THE
      UNITED STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-KSB




(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, 2007




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.**


(Name
      of
      Registrant in Our Charter)





**Delaware**
            **2842**
            **87-0654478**(State
                of Incorporation )
            (Primary
                Standard Industrial
              Classification
                Code Number)
            (I.R.S.
                Employer Identification
              No.)





**1890
                Cobb International Blvd**
              **Suite
                A**
              **Kennesaw,
                Georgia 30152**
              **(678)
                388-9492**
            
            **Wade
                R. Bradley**
              **1890
                Cobb International Blvd**
              **Suite
                A**
              **Kennesaw,
                Georgia 30152**
              **(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)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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. x Yes o NO




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. o




Issuer’s
      revenues for its most recent fiscal year: $878,599




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





As
      of
      March 25, 2008 the registrant had 15,257,113
      shares of common stock, par value $0.0001, outstanding.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates as of March 25, 2008, was $8,908,977 (based upon the closing
      price of $1.10 per share of common stock as reported on the OTC Bulletin
      Board).




Documents
      incorporated by reference: None




Transitional
      Small Business Disclosure Format (check one): o Yes x
      No





TABLE
      OF
      CONTENTS




PagePART
                IITEM
                1.
            DESCRIPTION
                OF BUSINESS.
            2ITEM
                2.
            DESCRIPTION
                OF PROPERTY.
            15ITEM
                3.
            LEGAL
                PROCEEDINGS.
            15ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS.
            15PART
                IIITEM
                5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER PURCHASES OF EQUITY SECURITIES.
            16ITEM
                6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
            18ITEM
                7.
            FINANCIAL
                STATEMENTS
            23ITEM
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.
            23ITEM
                8A.
            CONTROLS
                AND PROCEDURES.
            23ITEM
                8B
            OTHER
                INFORMATION
            26PART
                IIIITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
            26ITEM
                10.
            EXECUTIVE
                COMPENSATION.
            31ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS.
            36ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR
                INDEPENDENCE.
            38ITEM
                13.
            EXHIBITS
            40ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES.
            42SIGNATURES
            44





**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-KSB 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
                continued ability to raise investment capital necessary to continue
                to
                fund our product development activities and to fund our
                growth.





·
            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.





·
            Our
                ability to adequately manage and fund our anticipated rapid growth.





·
            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-KSB. 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-KSB are reasonable, we cannot provide you with any
      guarantee that the anticipated results will be achieved. All forward-looking
      statements in this Form 10-KSB 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-KSB. 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.** **DESCRIPTION
      OF 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 fluids. These fluids have various commercial applications
      and may be used in commercial food processing organic or non-organic
      agricultural products that clean, disinfect, remediate, hydrate and moisturize.
      The processes for which these fluids may be used are referred to in this Report
      (the “Report”) as the “EOW Technology.” For example, we believe that our food
      and agricultural treatment products potentially may be used to systemically
      treat all facets and phases of the food chain, from soil to animal feed to
      meat
      processing, by eliminating dangerous and unhealthy pathogens from the food
      chain
      with organically based and highly effective solutions. We make the claim that
      our products are “non-toxic”. We can do this because at the levels we employ our
      technology, our studies both internal as well as through third parties show
      no
      toxicity. 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 fluids created
      by the EOW Technology (referred to herein sometimes as the “EO Fluids” or
“Empowered Water TM ”)
      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 **.**





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.




We
      have
      obtained patent protection on two separate facets of electrolyzed fluids as
      well
      as the water generating technology. Those facets are how the fluids are used
      and
      how they are stabilized for use in different applications. Additionally, we
      have
      patents pending on poultry processing, and we have several provisional patent
      pending applications filed to protect new processes and products, as described
      herein. Previously, the Company’s revenues had been primarily generated from
      equipment sales to the carpet and living surfaces industries, and some consumer
      product sales. In 2006, we saw our first sales in the agriculture segment.
      All
      of these sales were made to Water Science, LLC, a company set up primarily
      to
      market Empowered WaterTM in Latin America. Currently we are seeking to expand
      those markets as well as to introduce what we have learned there to the United
      States. We will continue to seek to derive future EOW Technology revenues from
      recurring fees charged to customers based on per-unit or per-gallon of fluid
      used after equipment is installed. Additionally, we will seek to introduce
      our
      technology to meat and poultry processing by leveraging the development and
      trials that we concluded here in the United States.





**Products
      and Related Markets**




**EOW
      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. The quantity of electrolyzed sanitizing fluids can be
      metered, and the user of the generator will pay a lease fee based on either
      a
      set price per unit of fluid drawn from the generator, or will pay a fee based
      on
      the number of units, such as animal carcasses, that are treated with our
      electrolyzed water products. 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.


2




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 are being either planned or implemented to validate early
      results. EAU plans a full rollout at the end of the trials.





In
      2005,
      we entered into an agreement with Tyson Foods, Inc., to test our EOW Technology
      and EO Fluids (the “ **EOW
      System** ”)
      in its
      Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EOW System
      trial was completed. The
      trial yielded significant results in killing salmonella on the
      processed poultry. Independent testing analysis conducted by ABC Research,
      Inc., in Gainesville, Florida, revealed pre-chill microbial reduction was
      significantly below the Food Safety Inspection Service (the enforcement arm
      of
      the USDA; “FSIS”) allowable limit. From these results we successfully completed phase I of our USDA Online Reprocessing (OLR)
      Certification. The EAU Technologies OLR intervention also tested well showing
      a
      statistically significant difference between control and test groups.




