECTORSWADE
      R BRADLEY
                
                13,693,153
                
                31,565KARL
      HELLMAN
                
                13,692,553
                
                35,165THEODORE
      C JACOBY JR
                
                13,699,767
                
                24,951J
      LEO MONTGOMERY
                
                13,693,153
                
                31,565JAY
      S POTTER
                
                13,691,153
                
                33,565PETER
      F ULLRICH
                
                13,693,153
                
                31,565WILLIAM
      J WARWICK
                
                13,699,767
                
                24,951FOR
                
                AGAINST
                
                ABSTAIN02  -
      RATIFY AUDITORS
                
                13,626,293
                
                37,916
                
                60,509




16




PART
II




ITEM 5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
      AND   PURCHASES OF EQUITY
  SECURITIES




Our
common stock is presently listed on the OTC Bulletin Board under the
symbol EAUI.OB.  Prior to the completion of our name change from
Electric Aquagenics Unlimited, Inc. to EAU Technologies, Inc., on January 17,
2007, our common stock was listed under the symbol EAQU.OB.  We have
not declared dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future.





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 will occur in six monthly installments of $350,000 beginning
October 14, 2008 plus a final installment of $400,000 on April 15, 2009. On
March 27, 2009, the Company and Water Science amended the payment schedule of
the Stock Purchase Agreement.  The purchase of the common stock will
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.  If WS defaults on its obligation to purchase the stock under
the Purchase Agreement, then the conversion price reverts back to $3.00 per
share.  The Second Amended Convertible Note includes an interest rate
of 3% and a maturity date of March 16, 2009. In March 2009, the Company and WS
amended the Second Amended Convertible Note to extend the maturity date to
September 16, 2009 and increase the interest rate to 10%.  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.





In
October 2007, Water Science LLC exercised a portion of its warrants for
$2,000,000 and the Company issued 1,538,463 shares of common stock to Water
Science, at an exercise price of $1.30 per share.





In May
2007, the Company issued 100,000 shares of common stock to an individual who
exercised 100,000 warrants for $50,000 or $0.50 per share.





In May
2007, Peter F. Ullrich and Water Science LLC (“WS”), shareholders of EAU
Technologies, Inc., entered into an agreement (the “Termination Agreement”) for
the cancellation and reissuance of existing warrants held by WS (“Original
Warrants”) to purchase a total of 8.4 million shares of the Company’s common
stock.  In the Termination Agreement, the parties agreed as
follows:


·
              The
      Original Warrants were
cancelled.
 ·
              The
      Company granted to WS replacement warrants (“Replacement Warrants”) to
      purchase a total of 8.4 million shares of common stock at an exercise
      price of $1.30 per share, with an expiration date of May 9,
      2010.
 ·
              The
      Company has a right (“Put Right”) to require WS to exercise one of the
      Replacement Warrants for up to 3,230,769 shares. The Company may exercise
      the Put Right from time to time, but not more often than once per
      month.  The value of the Put warrants was valued using the
      Black-Scholes model.  The value of each warrant was $1.23, or a
      total of $3,974,885.
 ·
              The
      warrant shares are subject to an amended registration rights
      agreement.
 
 
 
  17


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





Our
shares are thinly traded, with low average daily volume.  This,
coupled with a limited number of market makers, impairs the liquidity of our
common stock, not only in the number of shares of common stock that can be
bought and sold, but also through possible delays in the timing of transactions,
and lower prices for our common stock that might otherwise
prevail.  This could make it difficult for an investor to sell shares
of our common stock or to obtain a desired price.





Our
common stock may be subject to the low-price security, or so called “penny
stock,” rules that impose additional sales practice requirements on
broker-dealers who sell such securities.  The securities Enforcement
and Penny Stock Reform Act of 1990 require additional disclosure in connection
with any trades involving a stock defined as a “penny stock” (generally defined
as, according to recent regulations adopted by the U.S.  Securities
and Exchange Commission, any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions), including the deliver,
prior to any penny stock transaction, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.  The
regulations governing low-priced or penny stocks sometimes may limit the ability
of broker-dealers to sell the Company’s common stocks and thus, ultimately, the
ability of the investors to sell their securities in the secondary
market.  Prices for the Company’s shares will be determined in the
marketplace and may be influenced by many factors, including the depth and
liquidity of the market for the shares, the Company’s results of operations,
what investors think of the Company and general economic and market
conditions.  Market fluctuations could have a material adverse impact
on the trading of our shares.





The table below sets forth the range of
high and low closing prices of our common stock as reported on the OTC Bulletin
Board, for the last two years.  Common stock began trading publicly
during May 2004.





EAU
      Technologies, Inc. Common StockHigh
                    
                    
                    LowYear
      Ended December 31, 2008Quarter
      Ended March 31, 2008
                    
                    $
                    1.40
                    
                    
                    $
                    0.92Quarter
      Ended June 30, 2008
                    
                    
                    1.10
                    
                    
                    
                    0.80Quarter
      Ended September 30, 2008
                    
                    
                    1.15
                    
                    
                    
                    0.80Quarter
      Ended December 31, 2008
                    
                    
                    0.80
                    
                    
                    
                    0.25





EAU
      Technologies, Inc. Common StockHigh
                          
                          
                          LowYear
      Ended December 31, 2007Quarter
      Ended March 31, 2007
                          
                          $
                          1.09
                          
                          
                          $
                          0.86Quarter
      Ended June 30, 2007
                          
                          
                          2.25
                          
                          
                          
                          1.00Quarter
      Ended September 30, 2007
                          
                          
                          1.25
                          
                          
                          
                          0.80Quarter
      Ended December 31, 2007
                          
                          
                          1.55
                          
                          
                          
                          0.56




18




As the foregoing are over-the-counter
market quotations, they reflect inter-dealer prices, without retail markup,
markdown, or commissions, and may not represent actual
transactions.




As of December 31, 2008, the Company had approximately
432record holders of common
stock.




ITEM 6.
            SELECTED
      FINANCIAL DATA




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 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




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





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
that will lead to partnerships with industry leaders who can assist in rolling
the technology out on a large scale.




19




We have obtained patent protection on
threeseparateuses of electrolyzed fluids(cleaning and disinfecting eggs, carpet
cleaning and mold remediation).  Those facets are how the
fluids are used and how they are stabilized for use in different applications.
Additionally, we haveapatent pending onthe electrolysis equipment
andseveral 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.





Critical
Accounting Estimates




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 consolidated financial statements and
accompanying notes.  Note 1 of the notes to consolidated financial
statements in Part II, Item 7 of this Form 10-K, 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.  We
believe the following to be our critical accounting estimates because they are
both important to the portrayal of our financial condition and results and they
require us to make judgments and estimates about matters that are inherently
uncertain.




Our critical accounting policies and
estimates include the following:




·
            Revenue
      recognition;


·
            Impairment
      of long-lived assets; and


·
            Allowances
      for doubtful accounts.





Revenuerecognition.We recognize revenueaccording to the terms of the
contractandwhentitle passes to the customer or when
services are performed in accordance with contract terms.  The Company
provides an allowance for sales returns based on current and historical
experience.





Impairment of long-lived assets.Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable.  Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition.  Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset.  Long-lived assets are reported at the lower of
carrying or fair value less costs to sell.





Allowance for
doubtful accounts.The Company sells its products tovariouscommercial customers.  It
regularly reviews its aging and reserves for amounts that maybe at risk in collection.  The
Company has historically
had very few uncollectible
amounts.





Commitments and
Contingencies





On May 1,
2006, we entered into a consulting agreement with JL Montgomery Consulting, LLC,
a Florida limited liability company.  By the terms of this agreement,
JL Montgomery Consulting agreed to assist the Company in locating and
structuring equity and long-term debt financing; to help establish financial
policies and procedures; to offer strategic financial assistance; to provide
strategic business planning; to offer financial advice to the Company and its
Board of Directors on financial matters; and to introduce the Company to third
parties, including independent companies, governmental contacts, and/or third
party individuals interested in purchasing our products or forming a business
relationship with us. As compensation, we granted to JL Montgomery Consulting a
five-year, fully vested warrant to purchase up to 500,000 of our $.0001 common
stock at the price of $2.76 per share.  In October 2007, these
warrants were extended an additional 5 years.




20




In December 2006, the Company entered
into an amended exclusive licensing and product supplier agreement with Zerorez,
an affiliated entity, to provide Zerorez with its Primacide water solutions and
water generator for its carpet cleaning franchisees. The Company is committed to
sell to Zerorez the Primacide B water generator over the next 5 years under the
agreement, ending on December 31, 2011.  The agreement allows for the
automatic renewal of the agreement for three (3) terms of five year terms,
unless both parties agree to the cancellation of the agreement.





In
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 agreement provides
termination rights by Water Sciences and a pro rata refund of the
fee.  This agreement also gives Water Science the rights to purchase
machinery from the Company at cost plus 25 percent.





Management
has determined that certain stock options and warrants granted for services may
not have been properly treated for income tax withholding
purposes.  Management is reviewing all granted options and warrants
with professional tax accountants to determine the proper
treatment.  In addition, in the past the Company has classified
several consultants and officers as independent contractors for federal and
state tax purposes.  This classification could be challenged by the
applicable taxing authorities for some or all of these
individuals.  Management believes that it is reasonably estimatable
and probable that the amount of liability to the Company will be approximately
$255,000.  The Company has estimated the potential tax liability as a
range between $129,000 and $574,000.





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





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 $494,612 in cash as of December 31, 2008, compared to $1,413,744 at
December 31, 2007.  Our working capital as of December 31, 2008 was a
negative $695,317 compared to a positive $114,443 at December 31, 2007. The
primary reason for the change in our working capital for the year ended December
31, 2008, was due to the increased net value of the senior convertible note and
our reduced cash position.  The Company has received and recorded
$697,500 in advance deposits from Water Science on machine orders at December
31, 2008.  We expect 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 South America and Mexico, is
also an affiliate of the Company, by agreement may purchase machinery from us at
cost plus 25 percent.  Long term debt decreased to $39,150 at December
31, 2008 from $59,045 at December 31, 2007.  At December 31, 2008, our
stockholders’ deficit was $9,113,120.





21




Summary
of select balance sheet information follows:




December 31,
                  2008
                
                
                December 31,
                  2007Balance
      Sheet Data:Cash and Cash
      Equivalents
                
                $
                494,612
                
                
                $
                1,413,744Total Current
      Assets
                
                
                4,080,824
                
                
                
                4,677,688Total
Assets
                
                
                4,665,778
                
                
                
                5,347,458Total Current
      Liabilities
                
                
                4,776,141
                
                
                
                4,563,245Long Term
    Debt
                
                
                39,150
                
                
                
                59,045Total liabilities and
      stockholders’ equity
                
                $
                4,665,778
                
                
                $
                5,347,458





Results OfOperations For The Year EndedDecember31, 2008As Compared To The Year EndedDecember31, 2007





Revenues and Net
Income -Net revenues for the year ended December 31, 2008, decreased by
$441,490, or 50%, to $437,109, of which $226,188 are revenues from a related
party, compared to revenues of $878,599 for the year ended December 31, 2007.
The majority of the revenues are from licensing and maintenance fees related to
our prior sales of our EW water machines.  We also recognized $200,000
in licensing revenues related to the exclusive license granted to Water
Science.





Our cost
of sales decreased by $434,945, to $84,806, for the year ended December 31,
2008. This is an 84% decrease over the $519,751 cost of sales during the year
ended December 31, 2007. This decrease is attributable to the decrease in
product sales of our EW water machines.





Our net
loss for the year ended December 31, 2008, was $6,727,214, which is $4,164,123
less than the $10,891,337 net loss for the fiscal year ended December 31, 2007.
This decrease of 38% in the net loss is primarily attributable to the Company’s
continued efforts to focus on our core segments and continued cost saving
measures.  In October 2008, the Company, as part of a financing
agreement with a related party, reduced the conversion rate of the Company’s
convertible note from $3.00 per share to $1.00 per share.  The
reduction, as well as adjusting the fair market value of the liability, resulted
in a loss on derivative liability of $1,863,866 in 2008 as compared with a loss
on the adjustment to fair value of the derivative liability of $2,118,761 in
2007.





General and
Administrative Expense –The Company incurred total general and
administrative expenses of $4,193,761, a 51% decrease over the $8,260,609
incurred in 2007. The majority of the change is due to certain warrants that
were issued in 2007 as part of ongoing financing agreements.  General
and administrative expenses for 2008 consist primarily of payroll expense
($1,304,264), expenses related to stock options and warrants ($837,167),
professional fees ($660,015), insurance expense ($299,461), and travel related
expenses ($168,181).





During
the year ended December 31, 2008, we expended $660,015 in professional fees,
which include legal and consulting fees. This was a decrease of $306,973 or 32%,
from the $966,988 spent in 2007. This decrease is primarily due to the Company’s
efforts to reduce costs and better utilize its own resources.





Our
interest expense decreased from $1,122,930 in 2007 to $742,625 in
2008.  The majority of the interest expense is related to a $3,000,000
loan to us from Water Sciences. This loan has a full discount of $3,000,000
which is being amortized to interest expense over the life of the loan. See Note
9 to our audited financial statements. This required accounting treatment
resulted in our recognizing $631,579 and $1,000,000 in interest expense for the
years ended December 31, 2008 and 2007, respectively.




22




Research and
Development -Our research and development expenses for the year ended
December 31, 2008, were $228,031, an increase of $87,087, or 62%, as compared to
$140,944 for the year ended December 31, 2007.




Summary
of select income statement information follows:




Year
      EndedDecember
      31,2008
                        
                        
                        2007
                        
                        
                        Better
                          (Worse)
                        
                        
                        Percent
                          ChangeRevenue,
net
                        
                        $
                        437,109
                        
                        
                        $
                        878,599
                        
                        
                        $
                        (441,490
                        )
                        
                        
                        50
                        %Gross
profit
                        
                        
                        352,303
                        
                        
                        
                        358,848
                        
                        
                        
                        (6,545
                        )
                        
                        
                        2
                        %Net loss
                        
                        
                        6,727,214
                        
                        
                        
                        10,891,337
                        
                        
                        
                        4,164,123
                        
                        
                        
                        38
                        %Loss per
    share
                        
                        
                        0.41
                        
                        
                        
                        0.79
                        
                        
                        
                        0.38
                        
                        
                        
                        48
                        %





Liquidity
And Capital Resources





We
currently do not have sufficient funds to operate our business for more than a
few months without additional funding, although we have limited funding
commitment in place which would allow us to continue our operations for up to 5
months. We expect to receive enough funding from this commitment to support our
operations over the next several months.  However, we may not receive
all the funding that has been committed.  We may not have enough
funding for operations to fund our business until it is developed enough to
bring the business plan to maturity.  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 March 2009, will become due in September 2009,
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.





At
December 31, 2008, we had cash and cash equivalents of $494,612, compared to
$1,413,744 at December 31, 2007.  We have had continuing net losses of
$6,727,214 for the year ended December 31, 2008 compared with net losses of
$10,891,337 for the year ended December 31, 2007.  The net loss per
share for the year ended 2008 was $0.41 compared to a loss of $0.79 per share
for the same period in 2007.  Our working capital as of December 31,
2008 was a negative $695,317 for reasons discussed above under financial
position.