The
      Company has experienced some sales resistance from the multiple industries
      including the poultry industry, as the status quo for the industry is to use
      the
      currently available toxic solutions that keep processing plants within
      regulatory limits of the allowable levels of pathogens. Throughout our learning
      process, we found that if a plant is in compliance with the USDA there would
      be
      no reason for that plant to take steps to better its processes unless there
      is a
      financial benefit of doing so. Due to the state of the industry it would take
      a
      change in government regulation or policy to make a dramatic change. We believe
      on February 5, 2008, that event occurred. 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 proposed 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. For processors with strong processes
      and
      intervention systems, 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, in conjunction with the new FSIS policies
      and
      regulations, there is now more than just incentive, efficacy, and positive
      environmental aspects to our technology that will make EAU appealing to the
      industry.




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 “physically”
kill mold spores and break down associated mycotoxins. We are currently working
      with an industry leader in environmental remediation to develop the protocol
      to
      use Empowered WaterTM in mold remediation work.





As
      of the
      date of this Report, the Company maintained an inventory of several EOW
      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.


3


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 years. This may
      lead
      to recurring sales, creating additional and ongoing revenues.





EOW
      Fluids can have varying strength and properties. We have created products by
      researching and testing the cleaning and sanitizing characteristics of EOW
      Fluids with varying electrical charges, pH levels and ppm (parts per million)
      of
      hypochlorous acid. 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 our EOW Technology is unique in the marketplace. Beyond our
      initial focus in our four
      Primary Markets, our EO Fluids have potential uses in many 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 following EOW
      Fluids:





·
            **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 expect to receive
                additional patent protection for other uses of Primacide A. EAU has
                completed successful trials in the field to further validate the
                use of
                Primacide A as a disinfectant.





·
            **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
                now
                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.


4




·
            **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 are being either planned or
                implemented to validate early results. EAU plans a full rollout at
                the end
                of the trials.





**Agriculture**





In
      2006
      we made initial sales under the “Exclusive License and Distribution Agreement”
with Water
      Science, LLC, a Florida limited liability company (“ **Water
      Science** ”)
      principally owned by Esmeralda’s CEO and Chairman of the board of directors, 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 shipped
      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, 2007, 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.
      While
      waiting for those destination orders, EAU has continuously upgraded the
      technology to accommodate varying local water qualities. 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 enter
      other
      agricultural markets such as green house and grow out of vegetable plants and
      vegetable packing facilities.




**Other
      Markets, Products and Industries**





Some
      of
      the other markets and industries that are attractive channels for our EOW
      Technology and other products and services are listed below. We intend to focus
      more efforts on these markets after we attain targeted revenues in our current
      market channels.





***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
“physically” kill mold spores and break down associated mycotoxins.





***Medical*** *–* The
      medical industry is in dire need of new and more effective sanitizing and
      disinfecting solutions. We believe that our EOW 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 EOW 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.


5




***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.




**Markets
      and Distribution**





We
      presently market our existing products in our identified market channels (dairy
      production and processing, meat and poultry processing, food 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 EOW Technology, to kill bacteria, viruses and fungus and
      to
      clean the living environment without the use of harsh chemicals. Our
      agricultural products 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 the EOW market 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 have
      an
      opportunity to penetrate and sell our products 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, environmental remediation and agricultural grow-out
      industries.





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
      substances currently 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 will outsource to third parties the majority of manufacturing
      and
      assembly of electrolyzed water generator components that comprise our EOW
      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. However, as of the date of this Report, we do not intend
      to
      enter into any single long-term contract related to generator manufacture.


6


**Distribution**





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 use a network of resellers and third party distributors 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. There have been many companies in the EOW 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
      EOW
      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.





**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, 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 the *United
      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
      creating  hypochlorous
      acid through the electrolysis process is generally recognized as safe for
      indirect food contact and food contact surfaces.





We
      have
      submitted a request to the EPA to confirm that our commercial fluid generator
      is
      a pesticide device, and are awaiting their response. 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.


7


**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. Two patents have been issued (for carpet cleaning and egg
      sanitization) while others are in pending or application status. We have entered
      into an exclusive license for certain stabilized acid water (Primacide C)
      technology developed by the University of Georgia. 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 in Houston, 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 in Salt Lake City, Utah to prepare
      and handle our Trademark applications and Trademark related issues.





**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;


·
            sanitize
                agricultural products;


·
            enhance
                current products for further use in carpet
                cleaning;


·
            sanitize
                and disinfect hard and soft
                surfaces;


·
            provide
                superior personal care products;


·
            create
                more effective and easier to use home surface sanitation products;


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





Our
      research and development expenditures totaled $140,944 for the year ended
      December 31, 2007, and $335,853 in 2006.




**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.*


8


**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, 2007 and 2006. 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.





**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
      do
      not expect to use outside distributors to market or sell our products in the
      next 12 months. 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.


9


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





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
      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.


10


**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-KSB. 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.





We
      have
      identified material weaknesses in our internal controls over financial
      reporting. See “Item 8A—Controls and Procedures—Management’s Report on
      Internal Control Over Financial Reporting” for a discussion of these material
      weaknesses. As of the date of this Annual Report on Form 10-KSB, we are
      still in the process of implementing remedial measures related to the material
      weaknesses identified as discussed at Item 8A—“Controls and
      Procedures—Management’s Report on Internal Control Over Financial Reporting.” If
      our efforts to remedy the weaknesses we identified are not successful, our
      business and operating results could be harmed and the reliability of our
      financial statements could be impaired, which could adversely affect our stock
      price. 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.


11


**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-KSB for the fiscal year ending
      December 31, 2007. We have dedicated significant time and resources during
      fiscal 2007 and expect to dedicate more time and resources during fiscal 2008
      to
      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.





**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’s 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.


12


**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.





**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.


13


**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.





**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 on the resale of the common shares, including penny
      stock
      regulations under the U.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 covered by 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 a penny 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 to the broker-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.


14


**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 10,839,843 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. There are approximately 11,651,781 shares of Common Stock which
      are available for sale under Rule 144 beginning December 31,
      2007.





**Employees**




As
      of
      December 31, 2007 we had 11 full-time employees and 5 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.




**ITEM
              2.**
            **DESCRIPTION
                OF 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 Courtyard Marriott Buckhead,
      located at 3332 Peachtree Road NE, Atlanta, Georgia 30326, on Tuesday, December
      6, 2007 at 7:30 a.m. for the following purposes:





1.
            To
                elect seven directors to serve for one-year terms expiring at the
                annual
                meeting in 2008 and until their successors are elected and qualified.





2.
            To
                consider and act upon the proposed 2007 Stock Incentive
                Plan.





3.
            To
                ratify the appointment of HJ & Associates, LLC as independent auditors
                for the fiscal year ending December 31,
                2007.


15


The
      results of the voting were as follows:





PROPOSAL
            
            FOR
            
            WITHHELD01
                - DIRECTORSWADE
                R BRADLEY
            
            11,345,042
            
            18,118KARL
                HELLMAN
            
            11,341,282
            
            21,878THEODORE
                C JACOBY JR
            
            11,345,482
            
            17,678J
                LEO MONTGOMERY
            
            11,346,042
            
            17,118JAY
                S POTTER
            
            11,324,282
            
            38,878PETER
                F ULLRICH
            
            11,348,682
            
            14,478WILLIAM
                J WARWICK
            
            11,351,642
            
            11,518FOR
            
            AGAINST
            
            WITHHELD
            
            NON-VOTES02
                - STOCK INCENTIVE PLAN
            
            8,445,996
            
            65,585
            
            90,738
            
            2,760,84103
                - RATIFY AUDITORS
            
            11,274,136
            
            77,014
            
            12,010
            
            0





**PART
      II**




**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER 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
      December 2007, the Company issued 480,260 options to various employees. The
      options are for a term of ten years and have an exercise price of $1.30 per
      share. The options vest over a period of four 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.





In
      November 2007, the Company issued 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.





On
      May 7,
      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:


16





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





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
      October 2006, the Company issued 500,000 options to Wade R. Bradley in
      connection with the appointment of Mr. Bradley as Chief Executive Officer and
      President. 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 4.71%, volatility at 81.29% and the stock price
      at $1.46. The value of each warrant is approximately $1.25 per warrant. The
      Company recognized $332,533 and $63,216 during the years ended December 31,
      2007
      and 2006, respectively, as consulting expense.




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 Stock*****High**
            
            **Low****Year
                Ended December 31, 2007**Quarter
                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


17


**EAU Technologies, Inc. Common Stock****High**
              
              **Low****Year
                  Ended December 31, 2006**Quarter
                  Ended March 31, 2006
              
              $
              3.35
              
              $
              2.40Quarter
                  Ended June 30, 2006
              
              
              2.85
              
              
              1.75Quarter
                  Ended September 30, 2006
              
              
              2.00
              
              
              1.51Quarter
                  Ended December 31, 2006
              
              
              1.70
              
              
              0.85





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, 2007, the Company had approximately 459 record holders of common
      stock.




**ITEM
              6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION******




EAU
      TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc.
      (referred to herein sometimes as “EAU,” “we,” “us,” or the “Company”), is in the
      business of developing, manufacturing and marketing equipment that uses water
      electrolysis to create fluids. These fluids have various commercial applications
      and may be used in commercial food processing organic or 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 “EOW Technology.” For example, we believe that our food and agricultural
      treatment products potentially may be used to systemically treat all facets
      and
      phases of the food chain, from soil to animal feed to meat processing. 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”. 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. At the levels employed, the fluids and
      products are safe for the environment and non-toxic. 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 fluids created by the EOW Technology (referred to herein sometimes
      as the “EO Fluids” or “Empowered Water TM ”)
      generated by our patented and patent pending specialized equipment currently
      replace many of the traditional products used in commercial, industrial and
      residential disinfecting and cleaning.





We
      have
      identified the following industries for early stage sales and marketing focus:
      1) 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.




We
      have
      obtained patent protection on two separate facets of electrolyzed fluids as
      well
      as the water generating technology. The facets for which we have obtained patent
      protection are how the fluids are used and how they are stabilized for use
      in
      different applications. Additionally, we have patents pending on poultry
      processing, and we have filed several provisional patent pending applications
      to
      protect new processes and products. Previously, we generated our revenues
      primarily from equipment sales to the carpet and living surfaces industries,
      and
      some consumer product sales. In 2006, we saw our first sales in the agriculture
      segment. All of these sales were made to Water Science, LLC, a company set
      up
      primarily to market Empowered WaterTM in Latin America. Currently we are seeking
      to expand those markets as well as introducing what we have learned in those
      markets to the United States. We will continue to seek to derive future EOW
      Technology revenues from recurring fees we charge to customers based on per-unit
      or per-gallon of fluid used after equipment has been installed. Additionally,
      we
      will seek to introduce our technology to meat and poultry processing by
      leveraging the development and trials that we conducted in the United States.


18


We
      have
      shipped and installed five units ordered from Water Sciences, LLC. The units
      have been installed in Holland, Ecuador, Costa Rica, Mexico and Colombia.
      Shipment dates and locations of the remaining units have yet to be determined
      by
      Water Sciences. Water Sciences is currently using Empowered WaterTM fluids in
      various agricultural channels.





We
      are
      currently installed in four Whole Foods Market (WFM) stores in the South Region.
      These stores are using the Empowered WaterTM in three areas of the store: floral,
      fresh cut produce and leafy vegetable rinse area. In January 2007, the Company
      entered into an amended exclusive licensing and product supplier agreement
      with
      Zerorez Franchising Systems, Inc. (Zerorez), a previously affiliated entity,
      to
      provide Zerorez with its Primacide water solutions and water generator for
      its
      carpet cleaning franchisees. The Company has sold Empowered WaterTM generators to
      over 30 franchises. The Company is committed to sell to Zerorez the Primacide
      B
      water generator over the next 5 years under the agreement, ending on December
      31, 2011. The agreement allows for the automatic renewal of the agreement for
      three (3) terms of five year terms, unless both parties agree to the
      cancellation of the agreement.