Net cash
used in operating activities for the year ended December 31, 2008 was
$3,728,474, a 21% decrease, compared to $4,715,198 for the same period in
2007.  The primary uses of cash were purchases of inventory of
$318,309 and an increase in pre-paid expenses
of  $21,868.  The other significant changes to the cash flow
from operating activities were the increase in the derivative liability of
$1,863,866, the recognition of deferred revenue of $200,000 and an increase in
accounts payable of $86,023




23




At December 31, 2008, the Company’snetinventory was $3,014,503, representing an increase of7% from the $2,814,533on hand at December 31, 2007.  The Company is in
multiple tests of our equipment and has included the machines in inventory until
they are sold and enter into revenues.  We expect a large portion of
the inventory to be removed from inventory and be included in property and
equipment during 2009 pursuant to lease agreements.





The
operating outflow of cash was reduced by the Company issuing warrants and stock
options in lieu of cash during the quarter of $837,167.  The Company
adopted SFAS 123(R), effective January 1, 2006, and now expenses stock options
given to employees.  The Company recognized a non-cash increase from
the discounting of the Company’s note payable to Water Science, LLC of
$631,579.  (See Note 9 to the Company’s financial
statements.)  Further, the Company recognized a non-cash increase in
the derivative liability of $1,863,866, due to changes in the Black-Scholes
value of the liability.





Net cash
used in investing activities during the period ended December 31, 2008 was
$26,003 as compared to $1,891,164 provided for in the same period in
2007.  During 2007, the cash flows consisted primarily of net cash
receipts of $2,150,000 from the sale of our consumer products division and the
issuance of a Note Receivable for $150,000.  During 2008 the primary
cash flows from investing activities consisted primarily of $26,003 related to
intellectual property disbursements.





Cash
flows from financing activities provided the Company $2,835,345 and $4,031,684
for the years ended December 31, 2008 and 2007, respectively.  This is
primarily a result of the Company’s continued sales of its common stock to fund
operations.  During the years ended 2008 and 2007, the Company raised
$2,851,500 and $4,050,000 from the sale of stock, respectively.  This
amount was offset by payments made on notes payable in the amount of $16,155 and
$18,316 in 2008 and 2007, respectively.





ITEM 7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




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
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA




Our
consolidated financial statements and the independent auditors' report are
attached to this Report and are incorporated into this Item 7 by
reference.





ITEM 9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




There
have been no changes in our independent accountants, HJ & Associates, LLC,
or disagreements with them on matters of accounting or financial
disclosure.





ITEM
      9A.
              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 December 31, 2008,
pursuant to Exchange Act Rule 15d-15.  Based upon that evaluation, the
principal executive and financial officers concluded that the Company’s
disclosure controls and procedures were effective at the reasonable assurance
level.




24




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.





Management’s Report on Internal
Control Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the company’s principal executive and
principal financial officers and effected by the company’s board of directors,
management and other associates, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and those policies and procedures that:




(1)
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;


(2)
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and


(3)
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. In making this
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission, known as COSO,
in Internal Control –
Integrated Framework.Based on its assessment, management has concluded
that, as of December 31, 2008, the Company’s internal control over
financial reporting was effective to provide reasonable assurance based on those
criteria.





The scope
of management’s assessment of the effectiveness of internal control over
financial reporting includes all of the Company’s operations.





The
Company has taken the steps discussed below under “Changes to Internal Control
Over Financial Reporting.”





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation requirements by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.




25




Changes to Internal Control Over
Financial Reporting





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





·
            Engaged
      an outside accounting firm to assist the Company with documenting and
      testing our internal controls;


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


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





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





ITEM9B.OTHER INFORMATION





On March 24, 2009, EAU Technologies,
Inc. (the “Company”) entered into the First Amendment to Second Amended and
Restated Senior Secured Convertible Promissory Note (the “Promissory Note”) with
Water Science, LLC (“WS”).  The amendment extends the maturity date of
the Promissory Note from March 16, 2009 to September 16, 2009, increases the
annual simple interest rate payable under the Promissory Note from 3% to 10% and
eliminates the 8% interest rate that would be payable upon
default.  In all other material respects, the Promissory Note, filed
as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed October 17,
2008 and incorporated herein by reference, remains unchanged.





On March
27, 2009, the Company and Water Science amended the payment schedule of the
Stock Purchase Agreement, entered into in October 2008.  On March 25,
2009 the Company received a partial payment of $150,000 of the balance owed of
$700,000 as of that date.  On March 27, 2009, the Company and Water
Science amended the payment schedule of the Stock Purchase
Agreement.  The purchase of the common stock will 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.  In
all other material respects, the Stock Purchase Agreement, filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed October 17, 2008 and
incorporated herein by reference, remains unchanged.





WS is a
shareholder of the Company and is controlled by Peter Ullrich, a member of the
Board of Directors of the Company.





26




PART
III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
      ACT




Directors
and Executive Officers




The
following table sets forth the names, age, and position of each of our directors
and executive officers.





Name and
      Address
              Age
              Position and Office
      HeldWade
      R. Bradley
                1890
      Cobb International Blvd.
                Kennesaw,
      GA 30152
              48
              Chief
      Executive Officer; DirectorBrian
      D. Heinhold
                1890
      Cobb International Blvd.
                Kennesaw,
      GA 30152
              36
              Chief
      Financial OfficerDoug
      Kindred
                1890
      Cobb International Blvd.
                Kennesaw,
      GA 30152
              53
              Chief
      Technology OfficerJoseph
      A. Stapley
                1890
      Cobb International Blvd.
                Kennesaw,
      GA 30152
              40
              Senior
      Vice President of Investor Relations and Business
    DevelopmentJay
      S. Potter
                10509
      Vista Sorrento Pkwy. #300
                San
      Diego, CA 92121
              44
              DirectorWilliam
      J. Warwick
                1063
      Ocean Ridge Drive
                Wilmington,
      North Carolina 28405
              74
              DirectorPeter
      Ullrich
                1800
      NW 89th
      Place
                Miami,
      FL  33172
              66
              DirectorTheodore
      C. Jacoby, Jr.
                1716
      Hidden Creek Ct.
                St.
      Louis, MO 63131
              68
              DirectorJ.
      Leo Montgomery
                1890
      Cobb International Blvd.
                Kennesaw,
      GA  30152
              68
              Non-executive
      Chairman of the Board; DirectorKarl
      G. Hellman
                1776
      Chadds Lake Drive
                Marietta,
      GA 30068
              62
              Director
  27


William
J. Warwick, an independent board member who is also a member of the Company’s
audit committee, is an audit committee financial expert as defined in Item
407(d)(5) of Regulation S-B promulgated by the U.S. Securities and Exchange
Commission.  Mr. Warwick is also a member of the Company’s
Compensation Committee.





Jay
Potter served as the Chairman of the Board from May 2006 until October
2007.  Mr. Potter also sat as Interim CEO from May 2006 until November
2006 when Mr. Bradley was hired. Mr. Potter is also a member of the Company’s
audit committee and is an audit committee financial expert as defined in Item
407(d)(5) of Regulation S-B promulgated by the U.S. Securities and Exchange
Commission.





In April
2007, the Board of Directors of the Company appointed Peter Ullrich, as a member
of the Board of Directors.





In
September 2007, the Board of Directors of the Company appointed Ted Jacoby, Jr.,
as a member of the Board of Directors. The Board also appointed Mr. Jacoby as a
member of the Audit Committee and the Compensation Committee.





In
October 2007, the Board of Directors of the Company appointed Karl Hellman and
J. Leo Montgomery as members of the Board of Directors. Mr. Montgomery serves as
Non-Executive Chairman of the Board. The Board also appointed Mr. Hellman as a
member of the Compensation Committee and appointed Mr. Montgomery as a member of
the Audit Committee.





Biographical
Information





Set forth
below is biographical information for each officer and director.





Wade
Bradleyis the Company’sChiefExecutiveOfficer and a board
member.  Before joining EAU Mr. Bradley served as President of the
Retail and Wholesale Group
from November 2005 to November 2006, and as Vice President of the Consumer
Products Group from June 2000 to November 2005, of Oil-Dri Corporation of
America (NYSE:ODC). He worked at various other positions with Oil-Dri from 1990
to 2000.  Mr. Bradley began his career at the public
accounting firm of Arthur Young & Company in their Entrepreneurial Services
Group. He then worked as the Executive Director of a Non-Profit organization
that assisted disadvantaged youths in furthering their education.Mr. Bradley received his Bachelor of
Science in Accountancy fromUniversityofIllinois. He then attended theHarvardBusinessSchoolfor a Master of Business
Administration.





Brian D.
Heinholdis the Company’s Chief Financial
Officer.  Mr. Heinholdtook over as CFO when the former CFO
resigned in September 2006.  He served as the Company’s controller
since joining the Company in May 2006.Before joining EAU, he
worked for a Certified Public Accounting firm, from 2004 to 2006, as an auditor
and consultant.While
working at the CPA firm, Mr. Heinhold was involved with both private and public
companies.  From 2002 to 2004, he worked as a manager of an
entertainment center inSalt Lake City, where he oversaw the operations of the
company. Prior to that, he worked as the business and finance manager
at a local automotive dealership from 2001 to 2002.  From 1994 to
2001, Mr. Heinhold was the accounting manager of a small engineering and
manufacturing firm, where he oversaw all the functions of the accounting
department.  He has also served in
many volunteer positions where he worked with adults and youth.  Mr.
Heinhold graduated from theUniversityofUtahwith a Masters of Public Accountancy
degree and a Bachelor of Arts degree in Finance.





Doug
Kindredis currentlythe Company’s Chief Technology
Officerand has over 27
years of management and engineering experience in numerous industries. He was a
co-owner and Vice President of ESI, Inc., a turnkey, design/build engineering
construction firm for over 18 years. He served as President of an air pollution
control equipment manufacturer prior to joining EAU. He has extensive experience
throughout his career with the production of premium quality water including
numerous boiler feed water systems that utilized demineralizers, automated acid
and caustic regeneration systems, water softeners and condensate polishing
systems for various industries. Mr. Kindred holds a B.S. degree in Mechanical
Engineering from Georgia Tech and is a graduate of the Kenan-Flagler Business
School Executive Program at The University of North Carolina,Chapel Hill. He is a registered professional
engineer.




28




Joseph A. Stapley is
Senior Vice President of Investor Relations and Business Development. He has
worked for the Company since 2003 and became an executive officer in June
2005.  Prior to joining the Company, Mr. Stapley was the head of
Corporate Finance at Nexcore Capital, Inc., a San Diego, California based
broker-dealer. Since 1996, Mr. Stapley has been involved with the funding of
over $100 million in financings, joint ventures, mergers and acquisitions for
start-up and growth stage companies.  Mr. Stapley held a Series 7
Registered Representative license until 2005. He has extensive international
experience gained as the owner of a number of restaurants and an import-export
company based in Tokyo, Japan.  Mr. Stapley holds a Bachelor of
Science degree in Business and Entrepreneurship from the Marshall School at the
University of Southern California.





Jay S. Potter has
served as a director of the Company since September 2005.  From May
2006 until October 2006, he served as interim CEO of the Company.  He
has been the Chairman of the Board of Directors of Voice Vision since its
inception in March 2007.  Mr. Potter has been active in the financial
industry for 20 years and has successfully participated, directed or placed over
one hundred million dollars of capital in start-up and early stage
companies.  Mr. Potter takes an active role in the development of the
funded companies and to that end has participated as advisor, director and
officer. Currently, Mr. Potter is a director for ENVSION Solar, LLC, and
Envirepel Energy, Inc., two companies that he helped fund, and that he continues
to guide and advise in the renewable energy sector.  He also is the founder
of GreenCore Private Equity Fund, investing in cutting edge companies developing
renewable energy and other "green" technologies.  He has served as
Chairman, President and CEO of Nexcore Capital, Inc. and its financial service
affiliates since co-founding the company in 1989.  Mr. Potter serves as
Founder and Chairman of Sterling Energy Resources, Inc., a public oil and gas
company (Symbol: SGER) involved in the acquisition, exploration and development
of oil and natural gas from its numerous leases.  Mr. Potter holds Series
7, 24 and 63 licenses in good standing with the National Association of
Securities Dealers, Inc.





William J. Warwick
has served as a director of the Company since 2003.  He retired from
AT&T after 39 years of service with responsibilities including President of
AT&T Consumer Products and Senior Vice President AT&T. In 1993 he was
elected Chairman and CEO, AT&T China. His business activities are numerous
and worldwide, having served on many high profile boards of directors and
industry associations. He is currently Chairman, Executive Advisory Board,
Cameron School of Business and a member of the Board of Directors of the UNC-W
Corporation at the University of North Carolina at Wilmington, North
Carolina.  Mr. Warwick obtained his BSBA from the University of North
Carolina, Chapel Hill, and his MBA from Northwestern University,
Chicago.





Peter Ullrich has
served as a director of the Company since April 2007.  Mr. Ullrich is
currently EAU’s largest shareholder and single largest customer. Mr. Ullrich is
the owner of Water Science, LLC (“WS”), Latin America’s exclusive licensee of
EAU’s Empowered WaterTM technologies. Mr. Ullrich is also the owner and Chairman
of the Board of Esmeralda Farms, an innovative leader in the international
floral industry. Mr. Ullrich has been involved in all aspects of the
international floral industry for over 35 years. He is a pioneer in developing
and adopting cutting edge technologies that not only assist in building better
business in the floral industry but creating cleaner safer working environments
for his over 5,000 employees. Esmeralda Farms are certified by various
international “green” organizations, such as Florverde, Flower Label Program and
Veriflora. Mr. Ullrich was the recipient of the 2006 SAF Gold Medal Achievement
Award.  Mr. Ullrich was born and educated in Germany.




29




Theodore C. Jacoby,
Jr. was appointed as a director in September 2007.  Mr. Jacoby
is currently President and Chief executive Officer of T.C. Jacoby & Co., the
leading independent distributor of bulk dairy products including raw milk,
cream, condensed milk, powdered milk, butter and cheese in the U.S.  Mr.
Jacoby has expanded T.C. Jacoby to numerous international markets. Mr. Jacoby is
an active member of the international dairy community serving on the Board of
Directors of the U.S. Dairy Export Committee Council since 1995.  He
currently serves on the Trade Policy Committee.   T.C. Jacoby &
Company is a member of many other prominent dairy trade organizations including
the International Dairy Foods Association, California Milk Processors
Association and Associate Member of National Milk Producers Federation. Mr.
Jacoby received his Bachelor of Science degree in Agriculture from the Missouri
College of Agriculture, Food, and Natural Resources.  After graduation, Mr.
Jacoby proudly served in the United States Marine Corp for four
years.





J. Leo
Montgomerywas appointed as
a director and non-executive Chairman of the Board in October
2007.  Mr. Montgomery was a senior partnerat Ernst & Young retiring in 2003
after a 39 year career.  Mr. Montgomery served in several leadership
roles at Ernst & Young and was the coordinating partner for many major
clients of the firm.  He is currently an Advisory Director at SunTrust
Robinson Humphrey (a division of SunTrust Capital
Markets).  He is also a member of the Board of Directors of Cypress
Communications, Inc.  Mr. Montgomery has served as a consultant to EAU
Technologiessince May
2006.  Mr.
Montgomery is a Certified Public Accountantand holds a B.A. degree fromHardingUniversity.





KarlG.Hellmanwas appointed as a director in October
2007.   Mr. Hellman is the founder of Resultrek, a management
consulting and marketing training firm, where he has served as Chief Executive
Officer and President since
1999.  Prior to that from 1997 to 1999, Mr. Hellman served as a
Principal of Scott, Madden & Associates, a management consulting
firm.  Mr. Hellman has more than 30 years of consulting and corporate
experience.  He received his B.A. fromBeloitCollegeand his MastersDegreefromNorthwesternUniversity.





Committees





The Board
of Directors maintains standing Audit and Compensation Committees.