In
      May
      2007, we signed an agreement with a small dairy plant whereby the dairy has
      agreed to lease our equipment and pay a royalty for the technology beginning
      in
      August 2007. The Company had been testing our equipment in this facility for
      over one year. While the amounts for this agreement are not significant, the
      Company believes that this agreement will serve as a model for expanding its
      presence in the dairy industry. Since then, we have also signed agreements
      with
      multiple other dairies to install our equipment and begin testing our equipment
      at their facilities. We are currently in trials on six farms in different
      regions of the Country.





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-KSB, 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


19


·
            Allowances
                for doubtful accounts.





*Revenue
      recognition.* We
      recognize revenue according to the terms of the contract and when title 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 to various commercial customers. It regularly reviews
      its aging and reserves for amounts that may be 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.





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.





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 $524,000.





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.


20


***Financial
      Position***





The
      Company had $1,413,744 in cash as of December 31, 2007, compared to $206,094
      at
      December 31, 2006. Our working capital as of December 31, 2007 was $114,443
      compared to $961,230 at December 31, 2006. The primary reason for the change
      in
      our working capital for the year ended December 31, 2007, was due to the
      reclassification of the senior convertible note from long-term debt to a current
      liability. The Company has received and recorded $697,500 in advance deposits
      from Water Science on machine orders at December 31, 2007. This will be reduced
      as the Company delivers machines on order to Water Science, a related party.
      Water Science, who has exclusive rights to sell our products in South America
      and Mexico, is also an affiliate of the Company, by agreement may purchase
      machinery from us at cost plus 25 percent. These deliveries are targeted to
      occur during 2008. Long term debt decreased from $1,371,091 at December 31,
      2006
      to $59,045 at December 31, 2007. This is due to the reclassification of the
      senior convertible note from long-term debt to a current liability. At December
      31, 2007, our stockholders’ deficit was $6,574,573.





Summary
      of select balance sheet information follows:





December
                31,
              2007
            
            December
                31,
              2006Balance
                Sheet Data:Cash
                and Cash Equivalents
            
            $
            1,413,744
            
            $
            206,094Total
                Current Assets
            
            
            4,677,688
            
            
            3,077,702Total
                Assets
            
            
            5,347,458
            
            
            4,929,761Total
                Current Liabilities
            
            
            4,563,245
            
            
            2,116,472Long
                Term Debt
            
            
            59,045
            
            
            1,371,091Total
                liabilities and stockholders’ equity
            
            $
            5,347,458
            
            $
            4,929,761





***Results
      Of Operations For The Year Ended December 31, 2007 As Compared To The Year
      Ended
      December 31, 2006***




***Revenues
      and Net Income -*** Net
      revenues for the year ended December 31, 2007, decreased by $271,873, or 24%,
      to
      $878,599, of which $717,503 are revenues from a related party, compared to
      revenues of $1,150,472 for the year ended December 31, 2006. The majority of
      the
      revenues are from sales of our EO water machines to Water Science, a related
      party with an exclusive license for Central and South America. Equipment sales
      to Water Science totaled $517,503 or 59% of total revenues. We also recognized
      $200,000 in licensing revenues related to the exclusive license granted to
      Water
      Science.





Our
      cost
      of sales decreased by $262,852, to $519,751, for the year ended December 31,
      2007. This is a 34% decrease over the $782,603 cost of sales during the year
      ended December 31, 2006. This decrease is attributable to the decrease in
      product sales of our EO water machines. We have also been able to develop better
      cost-effective manufacturing processes and procedures.





Our
      net
      loss for the year ended December 31, 2007, was $10,891,337, which is $2,375,980
      more than the $8,515,357 net loss for the fiscal year ended December 31, 2006.
      This increase of 28% in the net loss is primarily attributable to the Company’s
      continued capital raising efforts. In May 2007, the Company, as part of a
      financing agreement with a related party, cancelled 8,400,000 outstanding
      warrants and granted 8,400,000 new warrants. (See Item 5 above) As part of
      the
      new warrants the Company recorded a non-cash loss on derivative liability of
      $2,118,761 in 2007 as compared with a gain on the adjustment to fair value
      of
      the derivative liability of $714,404 in 2006.


21


***General
      and Administrative Expense -*** The
      Company incurred total general and administrative expenses of $8,260,609 in
      2007, a 24% increase over the $6,638,052 incurred in 2006. General and
      administrative expenses for 2007 consist primarily of payroll expense
      ($1,318,354), expenses related to stock options and warrants ($4,705,545),
      professional fees ($966,988), travel related expenses ($269,699) and insurance
      expense ($209,033).





During
      the year ended December 31, 2007, we expended $966,988 in professional fees,
      which include legal and consulting fees. This was a decrease of $377,006 or
      28%,
      from the $1,343,994 spent in 2006. This decrease is primarily due to the
      Company’s efforts to reduce costs and better utilize its own resources.





Our
      interest expense remained relatively unchanged from $1,161,485 in 2006 to
      $1,122,930 in 2007. 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 10 to our audited financial statements. This required accounting
      treatment resulted in our recognizing a $1,000,000 in interest expense for
      the
      year ended December 31, 2007 and 2006.




***Research
      and Development -*** Our
      research and development expenses for the year ended December 31, 2007, were
      $140,944, a decrease of $194,909, or 58%, as compared to $335,853 for the year
      ended December 31, 2006.




Summary
      of select income statement information follows:





Year
                Ended
              December
                31,2007
            
            2006
            
            Better
              (Worse)
            
            Percent
              ChangeRevenue,
                net
            
            $
            878,599
            
            $
            1,150,472
            
            $
            (271,873
            )
            
            24
            %Gross
                profit
            
            
            358,848
            
            
            367,869
            
            
            (9,021
            )
            
            2
            %Loss
                from continuing operations
            
            
            10,926,379
            
            
            7,434,940
            
            
            (3,491,439
            )
            
            47
            %Gain
                (loss) from discontinued operations
            
            
            35,042
            
            
            (1,080,417
            )
            
            1,115,459
            
            
            103
            %Net
                loss
            
            
            10,891,337
            
            
            8,515,357
            
            
            (2,375,980
            )
            
            28
            %Loss
                per share
            
            
            0.79
            
            
            0.71
            
            
            (0.08
            )
            
            11
            %





**Liquidity
      And Capital Resources**




At
      December 31, 2007, we had cash and cash equivalents of $1,413,744, compared
      to
      $206,094 at December 31, 2006. We
      have
      had continuing net losses of $10,891,337 for the year ended December 31, 2007
      compared with net losses of $8,515,357 for the year ended December 31, 2006.
      The
      net loss per share for the year ended 2007 was $0.79 compared to a loss of
      $0.71
      per share for the same period in 2006. Our working capital as of December 31,
      2007 was $114,443 for reasons discussed above under financial position.





Net
      cash
      used in operating activities for the year ended December 31, 2007 was
      $4,715,198, a 23% decrease, compared to $6,104,588 for the same period in 2006.
      The primary uses of cash were purchases of inventory of $357,084, an increase
      in
      restricted cash of $240,000 and a decrease in accounts payable of $296,020.
      Also
      included in the net cash used is $116,453 used from discontinued operations.


22







At
      December 31, 2007, the Company’s net inventory was $2,814,533, representing an
      increase of 12% from the $2,502,263 on hand at December 31, 2006. T he
      Company is in multiple tests of our equipment and has included the machines
      in
      inventory until they are sold and enter into revenues.





The
      operating outflow of cash was reduced by the Company issuing warrants and stock
      options in lieu of cash during the quarter of $4,705,545. 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 $1,000,000. (See Note 10 to
      the Company’s financial statements.) Further, the Company recognized a non-cash
      increase in the derivative liability of $2,118,762, due to changes in the
      Black-Scholes value of the liability.





Cash
      flows from investing activities provided the Company $1,891,164 during the
      period ended December 31, 2007 as compared to $429,862 provided for in the
      same
      period in 2006. During 2007, the cash flows consisted primarily of net cash
      receipts of $2,150,000 from the sale of our consumer products division (See
      Note
      15 to the Company’s financial statements) and the issuance of a Note Receivable
      for $150,000 and purchase of equipment of $91,848. During 2006 the primary
      cash
      flows from investing activities consisted primarily of $456,201 provided from
      the sale of our investment in Equilease and $54,552 used to purchase equipment.





Cash
      flows from financing activities provided the Company $4,031,684 and $5,199,472
      for the years ended December 31, 2007 and 2006, respectively. This is primarily
      a result of the Company’s continued sales of its common stock to fund
      operations. The Company raised $3,550,000 and $5,230,747 from the sale of stock
      and $500,000 and $0 from the advance made by a related party in anticipation
      of
      exercising warrants. This amount was offset by payments made on notes payable
      in
      the amount of $18,316 and $31,275 in 2007 and 2006, respectively.





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. We have no commitments
      to
      fund any future capital expenditures. 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 will become due in September 2008, which will require cash of $3,000,000
      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 EO machines as anticipated, we will 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.





**ITEM
              7.**
            **FINANCIAL
                STATEMENTS**




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





**ITEM
              8.**
            **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.




23




**ITEM8
              A.**
            **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, 2007,
      pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the principal
      executive and financial officers concluded that the Company’s disclosure
      controls and procedures were not effective at the reasonable assurance
      level.





·
            The
                Company engaged an outside accounting firm to assist the Company
                with
                documenting and testing our internal controls for the year ended
                December
                31, 2007. Based on the results of their tests and the evaluation
                of
                management, it was determined that some controls were not effective.
                The
                majority of the deficiencies result from a lack of segregation of
                duties,
                due to the size of our company and its accounting department. While
                most
                of the control deficiencies were mitigated by alternative procedures,
                the
                Company determined that there were some material weaknesses. The
                Company
                noted that certain audit adjustments were proposed by HJ & Associates
                for the period ended December 31, 2007. In reviewing the audit adjustments
                it was determined that the Company did have material weaknesses as
                described below.





In
      2006,
      Management also determined that certain stock options and warrants granted
      in
      2005 for services may not have been properly treated for tax withholding.
      Management is reviewing all granted options and warrants with professional
      tax
      accountants to resolve this matter.





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.


24


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, 2007. 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, 2007, the
      Company’s internal control over financial reporting was not effective to provide
      reasonable assurance based on those criteria.





A
      “material weakness” is a significant deficiency, or combination of significant
      deficiencies, in internal control over financial reporting such that there
      is a
      reasonable possibility that a material misstatement of the annual or interim
      financial statements will not be prevented or detected on a timely
      basis. In its
      assessment of internal control over financial reporting, management determined
      that the following areas had a material weakness:





·
            Inventory
                price testing was determined to be misstated. The Company has subsequently
                tested approximately 98% of inventory item costs and will perform
                quarterly price tests on certain inventory
                items.


·
            Certain
                accrued expenses were not properly reconciled and accrued. The Company
                will create an allowance account for unbilled and/or unknown expenses
                not
                received at the quarter end. Management will estimate an allowance
                and
                will reconcile subsequent invoices with this account on a quarterly
                basis


·
            Certain
                stock options or warrants were not properly reconciled and accrued.
                The
                Company will review all stock grants and option/warrants grants at
                least
                quarterly and will reconcile the accounting records on a timelier
                basis.