Audit Committee. The Audit
Committee, which consists of Theodore C. Jacoby, Jr., J. Leo Montgomery, Jay S.
Potter and William J. Warwick, serves as an independent and objective party to,
among other things, review the Company’s financial statements and annual report,
review and appraise the audit efforts of the Company’s auditors and pre-approve
permissible services to be performed for the Company by its auditors, and is
responsible for the appointment, compensation and oversight of the work of the
independent public accountants which audit the Company’s financial statements.
The primary function of the Audit Committee involves oversight functions to
support the quality and integrity of the Company’s accounting and financial
reporting processes generally. It should be noted, however, that the members of
the Committee are not necessarily experts in the fields of auditing and
accounting and do not provide special assurances on such matters. The Audit
Committee met six times during 2008. The Board of Directors has determined that
J. Leo Montgomery is an “audit committee financial expert” as that term is
defined by applicable rules of the Securities and Exchange Commission. The
report of the Audit Committee appears below in this Proxy Statement. A copy of
the Audit Committee’s charter is included on the Company’s website at www.eau-x.com.




Compensation Committee. The
Compensation Committee, consisting of Karl Hellman, Theodore C. Jacoby, Jr. and
William J. Warwick, sets the compensation of executive officers and administers
the Company’s incentive plans, including the Company’s stock option plans.The Compensation
Committee met twice during 2008. The Compensation Committee has adopted a
written charter, a copy of which is available on the Company’s website at www.eau-x.com. As set
forth in the Compensation Committee charter, the Committee:




·
              Has
      the authority to engage independent compensation consultants and legal
      advisors when determined by the Committee to be necessary or appropriate.
      In 2007, the Committee engaged a compensation consultant, Phillip Blount
      & Associates, Inc., to assist it with, among other things, research on
      appropriate director, executive and employee compensation
      levels.
  30
   ·
              Has
      the authority to delegate its responsibilities as it may deem appropriate,
      to the extent allowed under applicable law. The Committee generally does
      not delegate its responsibilities to
  others.
  ·
              Requests
      that the Chief Executive Officer provide to the Committee his
      recommendations relative to compensation of other executive officers of
      the Company. The Committee meets in executive session to determine the
      compensation of the Chief Executive Officer of the
      Company.
  Meetings and Attendance. The
Board of Directors held 5 meetings during 2008. Each incumbent director attended
at least 75 percent of the aggregate of the meetings of the Board of Directors
and of the committees of which he was a member. The Company strongly encourages
each Board member to attend the Company’s annual meeting of
stockholders.




Section 16(a) Beneficial Ownership
Reporting Compliance




Section 16(a) of the Securities Exchange
Act of 1934, as amended,
and the regulations of the Securities and Exchange Commission promulgated
thereunder, require our directors, executive officers and persons who own more
than 10% of a registered class of our equity securities to file reports of
ownership and changes in ownership with the
Securities and Exchange Commission, and provide us with copies of such reports.





Based solely on a review of the copies
of the reports furnished to us, or written representations that no reports were
required to befiled,we believe that during the fiscal year
ended December 31,2008all Section 16(a) filing requirements
applicable to our directors, officers, and greater than 10% beneficial owners
were completed.





ITEM 11.EXECUTIVE
COMPENSATION





Compensation of Executive Officers




The following table provides certain
summary information concerning the compensation paid or accrued by us and our
subsidiaries, to or on behalf of our Chief Executive Officer.  Other
than as set forth in the table, no executive officer’scash salary and bonus exceeded $100,000
in any of the applicable years.  The following information includes
the dollar value of base salaries, bonus awards, the value of restricted shares
issued in lieu of cash compensation and certain other compensation,if any, whether paid or
deferred:




Name
      and Principal Position
                              Year
                              Salary
                                ($)
                              Bonus
                                ($)
                              Stock
      Awards
                                ($)
                              Option
      Awards
                                ($)
                              Non-Equity
      Incentive Plan Compensation
                              Change
      in
                                Pension
      Value
                                and
                                Nonqualified
      Deferred Compensation Earnings
                                ($)
                              All
      Other Compensation ($)
                              Total
      ($)Wade
      R. Bradley
                                Chief
      Executive Officer
                              2008
                                2007
                              240,000
                                240,000
                              0.00
                                0.00
                              0.00
                                0.00
                              129,896
                                332,533
                              0.00
                                0.00
                              0.00
                                0.00
                              6,000
      (1)
                                5,750
      (1)
                              375,896
                                578,283Doug
      Kindred
                                Chief
      Technology Officer
                              2008
                                2007
                              176,985
                                125,936
                              0.00
                                0.00
                              0.00
                                0.00
                              218,367
                                33,892
                              0.00
                                0.00
                              0.00
                                0.00
                              6,000
      (1)
                                6,330
      (1)
                              401,352
                                166,158Joe
      Stapley
                                Senior
      Vice President, Investor Relations
                              2008
                                2007
                              136,000
                                120,000
                              0.00
                                0.00
                              0.00
                                0.00
                              90,429
                                6,496
                              0.00
                                0.00
                              0.00
                                0.00
                              0.00
                                0.00
                              226,429
                                126,496





(1)
            Other compensation consists of car
      allowances.




31




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





The
following table sets forth information regarding stock options and restricted
stock held by the Company's Named Executive Officers at December 31,
2008.





Option
      AwardsName
                  Number
                    of
      Securities Underlying Unexercised Options
                    (#)
                    Exercisable
                  Number
      of Securities Underlying Unexercised Options  (#)
                    Unexercisable
                  Option
      Exercise Price
                    ($)
                  Option
      Expiration DateWade
      R. Bradley, Chief Executive Officer
                  300,000
                  200,000
                  1.30
                  11/6/2016Doug
      Kindred,
                    Chief
      Technology Officer
                  20,000
                    25,000
                    132,500
                  397,500
                  3.50
                    2.45
                    1.30
                  5/27/2015
                    6/1/2015
                    11/8/2017Joseph
      Stapley,
                    Senior
      Vice President, Investor Relations
                  25,000
                    25,000
                    39,808
                  119,422
                  3.50
                    2.45
                    1.30
                  5/27/2015
                    6/1/2015
                    12/6/2017





Employee
Compensation





In April 2007, the Companyengaged Phillip Blount and Associates, Inc., a consulting firm in Human
Resources, to review the company’s overall compensation
program.  Based upon the findings of that study, recommendations of
management, and review by the Board, the compensation changes noted below were
made.





Base
compensation – Phillip Blount and Associates, Inc. performed an analysis on
compensations levels for each employee based on job description and comparative
compensation levels to companies our size.  Based on the results of
their findings certain employee’s base compensation was adjusted upon approval
by the Company’s board of directors.  Among the employee’s whose base
compensation levels were adjusted was Joseph A. Stapley and Douglas Kindred
(named executives).  The base pay for Mr. Stapley was increased from
$120,000 to $136,000.  Mr. Kindred’s employment agreement is
summarized below.





Incentive
Stock Options – Based on the recommendations of Phillip Blount and Associates,
Inc. and upon approval from the Board of Directors, a total of 480,260 stock
options were granted to various employees, pursuant to the Company’s 2007 Stock
Incentive Plan.  The following executives were included in the stock
option grants:  Joseph Stapley and Larry Earle, effective immediately.
The options were issued at a $1.30 exercise price and vest ratably over a period
of four years. Mr. Stapley was awarded a stock option grant of 159,230 shares.
It was also recommended that Douglas Kindred was granted stock options, which
were granted in November 2007 as part of Mr. Kindred’s employment
agreement.




32




Corporate Bonus Program – In connection
with the adjustments to our Human Resources policies, the Board approved a
corporate bonus program. Bonuses will be paid to executive officers when the
Company achieves an approximate operational break-even run rate, measured as the
achievement of consistent revenues of $250,000 per month over two consecutive
months, not taking into account capital or one time extraordinary charges. In
the calculation of monthly revenues, equipment revenues will only comprise up to
$50,000 of the $250,000 monthly revenue target for the calculation of the bonus.
Once this target is achieved, the payout of the bonus will be over a period of 2
months to 12 months, at the discretion of management.





The
following executives are included in the Bonus Program:  Wade R.
Bradley (President and Chief Executive Officer) is eligible for a $72,000 bonus,
30% of his base pay. Doug Kindred (Chief Technology Officer) is eligible for a
$61,600 bonus, 35% of his base pay. Mr. Stapley is eligible for a $40,800 bonus,
30% of his base pay.





401(k)
retirement plan – As part of the compensation package, the Company established a
“safe-harbor” retirement plan for its employees.  Effective January 1,
2008, the Company established the EAU 401(k) Retirement Trust, wherein all full
time employees are eligible to participate, including executives.  The
plan allows the employee’s to defer a portion of their income in a retirement
account.  As an incentive for the employee’s to participate in the
retirement plan, the Company has agreed to match the employee’s deferral 100% of
the amount of the deferrals that do not exceed 3% of the participant's
compensation, plus 50% of the amount of the participant's deferrals that exceed
3% of the participant's compensation but do not exceed 5% of the participant's
compensation.





Employment
Agreements




As of December 31, 2008,2executives had current employment
agreements.





Employment
Agreement and Option Agreement with Doug Kindred





In
connection with the continued employment of Mr. Kindred as Chief Technology
Officer on November 8, 2007, Mr. Kindred and the Company entered into an
employment agreement (the “Agreement”), a copy of which is attached as Exhibit
10.1 to the Form 8-K filed by the Company dated November 8, 2007 and
incorporated herein by reference.





The
material terms of the agreement include the following:





1. Appointment. Per the
terms of the Agreement, Mr. Kindred will continue to serve as the Company’s
Chief Technology Officer.





2. Base Salary. Mr.
Kindred’s initial base salary will be $176,985 per year.





3. Annual Bonuses.
Beginning with the Company's fiscal year which commences on January 1,
2008, Mr. Kindred is entitled to receive a bonus of up to 35% of his base salary
($61,945), upon the achievement of annual performance benchmarks, to be set by
the Board of Directors (the “Board”) and the CEO.




33




4. Inducement Stock Option
Grant. Mr. Kindred is entitled to receive stock options to purchase
530,000 shares of the Company’s common stock. The options will not constitute
incentive stock options under Section 422 of the Internal Revenue Code of
1986.  The options shall vest in installments in accordance with the
schedule below:




·
              132,500
      shares shall vest on November 8,
2008
  ·
              132,500
      shares shall vest on November 8,
2009
  ·
              132,500
      shares shall vest on November 8,
2010
  ·
              132,500
      shares shall vest on November 8,
2011
  The
exercise price per option is $1.30.  The terms and conditions of the
options are included in a separate option grant agreement substantially in the
form attached in an 8-K the Company filed with the SEC dated November 8,
2007.





5. Standard Benefits.
Mr. Kindred will be eligible to participate in the Company’s standard benefits
package, on the same basis as other senior executives of the
Company.




6. Vacation. Mr. Kindred
will be entitled to 20 business days of paid vacation per calendar
year.





7. Company Car. The
Company shall reimburse Mr. Kindred for the amount required to lease an
automobile of Mr. Kindred’s choice up to a maximum of $500 per month. In
addition, the Company will reimburse Mr. Kindred, up to a maximum of $1,000 per
year, for the following properly documented expenses related to such automobile:
(i) service, (ii) maintenance, (iii) repair and (iv) excess mileage fees
required by the automobile lease, if such excess mileage is the result of
required business travel by Mr. Kindred on behalf of the Company.





8. Term. The employment
agreement expires on the third anniversary of the Effective Date, subject to
automatic renewal for a one-year term unless either party has given the other 60
days’ prior written notice.





9. Severance. Mr.
Kindred will be entitled to certain severance payments and other rights if his
employment is terminated: (i) by the Company without “Cause,” as that term is
defined in his agreement, or (ii) by Mr. Kindred for “Good Reason,” as that term
is defined in his agreement. In each such instance, Mr. Kindred’s severance
benefits will be as follows:


·
              Salary. Any
      unpaid base salary through the date of
  termination.
  ·
              Vacation. Any
      earned but unused vacation
time.
  ·
              Severance
      Payment. He will be entitled to an amount equal to twelve months of
      base salary payable over the 12-month period immediately following
      termination.
  ·
              Options. All
      unvested options shall immediately vest and, together with the previously
      vested options, must be exercised during the 60 days immediately following
      the date of termination (and if not so exercised, all such options shall
      automatically and irrevocably
terminate).
  10. Additional Covenants.
The employment agreement contains restrictive covenants, including
anti-solicitation provisions extending one year after termination of his
employment, as well as standard confidentiality obligations.




34




Employment
Agreement, Option Agreement, and Escrow Agreement with Mr. Bradley





In
connection with the appointment of Wade R. Bradley as Chief Executive Officer
and President and as further described under Item 5.02 below, the contents of
which are incorporated hereunder by reference, on October 24, 2006, Mr. Bradley
and the Company entered into an employment agreement, a copy of which was filed
as Exhibit 10.1 in an 8-K the Company filed with the SEC dated October 30, 2006
and incorporated herein by reference.  Mr. Bradley agreed to begin working
for the Company on a date determined by him and in no event later than November
6, 2006 (the "Effective Date").





The
material terms of the agreement include the following:





1.Appointment.
Beginning on the Effective Date, Mr. Bradley will serve as President and Chief
Executive Officer of the Company. The Company's Board of Directors (the "Board")
is obligated to nominate him to serve on the Board. Subject to shareholder
elections, he will serve on the Board through the term of his employment, with
no additional compensation for services as a director.





2.Base Salary. Mr.
Bradley’s initial base salary will be $240,000 per year. The Board may increase
his base salary from time to time.





3.Annual Bonuses.
Beginning with the Company's fiscal year which commences on January 1,
2007, Mr. Bradley is entitled to receive a bonus of up to 30% of his base salary
($72,000), upon the achievement of annual performance benchmarks, to be set by
the Board from time to time in advance of each fiscal year.





4.Inducement Stock Option
Grant. Mr. Bradley is entitled to receive stock options to purchase
500,000 shares of the Company’s common stock, which will represent approximately
2.17% of the Company’s fully diluted capital stock. The options will not
constitute incentive stock options under Section 422 of the Internal Revenue
Code of 1986.  The options shall vest in installments in accordance with
the schedule below:


·
              100,000
      shares shall vest on February 6,
2007
  ·
              100,000
      shares shall vest on November 6,
2007
  ·
              100,000
      shares shall vest on November 6,
2008
  ·
              100,000
      shares shall vest on November 6,
2009
  ·
              100,000
      shares shall vest on November 6,
2010


The
exercise price per option shall be equal to the closing sale price of the
Company’s common stock on October 24, 2006. The number of shares subject to the
options will be equitably adjusted in the event of any stock split, stock
dividend, reverse stock split or other similar event. The terms and conditions
of the options are included in a separate option grant agreement substantially
in the form attached in an 8-K the Company filed with the SEC dated October 30,
2006 as Exhibit 10.2.





5.Standard Benefits.
Mr. Bradley will be eligible to participate in the Company’s standard benefits
package, on the same basis as other senior executives of the
Company.




6.Vacation. Mr. Bradley
will be entitled to 20 business days of paid vacation per calendar
year.





7.Company Car. The
Company shall reimburse Mr. Bradley for the amount required to lease an
automobile of Mr. Bradley’s choice up to a maximum of $500 per month. In
addition, the Company will reimburse Mr. Bradley, up to a maximum of $1,000 per
year, for the following properly documented expenses related to such automobile:
(i) service, (ii) maintenance, (iii) repair and (iv) excess mileage fees
required by the automobile lease, if such excess mileage is the result of
required business travel by Mr. Bradley on behalf of the Company.




35




8.Term. The employment
agreement expires on the third anniversary of the Effective Date, subject to
automatic renewal for a one-year term unless either party has given the other 60
days’ prior written notice.





9.Severance. Mr.
Bradley will be entitled to certain severance payments and other rights if his
employment is terminated: (i) by the Company without “Cause,” as that term is
defined in his agreement, (ii) by Mr. Bradley for “Good Reason,” as that term is
defined in his agreement, or (iii) non-renewal other than for “Cause.” In each
such instance, Mr. Bradley’s severance benefits will be as follows:


·
              Salary. Any
      unpaid base salary through the date of
  termination.
  ·
              Vacation. Any
      earned but unused vacation
time.
  ·
              Severance
      Payment. He will be entitled to an amount equal to twelve months of
      base salary payable over the 12-month period immediately following
      termination.
  ·
              Options. All
      unvested options shall immediately vest and, together with the previously
      vested options, must be exercised during the 60 days immediately following
      the date of termination (and if not so exercised, all such options shall
      automatically and irrevocably
terminate).


10.Additional Covenants.
The employment agreement contains restrictive covenants, including
anti-solicitation provisions extending one year after termination of his
employment, as well as standard confidentiality obligations.




Code of Ethics





The Company adopted a Code of Ethics on April 6, 2004, that applies
to its principal executive officer, principal financial officer, principal
accounting officer and controller or persons performing similar functions. A
copy of our Code of Ethics wasfiled as an exhibit to our
AnnualReport for the year ended December 31,
2004.The
Company undertakes to provide to any person, without charge, upon written or
verbal request directed toJoseph A. Stapley,1890 Cobb International
Boulevard,Kennesaw,Georgia, 30152, (678)388-9492.





ITEM 12.
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS ANDMANAGEMENT





The following table presents information
about the beneficial ownership of our common stock as ofMarch26, 2009by:




·
            each person or entity who is known
      by us to own beneficially more than 5% of the outstanding shares of
      our common stock;




·
            each of our
      directors;




·
            each of our named executive
      officers; and




·
            all directors and executive
      officers as a group.




36




Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to community
property laws, where applicable. The percentage of beneficial ownership is based
on18,785,918 shares of
common stock outstanding as ofMarch26, 2009.




Name
      and Address of Beneficial Owner
                Number of
                  Shares
                  Beneficially
      Owned
                
                Percentage of
                  Shares
                  OutstandingPeter F. Ullrich
      (1)
                  1800 NW 89th
      Place
                  Miami,FL33172
                18,035,769
                
                67.3%Water Science, LLC.
      (1)
                  1800 NW 89th
      Place
                  Miami,FL33172
                14,550,000
                
                54.2%Wade R. Bradley
      (2)
                  1890 Cobb International Blvd., Ste
      100
                  Kennesaw,GA30152
                300,000
                
                1.6%Joseph A. Stapley
      (3)
                  1890 Cobb International Blvd., Ste
      100
                  Kennesaw,GA30152
                188,058
                
                1.0%Doug Kindred(4)
                  1890 Cobb International Blvd., Ste
      100
                  Kennesaw,GA30152
                305,750
                
                1.6%William J.
      Warwick
                  1063 Ocean Ridge
      Drive
                  Wilmington,North Carolina28405
                173,077
                
                1.0%Jay S. Potter(5)
                  10509 Vista Sorrento Pkwy.#300
                  San Diego,CA92121
                512,982
                
                2.7%Theodore C. Jacoby,
      Jr.
                  1716 HiddenCreek Ct.
                  St. Louis,MO63131
                173,077
                
                *Karl Hellman
                  555 Northpoint Center East, 4th
      Floor
                  Alpharetta,GA30022
                23,077
                
                *J. LeoMontgomery (6)
                  1890 Cobb International Blvd., Ste
      100
                  Kennesaw,GA30152
                567,377
                
                3.0%All current directorsand executive officers as a
      group
                  (11 persons)
                20,299,017
                
                71.8%









(1)
            Mr.
      Ullrich is the managing member of Water Science, LLC.  Mr.
      Ullrich beneficially owns 3,485,769 shares and indirectly through Water
      Science beneficially owns 6,380,770 shares, warrants to purchase 5,169,230
      shares at an exercise price of $1.30 per share and a convertible note
      currently convertible into 3,000,000 shares.  The warrants and
      convertible note are held by Water Science,
LLC.


(2)
            Mr.
      Bradley holds options to purchase a total of 500,000 shares at an exercise
      price of $1.30 per share; 300,000 shares are currently exercisable or
      exercisable within 60 days of the date of this
  report.




37




(3)
            Mr.
      Stapley beneficially owns 98,250 shares and holds options to purchase a
      total of 25,000 shares at an exercise price of $3.50 per share, options to
      purchase 25,000 shares at an exercise price of $2.45 per share and options
      to purchase 159,230 shares at an exercise price of
      $1.30.  Options to purchase 25,000 shares with an exercise price
      of $3.50, 25,000 shares with an exercise price of $2.45 and 39,808 shares
      with an exercise price of $1.30 are currently exercisable or exercisable
      within 60 days of the date of this
report.


(4)
            Mr.
      Kindred beneficially owns 128,250 shares and holds options to purchase a
      total of 575,000 shares at exercise prices between $1.30 and $3.50 per
      share.  Options to purchase 20,000 shares with an exercise price
      of $3.50, 25,000 shares with an exercise price of $2.45 and 132,500 shares
      with an exercise price of $1.30 are currently exercisable or exercisable
      within 60 days of the date of this
report.


(5)
            Mr.
      Potter beneficially owns 114,816 shares.  Warrants to purchase a
      total of 398,166 shares at exercise prices ranging from $0.01 to $5.00 per
      share are owned by companies controlled by Mr.
  Potter.


(6)
            Mr.
      Montgomery beneficially owns 67,377 shares and beneficially holds warrants
      to purchase up to 500,000 shares at an exercise price of $2.76 per share
      held by JL Montgomery Consulting,
LLC.





Securities
Authorized for Issuance Under
Equity Compensation Plans




EQUITY COMPENSATION PLAN
      INFORMATION AS OF DECEMBER 31, 2008Plan
    category
                              Number of securities to be issued
      upon exercise of outstanding options, warrants and
      rights
                              Weighted-average exercise price of
      outstanding options,warrants and
      rights
                              Number of securities remaining
      available for future issuance under equity compensation
      plansEquity
      compensation plans approved by security holders
                              585,260
                              $1.69
                              1,769,740Equity
      compensation plans not approved by security holders*
                              7,802,607
                              $1.60
                              N/ATotal
                              8,387,867
                              $1.60
                              N/A




(*) Equity compensation plans not approved
by security holders consist of individually negotiated grants of options or
warrants to consultants, directors, suppliers, vendors and others who provide
goods or services to the Company, and grants of warrants to investors in
connection with limited offerings of the Company’s common
stock.





ITEM 13.
            CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS, AND
      DIRECTORINDEPENDENCE





The following are certain transactions
during the year ended December 31,2008,involving ourofficers, directors and shareholders owning more
than 10% of our outstanding stock.  We believe that the terms of these
transactions are at least as favorable to us as we would expect to negotiate
with unrelated third parties.





Effective
February 2009, Mr. Larry Earle resigned from the Company to pursue independent
consulting.  We will to continue to work with Mr. Earle in the poultry
industry and benefit from his industry experience as he consults with the
Company.




38




During
the year ended December 31, 2008, the Company engaged the services of Resultrek
for business consulting and planning.  Resultrek is controlled by Karl
Hellman, a director of the Company.  The Company paid approximately
$68,000 for various projects.





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.





The
Company has a consulting agreement with JL Montgomery Consulting, LLC, a
consulting practice owned by Mr. J. Leo Montgomery, who is the non-executive
Chairman of the Board. Under the agreement, in April 2006 Mr. Montgomery
received a warrant to purchase 500,000 shares of common stock at $2.76 per
share, to expire at the end of five years. (The agreement is described more
fully in the Company’s March 31, 2006 Quarterly Report on Form 10-QSB and
attached to the Form 10-QSB as exhibit 10.13. The consulting agreement and its
description are incorporated herein by this reference.) In October 2007, the
warrant was amended to expire in ten rather than five years. This agreement also
provides for consulting fees in a monthly amount to be negotiated after the
Company achieves two consecutive quarters of positive EBITDA. As the Company has
not achieved this milestone, no fees have been payable to date.





In
September 2005, the Company entered into a Senior Convertible Note with Water
Science, a related party, in exchange for $3,000,000. Pursuant to the debt
agreement, the Note accrues interest at the rate of 3% per annum and is due,
principal and interest together, on September 16, 2008.  In June 2008,
Water Science agreed to extend the maturity date of the Note to March 16,
2009.  In March 2009, the Company and Water Science extended the
maturity date to September 16, 2009 and increased the interest rate to
10%.  No principal or interest payments need to be paid during the
loan period.  The Company accrued $90,000 in interest expense for the
year ended December 31, 2008 and $90,000 in 2007.  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
issuance of the Note, the Company also granted a three year warrant to purchase
up to two million shares of the Company’s $0.0001 par value common stock with an
exercise price of $2.76 per share.





In May
2007, the Company entered into a termination agreement related to the
cancellation and reissuance of the existing warrants (“Original Warrants”) to
purchase a total of 8.4 million shares of $0.0001 par value common stock of the
Company, at a price of $2.76 per share, held by Water Science.  The
Company granted to Water Science replacement warrants to purchase 8.4 million
shares of common stock at a price of $1.30 per share, with an expiration date of
May 9, 2010.  The Company 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.





The
remaining warrants 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 December 31, 2008 and December 31, 2007, the value
of the derivative liability was $8,621,940 and $6,758,074,
respectively.  The Company recorded a loss of $1,863,866 and
$2,118,761 in the change of the derivative liability to fair market value for
the period ended December 31, 2008 and 2007, respectively.




39





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 agreement provides
termination rights by Water Sciences and a pro rata refund of the
fee.  The Company recognizes income from this agreement over the first
5 years of the agreement.  The Company recognized $200,000 in each of
the years ended December 31, 2008 and 2007.  This agreement also gives
Water Science the rights to purchase machinery from the Company at cost plus 25
percent.  During the year ended December 31, 2008, the Company sold
one small water generator and miscellaneous spare parts to Water Science for
$26,188.  During the year ended December 31, 2007, the Company sold
two large water generators, three small water generators and related parts to
Water Science for $517,503.  Further, the Company has received and
recorded $697,500 in advance deposits from Water Science on machine orders at
December 31, 2008 and 2007.  In connection with the sales of the
machines and products, the Company has recorded approximately $358,656 in
accounts receivable at December 31, 2008.





Director
Independence




The Board
of Directors has determined in accordance with the listing standards of The
NASDAQ Stock Market that each of the following directors is an independent
director: Mr. Hellman,Mr. Jacoby and Mr. Warwick. To be an independent director under those
listing standards, a director must have no relationship which, in the opinion of
the Company’s Board of Directors, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director, and
must have no relationships which are specified in the independence standards to
preclude an independence determination. Mr. Bradley is not independent because
he is an executive officer. Mr. Ullrich is not independent due to the level of
beneficial ownership of common stock of the Company. Mr. Potter is independent
under SEC Rule 10A-3, but does not satisfy the definition of independence under
the NASDAQ Marketplace Rules due to the fees received from the Company in 2005
by Nexcore Capital, his affiliate. Asdescribedat“Certain RelationshipsandRelatedTransactions,”Mr. Hellmanreceived consultingfeesin theamountof$68.000. Duetothenature andamountofthesefees,Mr.Hellmanisnotdisqualifiedfromindependenceunder the NASDAQlistingstandards.In making the
foregoing determination, the Board considered all relationships between members
of the Board of Directors and the Company, including the relationships described
at “Certain Relationships and Related Transactions.”




The Board
of Directors unanimously concluded that the above-rule listed relationships
would not affect the independent judgment of the three independent directors,
Mr. Hellman, Mr. Jacoby and Mr. Warwick, based on their experience, character
and independent means, and therefore do not preclude an independence
determination.




The Board
approved the participation of J. Leo Montgomery and Jay S. Potter as
non-independent members of the Audit Committee in accordance with the NASDAQ
listing standards exception. Mr. Potter is a principal of Nexcore Capital, which
received placement fees from the Company in 2005 for assisting it with a private
placement. Due to this relationship, Mr. Potter is not deemed an independent
director under NASDAQ’s listing standards relating to Audit Committees. The
listing standards include restrictions on receiving compensation from the
Company for the past three years. The Board believes that Mr. Potter will
qualify as an independent director under the NASDAQ Rules beginning in 2008
after more than three years have elapsed since the receipt of the last of the
placement fees. The Board found Mr. Potter’s membership was necessary due to his
extensive financial expertise and his comprehensive knowledge of the history of
the Company.




The Board
has determined that J. Leo Montgomery does not meet the above independence
standards due to his consulting arrangement with the Company. The Board
nonetheless appointed Mr. Montgomery to the Audit Committee due to his extensive
financial and accounting expertise. The Board of Directors has determined that
Mr. Montgomery is an “audit committee financial expert” as that term is defined
by applicable rules of the Securities and Exchange Commission. The Audit
Committee previously did not have such an expert.





40




ITEM 14.PRINCIPAL ACCOUNTINGFEES AND SERVICES





AUDIT
FEES





The following table shows
theauditfeesfor professional services
rendered by the principal accountant for the audit of the Company’s annual
financial statements and review of financial statements included in the
Company’s Form 10-Q or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.  Audit fees consisted of work performed in the integrated audit
of the financial statements or the review of interim financial statements and
the related SEC Form 10-K and 10-Q filings, respectively.





HJ
      & Associates2008
                2007Audit
      Fees
                $51,255
                $58,900





AUDIT-RELATED
FEES





HJ did
not bill us for any “audit-related fees” (as defined in Regulation S-X) in
connection with its audit of our financial statements for the fiscal years ended
December 31, 2008.





FINANCIAL INFORMATION SYSTEMS DESIGN AND
IMPLEMENTATION FEES





For the
fiscal years ended December 31, 2008 and December 31, 2007, HJ & Associates
did not bill us for, nor performed, any financial information systems design or
implementation.  For the fiscal years ended December 31, 2007 and
December 31, 2006, we were not billed for professional services from any other
accounting firm for information systems design or implementation.





TAX
FEES





HJ &
Associates did not bill us for any professional services rendered for tax
related services for the fiscal years ended December 31, 2008 or 2007. Tax fees
consisted of tax compliance and reporting. Tax services provided by other firms
were not included in this disclosure.





ALL
OTHER FEES





We were
not billed for any other professional services by HJ & Associates for the
fiscal years ended December 31, 2008 and December 31, 2007.





AUDITOR
INDEPENDENCE





Our Board
of Directors considers that the work done for us in the year ended December 31,
2008 by HJ Associates, LLC is compatible with maintaining HJ Associates, LLC
independence.





AUDITOR’S
TIME ON TASK





All of
the work expended by HJ & Associates on our December 31, 2008 audit was
attributed to work performed by HJ & Associates’ full-time, permanent
employees.