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.” The Company is also taking the following steps to
      remediate the material weaknesses:


·
            Inventory
                price testing and full inventory counts will be performed
                quarterly.


·
            The
                Company will create an allowance account for unbilled and/or unknown
                expenses not received at the quarter end. Management will estimate
                an
                allowance and will reconcile subsequent invoices with this account
                on a
                quarterly basis


·
            The
                Company will review all stock grants and option/warrants grants at
                least
                quarterly and will reconcile the accounting records on a timelier
                basis.





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.





**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:


25


·
            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.




**ITEM8
              B.**
            **OTHER
                INFORMATION**





None





**PART
      III**





**ITEM
              9.**
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 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 Held**Wade
                R. Bradley
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            
            47
            
            Chief
                Executive Officer; DirectorBrian
                D. Heinhold
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            
            35
            
            Chief
                Financial OfficerDoug
                Kindred
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            
            52
            
            Chief
                Technology OfficerLarry
                Earle
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            
            38
            
            Senior
                Vice President of Live ProcessingJoseph
                A. Stapley
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            
            39
            
            Senior
                Vice President of Investor Relations and Business
                DevelopmentJay
                S. Potter
              10509
                Vista Sorrento Pkwy. #300
              San
                Diego, CA 92121
            
            42
            
            Director





26





William
                J. Warwick
              1063
                Ocean Ridge Drive
              Wilmington,
                North Carolina 28405
            
            72
            
            DirectorPeter
                Ullrich
              1800
                NW 89thPlace
              Miami,
                FL 33172
            
            65
            
            DirectorTheodore
                C. Jacoby, Jr.
              1716
                Hidden Creek Ct.
              St.
                Louis, MO 63131
            
            67
            
            DirectorJ.
                Leo Montgomery
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            
            67
            
            Non-executive
                Chairman of the Board; DirectorKarl
                G. Hellman
              1776
                Chadds Lake Drive
              Marietta,
                GA 30068
            
            61
            
            Director




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
      Bradley is the
      Company’s chief executive officer 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
      from University of Illinois. He then attended the Harvard Business School for
      a
      Master of Business Administration.


27


Brian
      D. Heinhold is the Company’s Chief Financial Officer. Mr. Heinhold took
      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 in Salt 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 the University of Utah with a
      Masters of Public Accountancy degree and a Bachelor of Arts degree in
      Finance.





Doug
      Kindred ** is
      currently the Company’s Chief Technology Officer and 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.





Larry
      Earle is
      currently Senior Vice President of Live Processing.  Mr. Earle has
      extensive experience in process operations, management and
      engineering.   He has spent the past seven years working in the
      poultry industry as a production superintendent, plant manager and operations
      consultant for companies such as Seaboard Farms, Inc., ConAgra Foods, Inc.
      and
      Cagle’s, Inc.  Mr. Earle started out his career as a project and business
      manager for an industrial engineering firm now owned by BioMed, working with
      process plants and manufacturing facilities such as Coca-Cola Company and Cargill,
      Incorporated . 
      He holds a BBA in Agricultural Business Management from West Georgia College
      of
      the University of Georgia and holds certifications in Energy Management Systems,
      ASME, Technology Management, and Quality Assurance Systems.





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.


28


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.





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
      Montgomery was
      appointed as a director and non-executive Chairman of the Board in October
      2007.
      Mr. Montgomery was a senior partner at 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
      Technologies since May 2006. Mr. Montgomery is a Certified Public Accountant
      and
      holds a B.A. degree from Harding University.





Karl
      G. Hellman ** was
      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. from Beloit College
      and his Masters Degree from
      Northwestern University.


29


**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 four times during 2007. 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 2007. 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.




**•**
            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 10 meetings during 2007. 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.


30


Based
      solely on a review of the copies of the reports furnished to us, or written
      representations that no reports were required to be filed, we believe that
      during the fiscal year ended December 31, 2007 all
      Section 16(a) filing requirements applicable to our directors, officers, and
      greater than 10% beneficial owners were completed.





**ITEM
              10.**
            **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’s
      cash 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
            
            
            2007
              
              
              2006
            
            
            240,000
              
              
              40,000
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            332,533
              
              
              63,216
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            5,750
              
              
              1,000
            (1)
              
              
              (1)
            
            578,283
              
              
              104,216Doug Kindred
              Chief Technology Officer
            
            
            2007
              
              
              2006
            
            
            125,936
              
              
              120,000
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            33,892
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            6,330
              
              
              8,884
            (1)
              
              
              (1)
            
            128,884Larry Earle
              Senior Vice President, Live Processing
            
            
            2007
              
              
              2006
            
            
            120,000
              
              
              120,000
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            1,469
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            6,227
              
              
              5,351
            (1)
              
              
              (1)
            
            127,696
              
              
              125,351Joe Stapley
              Senior Vice President, Investor Relations
            
            
            2007
              
              
              2006
            
            
            120,000
              
              
              120,000
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            6,496
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              0.00
            
            
            0.00
              
              
              3,920
            (1)
            
            126,496
              
              
              123,920





(1)
            Other
                compensation consists of car
                allowances.





**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,
      2007.


31





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
            
            
            200,000
            
            
            300,000
            
            
            1.30
            
            
            11/6/2016Doug
                Kindred,
              Chief
                Technology Officer
            
            
            150,000
              
              
              150,000
              
              
              20,000
            
            
            25,000
              
              
              530,000
            
            
            0.01
              
              
              1.50
              
              
              3.50
              
              
              2.45
              
              
              1.30
            
            
            1/2/2008
              
              
              1/2/2008
              
              
              5/27/2015
              
              
              6/1/2015
              
              
              11/8/2017Joseph
                Stapley,
              Senior
                Vice President, Investor Relations
            
            
            25,000
            
            
            25,000
              
              
              159,230
            
            
            3.50
              
              
              2.45
              
              
              1.30
            
            
            5/27/2015
              
              
              6/1/2015
              
              
              12/6/2017Larry
                Earle,
              Senior
                Vice President, Live Processing
            
            
            25,000
            
            
            75,000
              
              
              
              
              
              36,000
            
            
            2.45
              
              
              3.50
              
              
              1.30
            
            
            6/1/2015
              
              
              5/27/2015
              
              
              12/6/2017




**Employee
      Compensation**





In
      April
      2007, the Company engaged
      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.
      Mr. Earle was awarded a stock option grant of 36,000 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.