41




POLICY
ON PRE-APPROVAL OF INDEPENDENT AUDITOR SERVICES




The Audit
Committee has adopted a written policy providing guidelines and procedures for
the pre-approval of all audit and permissible non-audit services provided by the
Company’s independent auditors. This policy contemplates that the independent
auditors will provide to the Audit Committee a proposed engagement letter and an
audit service fee proposal during the first quarter of each of the Company’s
fiscal years with a target of approving an engagement letter and appointing an
independent auditor for the audit of the Company’s financial statements as of
and for the year ended during such fiscal year prior to the review by the
Company’s independent auditor of the Company’s financial statements for the
Company’s first quarter. For non-audit services, Company’s management is
expected to submit to the Committee for approval a list of non-audit services
that it recommends that the Committee engage the independent auditor to provide
for the fiscal year, together with a budget estimating non-audit service
spending for the fiscal year. The Committee must approve both the engagement of
the auditor to provide the non-audit services and the budget for such services
prior to commencing the engagement. To ensure prompt handling of unexpected
matters, the Audit Committee has delegated to its Chair the authority to amend
or modify the list of approved permissible non-audit services and fees. The
Audit Committee approved all of the audit, audit related and tax services of the
Company’s principal accountant described in the preceding
paragraphs.




PART
IV





ITEM15.EXHIBITS, FINANCIAL STATEMENT
SCHEDULES




(a)(1) Financial
Statements





The following financial statements are
incorporated by reference in Item8of this Report:


Independent
Auditors’ Report


Balance
Sheet, December 31, 2008 and 2007


Statements
of Operations for years ended December 31, 2008 and 2007


Statements
of Changes of Stockholder Equity for years ended December, 2008 and
2007


Statements
of Cash Flow for year ended December, 2008 and 2007


Notes to
Financial Statements





(a)(2)
Exhibits





Exhibit
      No.
                
                Identification of
      Exhibit3(i).1
                
                Articles
      of Incorporation (incorporated by reference from registration statement on
      Form SB-2 filed with the SEC on July 29, 2002)3(i).2
                
                Certificate
      of Amendment of Certificate of Incorporation (incorporated by reference
      from registration statement on Form SB-2 filed with the Securities and
      Exchange Commission on July 29, 2002)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 Restated Bylaws (incorporated by reference from registration statement
      on Form 8-K filed with the Securities and Exchange Commission on September
      12, 2007).10.1
                
                Settlement
      and License Amendment dated as of March 7, 2008 between the Company and
      University of Georgia Research Foundation (Incorporated by reference from
      current report on Form 8-K filed with the Securities and Exchange
      Commission on March 13, 2008)10.2
                
                Stock
      Purchase Agreement dated as of October 6, 2008 between the Company and
      Water Sciences LLC  (Incorporated by reference from current
      report on Form 8-K filed with the Securities and Exchange Commission on
      October 17, 2008)10.3
                
                Second
      Amended and Restated Senior Secured Convertible Promissory Note dated as
      of October 6, 2008 between the Company and Water Sciences LLC
      (Incorporated by reference from current report on Form 8-K filed with the
      Securities and Exchange Commission on October 17, 2008)10.4
                
                Warrant
      Agreement, by and between the Company and Water Science, LLC, dated May 1,
      2006 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K,
      dated May 4, 2006)
  42
  10.5
                
                Registration
      Rights Agreement by and between the Company and Water Science, LLC, dated
      May 1, 2006 (Incorporated by reference to Exhibit 10.3 of the Company’s
      Form 8-K, dated May 4, 2006)10.6
                
                Amended
      and Restated Exclusive License and Distribution Agreement, by and between
      the Company and Water Science, LLC, dated May 1, 2006 (Incorporated by
      reference to Exhibit 10.4 of the Company’s Form 8-K, dated May 4,
      2006)10.7
                
                Consulting
      Agreement by and between the Company and JL Montgomery Consulting, LLC,
      dated May 1, 2006 (Incorporated by reference to Exhibit 10.13 of the
      Company’s Form 10-QSB for the quarter ended March 31,
  2006)10.8
                
                Form
      of Employment Agreement dated as of October 24, 2006 with Wade R. Bradley.
      (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated
      October 30, 2006.)10.9
                
                Form
      of Option Agreement dated as of October 24, 2006 with Wade R. Bradley.
      (Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K dated
      October 30, 2006.)10.10
                
                Form
      of Escrow Agreement dated as of October 24, 2006 with Wade R. Bradley.
      (Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K dated
      October 30, 2006.)10.11
                
                Amended
      and Restated License Agreement dated as of January 10, 2007 by and between
      Electric Aquagenics Unlimited, Inc. and Zerorez Franchising Systems, Inc.
      (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated
      November 16, 2006.)10.12
                
                Warrant
      Agreement dated as of May 9, 2007 between the Company and Peter F. Ullrich
      and Water Sciences LLC (Incorporated by reference to Exhibit 10.2 of the
      Company’s Form 8-K dated May 15, 2007)10.13
                
                Warrant
      and Put Agreement dated as of May 9, 2007 between the Company and Peter F.
      Ullrich and Water Sciences LLC (Incorporated by reference to Exhibit 10.3
      of the Company’s Form 8-K dated May 15, 2007)10.14
                
                Amended
      and Restated Registration Rights Agreement dated as of May 9, 2007 between
      the Company and Peter F. Ullrich and Water Sciences LLC (Incorporated by
      reference to Exhibit 10.4 of the Company’s Form 8-K dated May 15,
      2007)10.15
                
                License
      agreement between University of Georgia Research Foundation, Inc. and
      Electric Aquagenics Unlimited, Inc. dated June 18, 2002 (Incorporated by
      reference to Exhibit 10.9 of the Company's Form 10-QSB for the quarter
      ended June 30, 2007)10.16
                
                Agreement
      for Purchase and Sale of Assets dated as of August 13, 2007 between the
      Company and Perfect Water & Essentials, LLC (“PWE”) (Incorporated by
      reference to Exhibit 10.1 of the Company’s Form 8-K dated August 22,
      2007)10.17
                
                Agreement
      for Purchase and Sale of Assets dated as of August 13, 2007 between the
      Company and Perfect Water & Essentials, LLC (“PWE”) (Incorporated by
      reference to Exhibit 10.1 of the Company’s Form 8-K dated September 27,
      2007)10.18
                
                EAU
      Technologies, Inc. 2007 Stock Incentive Plan (incorporated by reference to
      Annex A to the Registrant’s Definitive Proxy Statement filed with the
      Commission on November 5, 2007).10.19
                
                Form
      of Employment Agreement dated as of November 8, 2007 with Doug Kindred
      (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
      November 8, 2007)10.20
                
                Form
      of Option Agreement dated as of November 8, 2007 with Doug Kindred
      (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated
      November 8, 2007)10.21
                
                Promissory
      Note dated November 15, 2007 in favor of the Company by Perfect Water
      & Essentials, LLC (Incorporated by reference to Exhibit 10.2 of the
      Company’s Form 8-K dated November 15, 2007)10.22
                
                Form
      of Option Agreement dated as of December 6, 2007 with select employees
      (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
      December 6, 2007)10.23
                
                Waiver
      and Consent Letter dated August 30, 2007 between the Company and Water
      Science, LLC.  (Incorporated by reference to Exhibit 10.28 of
      the Company’s Form 10-KSB dated March 27, 2008)10.24
                
                Stock
      Purchase Agreement dated as of January 10, 2007 by and between Electric
      Aquagenics Unlimited, Inc. and Peter Ullrich. (Incorporated by reference
      to Exhibit 10.2 of the Company's Form 8-K dated November 16,
      2006.)
  43
  10.25
                
                Stock
      Purchase Agreement dated as of November 10, 2008 between the Company and
      Theodore Jacoby. (Incorporated by reference from Ex. 4 to quarterly report
      on Form 10-Q filed with the Securities and Exchange Commission on November
      13, 2008)10.26
                
                Form
      of Restricted Stock Award Agreement for Non-Employee Directors.
      (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated
      February 27, 2008.)10.27
                
                Form
      of Restricted Stock Award Agreement for Employees. (Incorporated by
      reference to Exhibit 10.2 of the Company's Form 8-K dated February 27,
      2008.)10.28
                
                First
      Amendment to Lease Agreement dated as of October 31, 2006 between the
      Company and Cobb International Associates. (Incorporated by reference to
      Exhibit 10.39 of the Company's Registration Statement on Form S-1 (File
      No. 333-144646 dated April 11, 2008.)10.29
                
                Security
      Agreement dated September 16, 2005 between the Company and Water Science
      LLC (Incorporated by reference to Ex. 10.3 to the Company’s Form 8-K filed
      on October 12, 2005).10.30
                
                First
      Amendment to Second Amended and Restated Senior Secured Convertible
      Promissory Note signed March 24, 2009 between the Company and Water
      Science LLC.10.31
                
                First
      Amendment to Stock Purchase Agreement dated March 25, 2009 between the
      Company and Water Science LLC.10.32
                
                Amendment
      to Employment Agreement dated as of December 17, 2008 between the Company
      and Wade Bradley.10.33
                
                Amendment
      to Employment Agreement dated as of December 17, 2008 between the Company
      and Doug Kindred14
                
                Code
      of Ethics (incorporated by reference from our Annual Report for the year
      ended December 31, 2004, filed with the Securities and Exchange Commission
      on April 15, 2005).23.1
                
                Consent
      of HJ & Associates, LLC.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.




44




SIGNATURES




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





Dated:March 30, 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)


Pursuant to the requirements of the
Securities Act of 1933, this report has been signed by the following persons in
the capacities and on the dates indicated.





Signature
                                                              
                                                              Title
                                                              
                                                              Date/s/ Wade R. Bradley
                                                              
                                                              Chief
      Executive Officer
                                                              
                                                              March 30,
    2009Wade
      R. Bradley
                                                              
                                                              (principal
      executive officer)/s/ Brian D. Heinhold
                                                              
                                                              Chief
      Financial Officer
                                                              
                                                              March 30,
    2009Brian
      D. Heinhold
                                                              
                                                              (principal
      accounting officer)/s/ J. Leo Montgomery
                                                              
                                                              Director
                                                              
                                                              March 30,
    2009J.
      Leo Montgomery/s/ Karl Hellman
                                                              
                                                              Director
                                                              
                                                              March 30,
    2009Karl
      Hellman/s/ Theodore C. Jacoby, Jr.
                                                              
                                                              Director
                                                              
                                                              March 30,
    2009Theodore
      C. Jacoby, Jr./s/ Jay Potter
                                                              
                                                              Director
                                                              
                                                              March 30,
    2009Jay
      Potter/s/ Peter F. Ullrich
                                                              
                                                              Director
                                                              
                                                              March 30,
    2009Peter
      F. Ullrich/s/ William J. Warwick
                                                              
                                                              Director
                                                              
                                                              March 30,
    2009William
      J. Warwick




45







EAU
TECHNOLOGIES, INC.





REPORT
AND FINANCIAL STATEMENTS




DECEMBER
31, 2008 AND 2007









EAU
TECHNOLOGIES, INC.











REPORT
AND FINANCIAL STATEMENTS




DECEMBER
31, 2008 AND 2007







CONTENTS








PageReport
      of Independent Registered Public Accounting Firm
              F-2Financial
      StatementsBalance
      Sheets
              F-3
      – F-4Statements
      of Operations
              F-5
      – F-6Statements
      of Changes in Stockholders’ Equity (Deficit)
              F-7Statements
      of Cash Flows
              F-8
      – F-9Notes
      to  Financial Statements
              F-10
      – F-24









REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors


EAU
Technologies, Inc.


Kennesaw,
Georgia





We have audited the accompanying balance
sheets of EAU Technologies, Inc. as of December 31, 2008 and 2007,and the related statements of
operations, stockholders equity (deficit) and cash flows for the years ended
December 31, 2008 and 2007.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based
on our audits.





We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.





In our opinion, the financial statements
referred to above present
fairly, in all material respects, the financial position of EAU Technologies,
Inc. as of December 31, 2008 and 2007, and the results of its operations and its
cash flows for the years ended December 31, 2008 and 2007, in conformity
withU.S. generally accepted accounting
principles.





We were not engaged to examine
management's assessmentabout the effectiveness of EAU
Technologies, Inc.’s internal control over financial
reporting as of December 31, 2008 and, accordingly, we do not express an opinion
thereon.





The accompanying financial statements
have been prepared assuming that the Company will continue as a goingconcern.  As
discussed in Note 14to the
financial statements, the Company hasa working capital deficit as well as a
deficit in stockholders
equity.  This
raises substantial doubt about the Company's ability to continue as a going
concern.  Management's plans in regard to this matter are also
described in Note14.  The financial statements do
not include any adjustments thatmight result from the outcome of this
uncertainty.










HJ &
Associates, LLC


Salt Lake
City, Utah


March 27,
2009





F-2





EAU
TECHNOLOGIES, INC.





BALANCE
SHEETS




ASSETS





December
      31,2008
                    
                    
                    2007CURRENT
      ASSETSCash and cash
      equivalents
                    
                    $
                    494,612
                    
                    
                    $
                    1,413,744Accounts
      receivable, net
                    
                    
                    8,710
                    
                    
                    
                    61,196Accounts
      receivable – related party, net
                    
                    
                    358,656
                    
                    
                    
                    357,615Accrued
      interest
                    
                    
                    1,875
                    
                    
                    
                    -Prepaid
      expense
                    
                    
                    52,468
                    
                    
                    
                    30,600Note
      Receivable, current portion
                    
                    
                    150,000
                    
                    
                    
                    -Inventory,
      net
                    
                    
                    3,014,503
                    
                    
                    
                    2,814,533Total current
    assets
                    
                    
                    4,080,824
                    
                    
                    
                    4,677,688PROPERTY
      AND EQUIPMENT, net ofaccumulated depreciation of
      $128,516 and $220,064
                    
                    
                    246,897
                    
                    
                    
                    206,554OTHER
      ASSETSDeposits
                    
                    
                    10,496
                    
                    
                    
                    11,658Restricted
      cash
                    
                    
                    240,000
                    
                    
                    
                    240,000Note receivable
                    
                    
                    -
                    
                    
                    
                    150,000Intellectual
    property
                    
                    
                    87,561
                    
                    
                    
                    61,558Total other
assets
                    
                    
                    338,057
                    
                    
                    
                    463,216Total assets
                    
                    $
                    4,665,778
                    
                    
                    $
                    5,347,458




The accompanying footnotes are an
integral part of these financial statements




F-3




EAU
TECHNOLOGIES, INC.





BALANCE SHEETS
(Continued)




LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)




December
      31,2008
                    
                    
                    2007CURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    373,206
                    
                    
                    $
                    287,183Accrued
      expenses
                    
                    
                    658,608
                    
                    
                    
                    645,054Warranty
      reserve
                    
                    
                    100,000
                    
                    
                    
                    122,000Advance
      – related party
                    
                    
                    -
                    
                    
                    
                    500,000Advance
      deposits on machine orders – related party
                    
                    
                    697,500
                    
                    
                    
                    697,500Current
      portion of long-term debt
                    
                    
                    23,581
                    
                    
                    
                    19,841Senior
      convertible note payable – related party, current portion net of discounts
      of $76,754 and $708,333
                    
                    
                    2,923,246
                    
                    
                    
                    2,291,667Total current
      liabilities
                    
                    
                    4,776,141
                    
                    
                    
                    4,563,245LONG
      TERM LIABILITIESLong term debt, net of current
      portion
                    
                    
                    39,150
                    
                    
                    
                    59,045Deferred licensing revenue –
      related party
                    
                    
                    341,667
                    
                    
                    
                    541,667Derivative liability – related
      party
                    
                    
                    8,621,940
                    
                    
                    
                    6,758,074Total
      long term liabilities
                    
                    
                    9,002,757
                    
                    
                    
                    7,358,786Total
      Liabilities
                    
                    
                    13,778,898
                    
                    
                    
                    11,922,031STOCKHOLDERS’
      EQUITY (DEFICIT)Common
      stock, $.0001 par value; 50,000,000
      shares    authorized; 18,285,918 and 15,105,650 issued
      and outstanding, respectively
                    
                    
                    1,829
                    
                    
                    
                    1,511Additional
      paid in capital
                    
                    
                    39,594,894
                    
                    
                    
                    35,406,545Accumulated
      deficit
                    
                    
                    (48,709,843
                    )
                    
                    
                    (41,982,629
                    )Total
      stockholders’ equity (deficit)
                    
                    
                    (9,113,120
                    )
                    
                    
                    (6,574,573
                    )Total
      liabilities and stockholders’ equity (deficit)
                    
                    $
                    4,665,778
                    
                    
                    $
                    5,347,458




The accompanying footnotes are an
integral part of these financial statements




F-4




EAU
TECHNOLOGIES, INC.





STATEMENTS OF
OPERATIONS





For
      the Year EndedDecember
      31,2008
                      
                      
                      2007REVENUES,
      NET – RELATED PARTY
                      
                      $
                      226,188
                      
                      
                      $
                      717,503REVENUES,
      NET
                      
                      
                      210,921
                      
                      
                      
                      161,096TOTAL
      REVENUES
                      
                      
                      437,109
                      
                      
                      
                      878,599COST
      OF GOODS SOLD
                      
                      
                      84,806
                      
                      
                      
                      519,751GROSS
      PROFIT
                      
                      
                      352,303
                      
                      
                      
                      358,848OPERATING
      EXPENSESDepreciation and
      amortization
                      
                      
                      64,330
                      
                      
                      
                      210,463Research and
      development
                      
                      
                      228,031
                      
                      
                      
                      140,944General and
      administrative
                      
                      
                      4,193,761
                      
                      
                      
                      8,260,609Total operating
      expenses
                      
                      
                      4,486,122
                      
                      
                      
                      8,612,016LOSS
      FROM OPERATIONS
                      
                      
                      (4,133,819
                      )
                      
                      
                      (8,253,168
                      )OTHER
      INCOME (EXPENSE)Interest
      expense
                      
                      
                      (742,625
                      )
                      
                      
                      (1,122,930
                      )Interest
      income
                      
                      
                      12,956
                      
                      
                      
                      31,272Sale
      of technology license
                      
                      
                      -
                      
                      
                      
                      500,000Gain
      (loss) on derivative liability
                      
                      
                      (1,863,866
                      )
                      
                      
                      (2,118,761
                      )Gain
      (loss) on sale of assets
                      
                      
                      -
                      
                      
                      
                      (1,816
                      )Other
      income (expense)
                      
                      
                      140
                      
                      
                      
                      39,024Total other income
      (expense)
                      
                      
                      (2,593,395
                      )
                      
                      
                      (2,673,211
                      )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                      
                      
                      (6,727,214
                      )
                      
                      
                      (10,926,379
                      )PROVISION
      FOR INCOME TAXES
                      
                      
                      -
                      
                      
                      
                      -LOSS
      FROM CONTINUING OPERATIONS
                      
                      
                      (6,727,214
                      )
                      
                      
                      (10,926,379
                      )







F-5




EAU
TECHNOLOGIES, INC.





STATEMENTS OF OPERATIONS
(continued)





For
      the Year EndedDecember
      31,2008
                
                
                2007DISCONTINUED
      OPERATIONS:Loss
      from operations of discontinued operations (Net of $0 in income
      taxes)
                
                
                -
                
                
                
                (604,985
                )Gain
      (Loss) on disposal of discontinued operations (Net of $0 in income
      taxes)
                
                
                -
                
                
                
                640,027GAIN
      (LOSS) FROM DISCONTINUED OPERATIONS
                
                
                -
                
                
                
                35,042NET
      LOSS
                
                $
                (6,727,214
                )
                
                $
                (10,891,337
                )GAIN
      (LOSS) PER SHAREContinuing
      operations
                
                
                (0.41
                )
                
                
                (0.79
                )Discontinued
      operations
                
                
                0.00
                
                
                
                0.00Total
      net loss per share
                
                $
                (0.41
                )
                
                $
                (0.79
                )WEIGHTED
      AVERAGE OF SHARES OUTSTANDING
                
                
                16,404,945
                
                
                
                13,837,978




The accompanying footnotes are an
integral part of these financial statements




F-6




EAU
TECHNOLOGIES, INC.





STATEMENTS OF STOCKHOLDERS’
EQUITY(DEFICIT)




ADDITIONALCOMMON
      STOCK
                                
                                
                                PAID
      IN
                                
                                
                                ACCUMULATEDSHARES
                                
                                
                                AMOUNT
                                
                                
                                CAPITAL
                                
                                
                                DEFICIT
                                
                                
                                TOTALBalance,
      December 31, 2006
                                
                                
                                12,313,341
                                
                                
                                $
                                1,232
                                
                                
                                $
                                27,151,279
                                
                                
                                $
                                (31,091,292
                                )
                                
                                $
                                (3,938,781
                                )Issuance
      of 1,153,846 shares for cash of $1,500,000
                                
                                
                                1,153,846
                                
                                
                                
                                115
                                
                                
                                
                                1,499,885
                                
                                
                                
                                -
                                
                                
                                
                                1,500,000Issuance
      of warrants to Water Sciences, a related party (See Note
    11)
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3,974,885
                                
                                
                                
                                -
                                
                                
                                
                                3,974,885Issuance
      100,000 shares for cash of $50,000 or $0.50 per share
                                
                                
                                100,000
                                
                                
                                
                                10
                                
                                
                                
                                49,990
                                
                                
                                
                                -
                                
                                
                                
                                50,000Issuance
      1,538,463 shares for cash of $2,000,000 or $1.30 per share due to exercise
      of warrants by Water Sciences, a related party
                                
                                
                                1,538,463
                                
                                
                                
                                154
                                
                                
                                
                                1,999,846
                                
                                
                                
                                -
                                
                                
                                
                                2,000,000Vesting
      of options for services
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                730,660
                                
                                
                                
                                -
                                
                                
                                
                                730,660Net
      loss for the year ended December 31, 2007
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (10,891,337
                                )
                                
                                
                                (10,891,337
                                )Balance,
      December 31, 2007
                                
                                
                                15,105,650
                                
                                
                                
                                1,511
                                
                                
                                
                                35,406,545
                                
                                
                                
                                (41,982,629
                                )
                                
                                
                                (6,574,573
                                )Issuance
      of shares for cash of $1,500
                                
                                
                                150,000
                                
                                
                                
                                15
                                
                                
                                
                                1,485
                                
                                
                                
                                -
                                
                                
                                
                                1,500Issuance
      of shares of restricted stock to members of the Board of Directors and
      certain employees
                                
                                
                                187,962
                                
                                
                                
                                19
                                
                                
                                
                                216,137
                                
                                
                                
                                -
                                
                                
                                
                                216,156Exercise
      of warrants for $2,200,000, or $1.30 per share, by Water Science, a
      related party
                                
                                
                                1,692,306
                                
                                
                                
                                169
                                
                                
                                
                                2,199,831
                                
                                
                                
                                -
                                
                                
                                
                                2,200,000Issuance
      of shares for $1,050,000, or $1.00 per share, to Water Science, a related
      party
                                
                                
                                1,050,000
                                
                                
                                
                                105
                                
                                
                                
                                1,049,895
                                
                                
                                
                                -
                                
                                
                                
                                1,050,000Issuance
      of shares for $100,000, or $1.00 per share, to Theodore Jacoby, a
      director
                                
                                
                                100,000
                                
                                
                                
                                10
                                
                                
                                
                                99,990
                                
                                
                                
                                -
                                
                                
                                
                                100,000Issuance
      and vesting of options and warrants for services
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                621,011
                                
                                
                                
                                -
                                
                                
                                
                                621,011Net
      loss for the year ended December 31, 2008
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (6,727,214
                                )
                                
                                
                                (6,727,214
                                )Balance,
      December 31, 2008
                                
                                
                                18,285,918
                                
                                
                                $
                                1,829
                                
                                
                                $
                                39,594,894
                                
                                
                                $
                                (48,709,843
                                )
                                
                                $
                                (9,113,120
                                )






The accompanying footnotes are an
integral part of these financial statements




F-7




EAU
TECHNOLOGIES, INC.





STATEMENTS OF CASH
FLOWS





For
      the Year ended
                  December
      31,2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (6,727,214
                )
                
                $
                (10,891,337
                )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
                
                
                77,996
                
                
                
                210,463Bad
      debt expense
                
                
                55,092
                
                
                
                6,594Common
      stock issued for services
                
                
                216,156
                
                
                
                -Warrants
      and options granted
                
                
                621,011
                
                
                
                4,705,545Discount
      of note payable
                
                
                631,579
                
                
                
                1,000,000(Gain)
      Loss on disposal of discontinued operations
                
                
                -
                
                
                
                (640,024
                )Loss
      on disposal of assets
                
                
                -
                
                
                
                1,816Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                (2,606
                )
                
                
                (28,096
                )(Increase)
      decrease in accounts receivable – related party
                
                
                (1,041
                )
                
                
                (138,136
                )(Increase)
      in pre-paid expense
                
                
                (21,868
                )
                
                
                (14,959
                )(Increase)
      in accrued interest
                
                
                (1,875
                )
                
                
                -Decrease
      (increase) in inventory
                
                
                (318,309
                )
                
                
                (325,479
                )(Increase)
      decrease in deposits
                
                
                1,162
                
                
                
                1,658(Increase)
      in restricted cash
                
                
                -
                
                
                
                (240,000
                )Increase
      (decrease) in accounts payable
                
                
                86,023
                
                
                
                (296,020
                )Increase
      (decrease) in accrued expenses
                
                
                13,554
                
                
                
                110,830Increase
      (decrease) in warranty reserve
                
                
                (22,000
                )
                
                
                19,638Increase
      in advance deposits on machine orders – related party
                
                
                -
                
                
                
                -(Decrease)
      in deferred revenue
                
                
                (200,000
                )
                
                
                (200,000
                )Increase
      (decrease) in derivative liability
                
                
                1,863,866
                
                
                
                2,118,762Net
      cash used in continuing operations
                
                
                (3,728,474
                )
                
                
                (4,598,745
                )Net
      cash used in discontinued operations
                
                
                -
                
                
                
                (116,453
                )Net
      cash used in operating activities
                
                
                (3,728,474
                )
                
                
                (4,715,198
                )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from sale of assets
                
                
                -
                
                
                
                2,150,000Acquisition
      of property and equipment
                
                
                -
                
                
                
                (84,958
                )Issuance
      of note receivable
                
                
                -
                
                
                
                (150,000
                )Intellectual
      property disbursements
                
                
                (26,003
                )
                
                
                (16,988
                )Net
      cash provided in continuing operations
                
                
                (26,003
                )
                
                
                1,898,054Net
      cash provided (used) in discontinued operations
                
                
                -
                
                
                
                (6,890
                )Net
      cash provided (used) in investing activities
                
                
                (26,003
                )
                
                
                1,891,164CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on notes payable
                
                
                (16,155
                )
                
                
                (18,316
                )Proceeds
      from issuance of common stock – related party
                
                
                2,851,500
                
                
                
                4,000,000Proceeds
      from issuance of common stock
                
                
                -
                
                
                
                50,000Net
      cash provided by financing activities
                
                
                2,835,345
                
                
                
                4,031,684NET
      INCREASE (DECREASE) IN CASH
                
                
                (919,132
                )
                
                
                1,207,650CASH
      and cash equivalents, beginning of period
                
                
                1,413,744
                
                
                
                206,094CASH
      and cash equivalents, end of period
                
                $
                494,612
                
                
                $
                1,413,744




The accompanying footnotes are an
integral part of these financial statements




F-8




EAU
TECHNOLOGIES, INC.





STATEMENTS OF CASH
FLOWS


(Continued)





Year
      ended December 31,2008
                  
                  
                  2007Supplemental
      Disclosures of Cash Flow InformationCash paid during the period
      for:Interest
                  
                  $
                  20,650
                  
                  
                  $
                  37,296Income Taxes
                  
                  $
                  -
                  
                  
                  $
                  -Supplemental
      Disclosures of Non-cash Investing and Financing ActivitiesCommon stock issued for
      services
                  
                  $
                  216,156
                  
                  
                  $
                  -




The accompanying footnotes are an
integral part of these financial statements




F-9




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES





Business
Description–EAU
Technologies, Inc. (the “Company” or “EAU”), was incorporated on March 6, 2000,
under the laws of the state of Delaware and commenced operations in September,
2000 as Primacide, Inc.  On May 10, 2001, the Company changed its name
from Primacide, Inc., to Electric Aquagenics Unlimited, Inc.  On
January 17, 2007 the Company changed its name from Electric Aquagenics
Unlimited, Inc. to EAU Technologies, Inc.  The Company is in the
business of developing, manufacturing and marketing equipment that uses water
electrolysis to create fluids. These fluids have various commercial applications
and may be used in commercial food processing organic or non-organic
agricultural and consumer products that clean, disinfect, remediate, hydrate and
moisturize.  These products, which the Company intends to market
nationally and internationally, are for commercial and residential use. The
Company’s financial statements are presented in accordance with accounting
principles generally accepted in the United States of America.





Cash
and Cash Equivalents - For purposes of the balance sheet and statement of
cash flows, the Company considers all highly liquid debt instruments purchased
with maturity of three months or less to be cash equivalents.





Receivables– Receivables represent valid claims against debtors for sales or other
charges arising on or before the balance-sheet date and are reduced to their
estimated net realizable value.  The Company estimates allowances for
doubtful accounts based on the aged receivable balances and historical
losses.  The Company charges off uncollectible accounts receivable
when management estimates no possibility of collecting the related
receivable.





Inventory– Inventory, consisting
primarily of finished goods, is stated at the lower of cost or market; cost is
determined on first-in, first-out (FIFO) method.





Property
and Equipment, and Depreciation – Property and equipment are recorded at
historical cost.  Expenditures for additions and major improvements
that extend the life of the asset are capitalized, whereas the cost of
maintenance and repairs are expensed as incurred.  The Company is
currently testing its system with multiple dairies.  Upon completion
of the tests, and once the lease for the system has started, the cost of the
system will be transferred from inventory to property and
equipment.  Depreciation is computed on the straight-line method over
the estimated useful lives of the assets ranging from three to seven
years.  Depreciation expense for the years ended December 31, 2008 and
2007 was $64,330 and $210,463, respectively.  In September 2005, the
Company pledged all the assets of the Company as collateral for the Senior
Convertible Note, payable to Water Science, a related party.





Long-Lived
Assets–Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be
recoverable.  Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition.  Measurement of an impairment loss for
long-lived assets that management expects to hold and use is based on the fair
value of the asset.  Long-lived assets are reported at the lower of
carrying or fair value less costs to sell.





Fair
Value of Financial Instruments–The carrying values of cash
on hand, receivables, payables and accrued expenses approximate their fair value
due to the short period to maturity of these instruments.




F-10




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)





Recognition of
Sales and Costs of Goods Sold– The Company records sales of its
products based upon the terms of the contract; when title passes to its
customers; and, when collectibility is reasonably assured.  The
Company provides an allowance for sales returns based on current and historical
experience.  Cost of goods sold consists of the purchase price of
products sold including inbound shipping charges.





Warranties–The Company warrants its
products against defects in materials and workmanship for a period of three
years.  The Company has accrued a reserve for these anticipated future
warranty costs.





Advertising
Costs–The Company
expenses advertising costs as incurred.  The Company expensed
approximately $13,000 and $112,000, during the years ended December 31, 2008 and
2007, respectively.