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.


32


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. Mr. Earle is eligible for a $30,000 bonus, 25% 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, 2007, 2 executives had current employment agreements (the **“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.





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





33




·
            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.





*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:


34


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.





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.


35


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
      was filed
      as
      an exhibit to our Annual Report for the year ended December 31, 2004. The
      Company undertakes to provide to any person, without charge, upon written or
      verbal request directed to Joseph A. Stapley, 1890 Cobb International Boulevard,
      Kennesaw, Georgia, 30152, (678)388-9492.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table presents information about the beneficial ownership of our
      common stock as of March
      25, 2008 by:




·
            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.




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 on 15,257,113 shares
      of
      common stock outstanding as of March
      25,
      2008.


36


**Name
                  and Address of Beneficial Owner**
              
              **Number
                  of**
                **Shares**
                **Beneficially
                  Owned**
              
              **Percentage
                  of**
                **Shares**
                **Outstanding**Peter
                  F. Ullrich (1)
                1800
                  NW 89th Place
                Miami,
                  FL 33172
              
              
              14,485,569
              
              
              62.7
              %Water
                  Science, LLC. (1)
                1800
                  NW 89th Place
                Miami,
                  FL 33172
              
              
              11,000,000
              
              
              47.6
              %Wade
                  R. Bradley (2)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              200,000
              
              
              1.3
              %Joseph
                  A. Stapley (3)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              123,250
              
              
              *Doug
                  Kindred (4)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              148,250
              
              
              *Larry
                  Earle (5)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              49,750
              
              
              *William
                  J. Warwick
                1063
                  Ocean Ridge Drive
                Wilmington,
                  North Carolina 28405
              
              
              173,077
              
              
              1.1
              %Jay
                  S. Potter (6)
                10509
                  Vista Sorrento Pkwy. #300
                San
                  Diego, CA 92121
              
              
              512,982
              
              
              3.3
              %Theodore
                  C. Jacoby, Jr.
                1716
                  Hidden Creek Ct.
                St.
                  Louis, MO 63131
              
              
              73,077
              
              
              *Karl
                  Hellman
                555
                  Northpoint Center East, 4th Floor
                Alpharetta,
                  GA 30022
              
              
              23,077
              
              
              *J.
                  Leo Montgomery (7)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              567,377
              
              
              3.6
              %All
                  current directors and executive officers
                as
                  a group (11 persons)
              
              
              16,367,259
              
              
              67.2
              %
  
 *Less
                  than 1%


(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 3,138,463 shares, warrants to purchase 6,861,537
                  shares
                  at an exercise price of $1.30 per share and a convertible note
                  currently
                  convertible into 1,000,000 shares. The warrants and convertible
                  note are
                  held by Water Science,
                  LLC.


37


(2)
              Mr.
                  Bradley holds options to purchase a total of 500,000 shares at
                  an exercise
                  price of $1.30 per share; only 200,000 shares are currently exercisable
                  or
                  exercisable within 60 days of the date of this report.(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. Only
                  25,000
                  shares with an exercise price of $3.50 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. Only 20,000 shares with an exercise price of $3.50 are currently
                  exercisable or exercisable within 60 days of the date of this
                  report.(5)
              Mr.
                  Earle own 24,750 shares and holds options to purchase a total of
                  136,000
                  shares at an exercise price of $2.45 (75,000 shares), $3.50 (25,000
                  shares) and $1.30 (36,000 shares) per share. Only the 25,000 shares,
                  with
                  an exercise price of $3.50, are currently exercisable.(6)
              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.(7)
              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. See “Selling
                  Shareholders”.





**Securities
      Authorized for Issuance Under Equity Compensation
      Plans**





EQUITY
                COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2007




Plan 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
            
            
            700,260
            
            $
            1.99
            
            
            1,769,740Equity
                compensation plans not approved by security holders*
            
            
            9,941,579
            
            $
            1.52
            
            
            N/ATotal
            
            
            10,641,839
            
            $
            1.55
            
            
            N/A





(1)
      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
              12.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**




The
      following are certain transactions during the year ended December 31, 2007, involving our officers ,
      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.


38


**Sale
      of Products to Affiliates of Shareholders**




Water
      Science, who has exclusive rights to sell our products in South America and
      Mexico, is a major shareholder of the Company. Water Science by agreement may
      purchase machinery from the Company at cost plus 25 percent. 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, 2007. In connection with the sales
      of
      the machines and products, the Company has recorded approximately $357,615
      in
      accounts receivable at December 31, 2007. During
      the year ended December 31, 2006, the Company sold four large water generators,
      one small water generator and related parts to Water Science for $660,141. The
      Company also sold approximately $239,419 in products to an entity related to
      Water Science.





Pursuant
      to the Amended and Restated Exclusive License and Distribution Agreement,
      certain terms in the original Exclusive License and Distribution Agreement
      between Water Science and us on or about September 19, 2005, were clarified,
      specifically with respect to what products and technology is intended to be
      covered by the License Agreement, and to specify the initial pricing with
      respect to such products.




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.) 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.





The
      Company made payments of $248,030 and $30,000 to SunTrust Robinson Humphrey
      in
      May and October of 2006, respectively, in connection with certain financing
      agreements. During this time, Mr. Montgomery was an Advisory Director with
      SunTrust Robinson Humphrey.