Income
Taxes– Deferred income taxes are provided using the
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax bases.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
someportion or all of the deferred tax
assets will not be realized.  Deferred tax assets and liabilities are
adjusted for the effects of the changes in tax laws and rates of the date of
enactment.




When tax returns are filed, it is highly
certain that some positions
taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the
amount of the position that would be ultimately sustained.  The
benefit of a tax position is recognized in the financial statements in
the period during which, based on all available evidence, management believes it
is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any.  Tax positions
taken are not offset or aggregated with other positions.  Tax
positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable
taxing authority.  The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon
examination.




Interest and penalties associated with
unrecognized tax benefits are classified as additional income taxes in the
statement of income.





Accounting
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates.





Research
and Development –Research and development costs are expensed as
incurred. Research and development
expenses for the years ended December 31, 2008 and 2007 were approximately
$228,000 and $141,000, respectively.





Patents,
Trademarks and Intellectual Property – Patents, trademarks and
intellectual property, consisting of trade secrets and formulas, are recorded in
accordance with SFAS No. 142.  As such, patents and trademarks are
initially measured based on their fair values.  Patents and trademarks
will be amortized on a straight-line basis over its estimated
life.  Currently, we do not have any patents issued to begin
amortizing.




F-11




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)





Earnings Per
Share –The Company adopted
SFAS No. 128,“Earnings
per Share”(“SFAS
128"), which is effective for annual periods ending afterDecember 15,
1997.
 Earnings per share (EPS) are computed based on the weighted
average number of shares actually outstanding.  No changes in the
computation of diluted earnings per share amounts are presented because warrants
granted would have been anti-dilutive due to the Company’s net reported
loss.





Stock
Based Compensation-The Company adopted
SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS
123(R)”) which requires the measurement and recognition of compensation expense
for all share-based payments to employees and directors including employee stock
options and stock purchases related to the Company’s employee stock option and
award plans based on estimated fair values.





Recently   Enacted   Accounting   Standards
-In December 2007, the FASB issued SFAS 141(R), Business Combinations, an
amendment of SFAS 141, which provides additional guidance on business
combinations including defining the acquirer, recognizing and measuring the
identifiable assets acquired and the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS Nos. 141(R) is scheduled to become effective for
us for financial statements issued for fiscal year 2009.  This statement
has no effect on the Company’s financial reporting at this time.





In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, which amended ARB 51, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 is
scheduled to become effective for us for financial statements issued for fiscal
year 2009.  We believe that this statement will have no effect on the
Company’s financial reporting at this time.





In
March 2008, the Financial Accounting Standards Board (FASB) issued SFAS
No. 161, Disclosures about Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS No. 161 changes
the disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about how and why an
entity uses derivative instruments, how the instruments are accounted for under
SFAS No. 133 and its related interpretations, and how the instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. The guidance in SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (fiscal year 2009 for the Company). The Company is
currently evaluating the potential impact of the adoption of SFAS No. 161
on its disclosures in the Company's financial statements.





In May of
2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.”This statement identifies literature
established by the FASB as the source for accounting principles to be applied by
entities which prepare financial statements presented in conformity with
generally accepted accounting principles (GAAP) in the United States.  This
statement is effective 60 days following approval by the SEC of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.”This
statement will require no changes in the Company’s financial reporting
practices.





F-12




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
1 – BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES
(continued)





In May of
2008 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 163, “Accounting for Financial Guarantee
Insurance – an interpretation of FASB Statement No. 60, Accounting and Reporting
by Insurance Enterprises”.This statement requires that an
insurance enterprise recognize a claim liability prior to an event of default
(insured event) when there is evidence that credit deterioration has occurred in
an insured financial obligation.  This statement also clarifies how
Statement 60 applies to financial guarantee insurance contracts.  This
statement is effective for fiscal years beginning after December 15, 2008.
 This statement has no effect on the Company’s financial reporting at this
time.





Reclassification-The financial statements
for periods prior to December 31, 2008, have been reclassified to conform to the
headings and classifications used in the December 31, 2008, financial
statements.





NOTE
2 – CONCENTRATIONS OF CREDIT RISK





The
Company occasionally maintains cash balances in excess of the $250,000 federally
insured limit.  To date, the Company has not incurred, and the
Company’s management does not currently expect to incur, any losses associated
with its cash balances.





The
Company extends unsecured credit to its customers in the normal course of
business.  Periodically, the Company performs credit evaluations of
its customers’ financial condition for determination of doubtful
accounts.





For the
year ended December 31, 2008, sales to one customer, a related party,
represented approximately 52% of the Company’s total net
sales.  Approximately 98% of the Company’s outstanding receivables
were attributable to one customer, a related party, as of December 31,
2008.





For the
year ended December 31, 2007, sales to one customer, a related party,
represented approximately 82% of the Company’s total net
sales.  Approximately 81% of the Company’s outstanding receivables
were attributable to one customer, a related party, as of December 31,
2007.





NOTE
3 – RESTRICTED CASH





In
November 2006 the Company entered into an employment agreement with Wade
Bradley, the Company’s CEO. Pursuant to the agreement the Company deposited
$240,000 with an escrow agent in January 2007. The Company has recognized this
amount as restricted cash on the Company’s financial statements.  The
Company recognized $2,962 and $9,540 in interest income from the escrow account
for the years ended December 31, 2008 and 2007, respectively.





NOTE
4 - TRADE ACCOUNTS RECEIVABLE





Trade
accounts receivable consist of the following
at:





December
      312008
                    
                    
                    2007Trade
      Accounts Receivable
                    
                    $
                    78,710
                    
                    
                    $
                    86,196Trade
      Accounts Receivable – Related Party
                    
                    
                    358,656
                    
                    
                    
                    357,615Less
      allowance for doubtful accounts
                    
                    
                    (70,000
                    )
                    
                    
                    (25,000
                    )$
                    367,366
                    
                    
                    $
                    418,811





Bad debt
expense for the years ended December 31, 2008 and 2007 was $55,092 and $6,894,
respectively.




F-13




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
5 - INVENTORIES





The
composition of inventories is as follows at December 31:





2008
                  
                  
                  2007Finished
      goods
                  
                  $
                  1,828,984
                  
                  
                  $
                  1,887,934Raw
      materials
                  
                  
                  1,585,519
                  
                  
                  
                  1,326,599Allowance
      for obsolete inventory
                  
                  
                  (400,000
                  )
                  
                  
                  (400,000
                  )$
                  3,014,053
                  
                  
                  $
                  2,814,533





The
Company has established an allowance for obsolete inventory.  Expense
for obsolete inventory was $0 and $132,613, for the years ended December 31,
2008 and 2007, respectively, and is included in Cost of Goods Sold.





NOTE
6 – PROPERTY AND EQUIPMENT





Property and equipment consisted of the
following at December 31:





2008
                    
                    
                    2007Machinery
      and equipment
                    
                    $
                    63,426
                    
                    
                    $
                    287,710Vehicles
                    
                    
                    -
                    
                    
                    
                    19,966Furniture
      and fixtures
                    
                    
                    64,442
                    
                    
                    
                    64,442ER
      Systems
                    
                    
                    215,409
                    
                    
                    
                    22,364Leasehold
      improvements
                    
                    
                    32,136
                    
                    
                    
                    32,136Total
      property and equipment
                    
                    
                    375,413
                    
                    
                    
                    426,618Less:  accumulated
      depreciation
                    
                    
                    (128,516
                    )
                    
                    
                    (220,064
                    )Property
      and equipment, net
                    
                    $
                    246,897
                    
                    
                    $
                    206,554





NOTE
7 – 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 $200,000 in each of the years ended
December 31, 2008 and 2007.  This agreement also gives Water Science
the rights to purchase machinery from the Company at cost plus 25
percent.  During the year ended December 31, 2008, the Company sold
one small water generator and miscellaneous spare parts to Water Science for
$26,188.  During the year ended December 31, 2007, the Company sold
two large water generators, three small water generators and related parts to
Water Science for $517,503.  Further, the Company has received and
recorded $697,500 in advance deposits from Water Science on machine orders at
December 31, 2008 and 2007.  In connection with the sales of the
machines and products, the Company has recorded approximately $358,656 in
accounts receivable at December 31, 2008.





F-14




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
7 – RELATED PARTY TRANSACTIONS – (Continued)





Senior Note
Payable -In September 2005, the Company entered into a Senior
Convertible Note with Water Science in exchange for $3,000,000 (see Note
9).  Due to the discount of this note and the beneficial conversion
feature, the Company has recognized approximately $774,000 and $1,000,000 in
interest expense for the years ended December 31, 2008 and 2007,
respectively.  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 $1,863,866
due to the change in the fair market value at December 31, 2008.  The
Company recorded a loss of $2,118,761 in the change of the derivative liability
to fair market value for the year ended December 31, 2007.





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 $200,000 in each of the years ended December 31, 2008 and
2007.





Advances from
Related Party –In April 2007, Water Science advanced $1,000,000 to
the Company. In June 2007 and August 2007, Water Science advanced an additional
$1,000,000 to the Company. These advances were used to exercise warrants in
October 2007, see Note 10.  In October 2007, Water Science advanced
$500,000.  All of the advances were used to purchase common stock upon
the exercise of warrants.





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 officers and employees
cash for certain reimbursable expenses.  As of December 31, 2008 and
2007, the Company had advances to employees or officers in the amount of $8,500
and $5,500, respectively.





Employee Options– In December 2007, the Company granted 480,260 options to various
employees.  The options are for a term of ten (10) years and have an
exercise price of $1.30 per share.  The options vest over a period of
four (4) years.   The warrants were valued using the
Black-Scholes model with the following assumptions:  risk free rate of
4.64%, volatility at 87.06% and the stock price at $1.30.  The value
of each warrant is approximately $1.13 per warrant.  The Company
recognized $272,748 during the year ended December 31, 2008.





In
November 2007, the Company granted 530,000 options to Douglas Kindred, in
connection with the appointment of Mr. Kindred as Chief Technology
Officer.  The options are for a term of ten (10) years and have an
exercise price of $1.30 per share.  The options vest over a period of
four (4) years.   The warrants were valued using the
Black-Scholes model with the following assumptions:  risk free rate of
4.28%, volatility at 85.99% and the stock price at $1.01.  The value
of each warrant is approximately $0.85 per warrant.  The Company
recognized $218,367 during the year ended December 31, 2007.





In
October 2006, the Company granted 500,000 options to Mr. Wade Bradley, the
Company’s CEO, pursuant to his employment agreement.  The options vest
over four years and have an exercise price of $1.30 per share.  (See
Note 11)




F-15




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
8 – 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 are as follows:




For
      the Year Ended December 31,2008
                                      
                                      
                                      2007Warranty
      reserve at beginning of period
                                      
                                      $
                                      122,000
                                      
                                      
                                      $
                                      102,362Costs
      accrued for additional warranties
                                      
                                      
                                      3,208
                                      
                                      
                                      
                                      44,000Service
      obligations honored
                                      
                                      
                                      (25,208
                                      )
                                      
                                      
                                      (24,362
                                      )Warranty
      reserve at end of period
                                      
                                      $
                                      100,000
                                      
                                      
                                      
                                      122,000




NOTE
9 - SENIOR CONVERTIBLE DEBT





In
September 2005, the Company entered into a Senior Convertible Note (the “Note”)
with Water Science, a related party, in exchange for $3,000,000. Pursuant to the
debt agreement, the Note accrues interest at the rate of 3% per annum and is
due, principal and interest together, on September 16, 2008.  In June
2008, Water Science agreed to extend the maturity date of the Note to March 16,
2009.  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 issuance of the Note, the Company also
granted a three year warrant to purchase up to two million shares of the
Company’s $0.0001 par value common stock with an exercise price of $2.76 per
share.





In May
2007, the Company entered into a termination agreement related to the
cancellation and reissuance of the existing warrants (“Original Warrants”) to
purchase a total of 8.4 million shares of $0.0001 par value common stock of the
Company, at a price of $2.76 per share, held by Water Science.  The
Company granted to Water Science replacement warrants to purchase 8.4 million
shares of common stock at a price of $1.30 per share, with an expiration date of
May 9, 2010.  The Company 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.





The
remaining warrants 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 December 31, 2008 and December 31, 2007, the value
of the derivative liability was $8,621,940 and $6,758,074,
respectively.  The Company recorded a loss of $1,863,866 and
$2,118,761 in the change of the derivative liability to fair market value for
the period ended December 31, 2008 and 2007, respectively.




F-16




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
10 – LONG TERM DEBT





Long-term debt consisted of the
following at:





December
      31,2008
                    
                    
                    2007Unsecured
      note payable to unrelated third party, payable in monthly installments of
      $1,500, including interest of approximately 22%, due October
      2012
                    
                    $
                    31,366
                    
                    
                    $
                    39,443Unsecured
      note payable to unrelated third party, payable in monthly installments of
      $1,500, including interest of approximately 22%, due October
      2012
                    
                    
                    31,365
                    
                    
                    
                    39,443Total
      debt
                    
                    
                    62,731
                    
                    
                    
                    78,886Less:  current
      portion
                    
                    
                    (23,581
                    )
                    
                    
                    (19,841
                    )Long
      term debt
                    
                    $
                    39,150
                    
                    
                    $
                    59,045





Maturities
of the notes payable are as follows:





Year Ending December
      31,
                    
                    Amount2009
                    
                    $
                    23,5812010
                    
                    
                    29,8222011
                    
                    
                    9,3282012
                    
                    
                    -Thereafter
                    
                    
                    -$
                    62,731





NOTE
11 – COMMON STOCK





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 will occur in six monthly installments of $350,000 beginning
October 14, 2008 plus a final installment of $400,000 on April 15, 2009. On
March 27, 2009, the Company and Water Science amended the payment schedule of
the Stock Purchase Agreement.  The purchase of the common stock will
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.  If WS defaults on its obligation to purchase the stock under
the Purchase Agreement, then the conversion price reverts back to $3.00 per
share. The Second Amended Convertible Note includes 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%.  WS is controlled by Peter Ullrich, a member of
the Board of Directors of the Company.




F-17





EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
11 – COMMON STOCK – (Continued)





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





In
October 2007, Water Science LLC exercised a portion of its warrants for
$2,000,000 and the Company issued 1,538,463 shares of common stock to Water
Science, at an exercise price of $1.30 per share.





In May
2007, the Company issued 100,000 shares of common stock to an individual who
exercised 100,000 warrants for $50,000 or $0.50 per share.





In May
2007, Peter F. Ullrich and Water Science LLC (“WS”), shareholders of EAU
Technologies, Inc., entered into an agreement (the “Termination Agreement”) for
the cancellation and reissuance of existing warrants held by WS (“Original
Warrants”) to purchase a total of 8.4 million shares of the Company’s common
stock.  In the Termination Agreement, the parties agreed as
follows:




·
              The
      Original Warrants were
cancelled.


·
              The
      Company granted to WS replacement warrants (“Replacement Warrants”) to
      purchase a total of 8.4 million shares of common stock at an exercise
      price of $1.30 per share, with an expiration date of May 9,
      2010.
 ·
              The
      Company has a right (“Put Right”) to require WS to exercise one of the
      Replacement Warrants for up to 3,230,769 shares. The Company may exercise
      the Put Right from time to time, but not more often than once per
      month.  The value of the Put warrants was valued using the
      Black-Scholes model.  The value of each warrant was $1.23, or a
      total of $3,974,885.


·
              The
      warrant shares are subject to an amended registration rights
      agreement.




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





STOCK
INCENTIVE PLAN – In October 2007, the Company’s board of directors approved its
2007 Stock Incentive Plan (“the Plan”) upon shareholder approval. In December
2007, the Company’s shareholders approved the Plan.  Under the plan,
the Company may issue up to 2,250,000 shares of both Incentive Stock Options to
employees only and Non-Qualified Stock Options to employees and consultants at
its discretion.  As of December 31, 2008 the Company has issued
480,260 options under the plan.





F-18




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
11 – COMMON STOCK – (Continued)





A summary
of the status of the options and warrants granted at December 31, 2008 and 2007,
and changes during the years then ended is presented below.





For
      the years ended December 31,2008
                  
                  
                  2007Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of period
                  
                  
                  10,641,839
                  
                  
                  
                  1.55
                  
                  
                  
                  11,925,793
                  
                  
                  
                  2.57Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,410,260
                  
                  
                  
                  3.21Exercised
                  
                  
                  (1,842,306
                  )
                  
                  
                  1.19
                  
                  
                  
                  (1,638,463
                  )
                  
                  
                  1.25Expired
      or cancelled
                  
                  
                  (411,666
                  )
                  
                  
                  2.21
                  
                  
                  
                  (9,055,751
                  )
                  
                  
                  2.76Outstanding
      at end of period
                  
                  
                  8,387,867
                  
                  
                  
                  1.60
                  
                  
                  
                  10,641,839
                  
                  
                  
                  1.55Weighted
      average fair value of options exercisable
                  
                  
                  7,430,172
                  
                  
                  
                  1.63
                  
                  
                  
                  11,425,793
                  
                  
                  
                  2.57





A summary
of the status of the options and warrants outstanding at December 31, 2008 is
presented below:




Warrants
      Outstanding
                        
                        
                        Warrants
      ExercisableRange of
                        
                        
                        
                        
                        Weighted-Average
                        
                        Weighted-AverageExercise
                        
                        
                        Number
                        
                        Remaining
                        
                        Exercise
                        
                        
                        Number
                        
                        
                        ExercisePrices
                        
                        
                        Outstanding
                        
                        Contractual
      Life
                        
                        Price
                        
                        
                        Exercisable
                        
                        
                        Price$.01-.50
                        
                        
                        
                        310,000
                        
                        1.1years
                        
                        $
                        0.04
                        
                        
                        
                        310,000
                        
                        
                        $
                        0.041.00-1.99
                        
                        
                        
                        6,724,491
                        
                        2.6years
                        
                        
                        1.30
                        
                        
                        
                        5,766,796
                        
                        
                        
                        1.302.00-2.99
                        
                        
                        
                        720,000
                        
                        5.6years
                        
                        
                        2.56
                        
                        
                        
                        720,000
                        
                        
                        
                        2.563.00-3.99
                        
                        
                        
                        115,000
                        
                        6.0years
                        
                        
                        3.46
                        
                        
                        
                        115,000
                        
                        
                        
                        3.464.00-4.99
                        
                        
                        
                        255,000
                        
                        0.8years
                        
                        
                        4.00
                        
                        
                        
                        255,000
                        
                        
                        
                        4.005.00-5.50
                        
                        
                        
                        263,376
                        
                        0.9years
                        
                        
                        5.15
                        
                        
                        
                        263,376
                        
                        
                        
                        5.15$.01-5.50
                        
                        
                        
                        8,387,867
                        
                        2.8years
                        
                        $
                        1.60
                        
                        
                        
                        7,430,172
                        
                        
                        $
                        1.63




The fair
value of each warrant granted is estimated on the date granted using the
Black-Scholes pricing model, with the following assumptions used for the grants
during 2007: risk-free interest rate of between 4.28% and 4.64%, expected
dividend yield of zero, expected lives of three to ten years and expected
volatility of between 72.07% and 87.06%.




F-19




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE 12–INCOME TAXES





The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.”  SFAS No. 109 requires the Company to provide a net
deferred tax asset or liability equal to the expected future tax benefit or
expense of temporary reporting differences between book and tax accounting and
any available operating loss or tax credit carryforwards.  At December
31, 2008 and 2007, the total of all deferred tax assets was approximately
$14,837,000 and $12,521,000, respectively, and the total of the deferred tax
liabilities was approximately $0 and $0, respectively.  The amount of
and ultimate realization of the benefits from the deferred tax assets for income
tax purposes is dependent, in part, upon the tax laws in effect, the Company’s
future earnings, and other future events, the effects of which cannot be
determined.  Because of the uncertainty surrounding the realization of
the deferred tax assets, the Company established a valuation allowance of
approximately $14,837,000 and $12,521,000 as of December 31, 2008 and 2007,
respectively, which has been offset against the deferred tax
assets.  The net change in the valuation allowance during the year
ended December 31, 2008, was $2,316,000.





The
Company has available at December 31, 2008, unused tax operating loss
carryforwards of approximately $30,005,000, which may be applied against future
taxable income and expire in various years through 2028.





The
components of income tax expense from continuing operations for the years ended
December 31, 2008 and 2007 consist of the following:




Year Ended December
      31,2008
                                  
                                  
                                  2007Current income tax
      expense:Federal
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -State
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net current tax
      expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Deferred tax expense (benefit)
      arising from:Excess of tax over financial
      accounting depreciation
                                  
                                  $
                                  (6,518
                                  )
                                  
                                  $
                                  66,786Accrued compensation and
      taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (95,354
                                  )Reserve for bad
      debts
                                  
                                  
                                  (16,785
                                  )
                                  
                                  
                                  -Derivative
      liability
                                  
                                  
                                  (695,223
                                  )
                                  
                                  
                                  (2,520,762
                                  )Warranty
      reserve
                                  
                                  
                                  8,206
                                  
                                  
                                  
                                  (7,325
                                  )Deferred
    income
                                  
                                  
                                  74,600
                                  
                                  
                                  
                                  74,600Obsolete
      inventory
                                  
                                  
                                  -
                                  
                                  
                                  
                                  6,018Net operating loss
      carryforwards
                                  
                                  
                                  (1,681,089
                                  )
                                  
                                  
                                  (1,413,806
                                  )Other
                                  
                                  
                                  1,249
                                  
                                  
                                  
                                  (62,432
                                  )Valuation
      allowance
                                  
                                  
                                  2,315,560
                                  
                                  
                                  
                                  3,952,273Net deferred tax
      expense
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -


Deferred
income tax expense results primarily from the reversal of temporary timing
differences between tax and financial statement income.
  F-20


EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE 12–INCOME TAXES–(Continued)





The
temporary differences gave rise to the following deferred tax asset (liability)
at December 31, 2008 and 2007:




December
      31,2008
                              
                              
                              2007Excess
      of tax over book accounting depreciation
                              
                              $
                              (81,293
                              )
                              
                              $
                              (87,811
                              )Obsolete
      inventory
                              
                              
                              149,200
                              
                              
                              
                              149,200Accrued
      compensation and payroll taxes
                              
                              
                              102,068
                              
                              
                              
                              102,068Warranty
      reserve
                              
                              
                              37,300
                              
                              
                              
                              45,506Contribution
      carryover
                              
                              
                              7,124
                              
                              
                              
                              7,124Deferred
      income
                              
                              
                              127,442
                              
                              
                              
                              202,042Reserve
      for bad debt
                              
                              
                              26,110
                              
                              
                              
                              9,325NOL
      carryforwards
                              
                              
                              11,191,903
                              
                              
                              
                              9,510,814Derivative
      liability
                              
                              
                              3,277,167
                              
                              
                              
                              2,583,192




The Company files income tax returnsin theU.S.federal jurisdiction, andNorth Carolina,Georgia, andUtah.  With few exceptions, the
Company is no longer subject toU.S.federal, state and local, or non-U.S.
income tax examinations by tax authorities for years before 2003.  The
Company filedits 2007tax returnand is determining what prior year
returns have yet to be filed.The statue of limitations
remains open on all years from 2004 going forward.  Once the returns
have been filed the IRS will have 3 years to examine and adjust the
amounts
reported.





The company operates at a loss and will
only be liable for minimum state tax payments once returns are
filed.  No unrecognized liability will be added tothe Company’s balance sheet for the un-filed returns
as the amounts reported are an immaterial amount.




The Company adopted the provisions of
FASB Interpretation No. 48,Accounting for
Uncertainty in Income Taxes, on January 1, 2007.  A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:




Balance atJanuary 1, 2008
                  $0Additions based on tax positions
      related to the current year
                  0Additions for tax positions of
      prior years
                  0Reductions for tax positions of
      prior years
                  0Settlements
                  0Balance at December 31,
      2008
                  $0





At December 31, 2008, there are notax positions for which the ultimate
deductibility is highly certain but for which there is uncertainty about the
timing of such deductibility.  Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance ofthe shorter deductibility period would
not affect the annual effective tax rate but would accelerate the payment of
cash to the taxing authority to an earlier period.





F-21





EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE13 – COMMITMENTS AND
CONTINGENCIES





The
Company entered into an amended exclusive licensing and product supplier
agreement with Zerorez, an affiliated entity, to provide Zerorez with its
Primacide water solutions and water generator for its carpet cleaning
franchisees. The Company is committed to sell to Zerorez the Primacide B water
generator for over the next 5 years under the agreement, ending on December 31,
2011.  The agreement allows for the automatic renewal of the agreement
for three (3) terms of five year terms, unless both parties agree to the
cancellation of the agreement.





In
September 2005, the Company entered into an exclusive license and distribution
agreement with Water Sciences LLC, a related party, in exchange for receiving
$1,000,000 and future royalty payments. Under the agreement, the licensee was
granted the exclusive right to commercialize and develop the Company’s low-cost,
non-toxic electrolyzed oxidative fluids used for cleaning, disinfection,
remediation and hydration and to manufacture, distribute and sell the products
to certain territories within Central and South America. Royalty payments under
the agreement range from 2% - 5% depending on the annual sales volume of the
licensee. This agreement automatically renews each year and shall remain in
effect unless sooner terminated by the Company or licensee.





Management
has determined that certain stock options and warrants granted for services may
not have been properly treated for income tax withholding
purposes.  Management is reviewing all granted options and warrants
with professional tax accountants to determine the proper
treatment.  In addition, in the past the Company has classified
several consultants and officers as independent contractors for federal and
state tax purposes.  This classification could be challenged by the
applicable taxing authorities for some or all of these
individuals.  Management believes that it is reasonably estimatable
and probable that the amount of liability to the Company will be approximately
$255,000.  The Company has estimated the potential tax liability as a
range between $129,000 and $574,000.





NOTE 14–GOING CONCERN





The
Company has incurred significant losses and has had negative cash flows from
operations.  As a result, at December 31, 2008, the Company has had a
high level of equity financing transactions and additional financing will be
required by the Company to fund its future activities and to support its
operations.  We currently do not have sufficient funds to operate our
business for more than a few months without additional funding, although we have
a funding commitment in place which would allow us to continue our operations
for up to 5 months. We expect to receive enough funding from this commitment to
support our operations over the next several months.  However, we may
not receive all the funding that has been committed.  We may not have
enough funding for operations to fund our business until it is developed enough
to bring the business plan to maturity.  Management will 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 September 2009, 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.




F-22





EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE 14–GOING CONCERN–(Continued)





Our auditors have issued their
Independent Registered Public Accountants’Report on the Company's financial
statements for the fiscal year ended December 31, 2008with 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
15 – LOSS PER SHARE





Basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is calculated
by dividing net income by the weighted average shares outstanding during the period. Diluted earnings
per share is calculated by dividing net income by the weighted average number of
common shares used in the basic earnings per share calculation plus the number
of common shares that would be issued assuming exerciseor conversion of all potentially
dilutive common shares outstanding. At December 31, 2008, the Company had outstanding warrants
and notes payable convertible into shares of common stock, which were not used
in the computation of loss per share because their effect would be
anti-dilutive.





The
following data shows the amounts used in computing loss per share:




For
      the years ended
                    December
      31,2008
                  
                  
                  2007Net
      loss from Continuing Operations
                  
                  $
                  (6,727,214
                  )
                  
                  $
                  (10,926,379
                  )Net
      income (loss) from Discontinued Operations
                  
                  
                  -
                  
                  
                  
                  35,042Total
      net loss
                  
                  $
                  (6,727,214
                  )
                  
                  $
                  (10,891,337
                  )Net
      loss per share continuing operations
                  
                  
                  (0.41
                  )
                  
                  
                  (0.79
                  )Net
      Income (loss) per share discontinued operations
                  
                  
                  0.00
                  
                  
                  
                  0.00Total
      net loss per share
                  
                  $
                  (0.41
                  )
                  
                  $
                  (0.79
                  )Weighted
      average number of commonsharesoutstanding  used
      in loss per share for the period
                  
                  
                  16,404,945
                  
                  
                  
                  13,837,978




F-23




EAU
TECHNOLOGIES, INC.





NOTES
TO FINANCIAL STATEMENTS





NOTE
16 – DISCONTINUED OPERATIONS





In 2007,
the Company signed a Purchase Agreement with Perfect Water & Essentials, LLC
(“PWE”) to for the sale of all of the assets of the Company’s Consumer Products
division.  In November 2007, the Company closed the sale of the assets
of its consumer division to PWE.  At the closing, PWE paid a total of
$2,300,000 in cash (in addition to the cash on deposit of $50,000 applied toward
the purchase price) plus $150,000 to EAU in the form of a promissory note. The
note has a maturity date of November 15, 2009. During the first year of the term
of the note, it shall bear no interest. Beginning on November 15, 2008, and
until the note is paid in full, the note shall bear interest at the rate of 10%
per annum.





In
addition to the purchase of the assets, PWE was obligated under the Asset
Purchase Agreement to purchase a technology license from the Company to operate
the Perfect Essentials Division (the “Technology License”).The agreement allocated
$500,000 of the total purchase price to the Technology License, which was
recorded as revenue for the year ended December 31, 2007.  The closing
took place on November 15, 2007.  The Company recognized a loss from
operations of discontinued operations in the amount of $604,985 for the year
ended December 31, 2007.  The Company recorded a gain on disposal of
discontinued operations in the amount of $640,027.  The following is a
summary of the operations of the division.




For
      the Year Ended
                    December
      31, 2007Sales,
      net
                  
                  $
                  722,244Cost
      of goods sold
                  
                  
                  336,337Gross
      profit
                  
                  
                  385,907Operating
      expenses
                  
                  
                  989,137Loss
      from operations
                  
                  
                  (602,230
                  )Other
      income (expense)
                  
                  
                  (1,755
                  )Loss
      from discontinued operations
                  
                  
                  (604,985
                  )Gain
      on disposal of discontinued operations
                  
                  
                  640,027Net
      income (loss) on discontinued operations
                  
                  $
                  35,042





NOTE
17 – SUBSEQUENT EVENTS





On March
24, 2009, EAU Technologies, Inc. (the “Company”) entered into the First
Amendment to Second Amended and Restated Senior Secured Convertible Promissory
Note (the “Promissory Note”) with Water Science, LLC (“WS”).  The
amendment extends the maturity date of the Promissory Note from March 16, 2009
to September 16, 2009, increases the annual simple interest rate payable under
the Promissory Note from 3% to 10% and eliminates the 8% interest rate that
would be payable upon default.  In all other material respects, the
Promissory Note remains unchanged.  WS is a shareholder of the Company
and is controlled by Peter Ullrich, a member of the Board of Directors of the
Company.





On March
27, 2009, the Company and Water Science amended the payment schedule of the
Stock Purchase Agreement, entered into in October 2008.  On March 25,
2009 the Company received a partial payment of $150,000 of the balance owed of
$700,000 as of that date.  On March 27, 2009, the Company and Water
Science amended the payment schedule of the Stock Purchase
Agreement.  The purchase of the common stock will 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.




F-24