During
      the year ended December 31, 2006, we sold our products to Zerorez Franchising
      Systems, Inc. (“Zerorez”), a Nevada Corporation in which Gaylord Karren and John
      Hopkins, former officers of the Company, are beneficial owners. These
      sales to affiliates represented approximately
      1% of
      our
      revenue during the fiscal year ended December 31, 2006. We did
      not sell any products to Zerorez during the year 2007.





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 years each, unless both parties agree to the
      cancellation of the agreement. The Company did not have any sales to Zerorez
      in
      2007 and received $25,000 from sales of machines to Zerorez in
      2006.




**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. 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.”


39


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.





**ITEM
      13.**  **EXHIBITS**




(a)(1)
      Financial Statements





The
      following financial statements are incorporated by reference in Item 7 of this
      Report:


Independent
      Auditors’ Report


Balance
      Sheet, December 31, 2007 and 2006


Statements
      of Operations for years ended December 31, 2007 and 2006


Statements
      of Changes of Stockholder Equity for years ended December, 2007 and
      2006


Statements
      of Cash Flow for year ended December, 2007 and 2006


Notes
      to
      Financial Statements





(a)(2)
      Exhibits




**Exhibit**
              **No.**
            
            **Identification
                of Exhibit**3(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)


40





3(ii).1
            
            Bylaws
                (incorporated by reference from registration statement on Form SB-2
                filed
                with the Securities and Exchange Commission on April 24,
                2002).10.1
            
            Senior
                Secured Convertible Promissory Note dated September 16, 2005 (Incorporated
                by reference to Exhibit 10.2 of the Company’s Form 8-K, dated September
                16, 2005)10.2
            
            Subscription
                Agreement, by and between the Company and Water Science, LLC, dated
                May 1,
                2006 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K,
                dated May 4, 2006)10.3
            
            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)10.4
            
            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)10.5
            
            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)10.6
            
            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)10.7
            
            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.)10.8
            
            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.)10.9
            
            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.)10.10
            
            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.)10.11
            
            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.)10.12
            
            Separation
                Agreement by and between the Company and John Hopkins, dated May
                26, 2006
                (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
                April 2, 2007)10.13
            
            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
                January 17, 2007)10.14
            
            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 January 17,
                2007)10.15
            
            Waiver
                Letter signed January 10, 2007 by Peter Ullrich (Incorporated by
                reference
                to Exhibit 10.3 of the Company’s Form 8-K dated January 17,
                2007)10.16
            
            Agreement
                Terminating Warrants and Registration Rights dated as of May 9, 2007
                between the Company and Peter F. Ullrich and Water Sciences LLC
                (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
                May 15, 2007)10.17
            
            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)10.18
            
            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)10.19
            
            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)


41





10.20
            
            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)10.21
            
            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)10.22
            
            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)10.23
            
            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).10.24
            
            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)10.25
            
            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)10.26
            
            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)10.27
            
            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)10.28
            
            Waiver
                and Consent Letter dated August 30, 2007 between the Company and
                Water
                Science, LLC.14
            
            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.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**AUDIT
      FEES**





The
      following table shows the fees for
      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-QSB or services that are normally provided by
      the accountant in connection with statutory and regulatory filings or
      engagements for those fiscal years.





**HJ
                & Associates**




2007
            
            2006Audit
                Fees
            
            $
            58,900
            
            $
            44,233





**AUDIT-RELATED
      FEES**





HJ
      did
      not bill us for any audit-related fees in connection with its audit of our
      financial statements for the fiscal years ended December 31, 2007.


42


**FINANCIAL
      INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES**





For
      the
      fiscal years ended December 31, 2007 and December 31, 2006, 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, 2007 or 2006.





**ALL
      OTHER FEES**





We
      were
      not billed for any other professional services by HJ & Associates for the
      fiscal years ended December 31, 2007 and December 31, 2006.





**AUDITOR
      INDEPENDENCE**





Our
      Board
      of Directors considers that the work done for us in the year ended December
      31,
      2007 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, 2007 audit was
      attributed to work performed by HJ & Associates’ full-time, permanent
      employees.





**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.


43


**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
      26,
      2008





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
                26, 2008Wade
                R. Bradley
            
            (principal
                executive officer)/s/
                Brian D. Heinhold
            
            Chief
                Financial Officer
            
            March
                26, 2008Brian
                D. Heinhold
            
            (principal
                accounting officer)/s/
                J. Leo Montgomery
            
            Director
            
            March
                26, 2008J.
                Leo Montgomery/s/
                Karl Hellman
            
            Director
            
            March
                26, 2008Karl
                Hellman/s/
                Theodore C. Jacoby, Jr.
            
            Director
            
            March
                26, 2008Theodore
                C. Jacoby, Jr./s/
                Jay Potter
            
            Director
            
            March
                26, 2008Jay
                Potter/s/
                Peter F. Ullrich
            
            Director
            
            March
                26, 2008Peter
                F. Ullrich/s/
                William J. Warwick
            
            Director
            
            March
                26, 2008William
                J. Warwick


44








**EAU
      TECHNOLOGIES, INC.**





**REPORT
      AND FINANCIAL STATEMENTS**




DECEMBER
      31, 2007 AND 2006








**EAU
      TECHNOLOGIES, INC.**





**REPORT
      AND FINANCIAL STATEMENTS**




DECEMBER
      31, 2007 AND 2006




***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-7
                - F-8Statements
                of Cash Flows
            F-9
                - F-10Notes
                to Financial Statements
            F-11
                - F-27





REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors


EAU
      Technologies, Inc.


Kennesaw,
      Georgia





We
      have
      audited the balance sheets of EAU Technologies, Inc. as of December 31, 2007
      and
      2006, and the related statements of operations, stockholders equity (deficit)
      and cash flows for the years ended December 31, 2007 and 2006. 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, 2007, and the results of its operations and its cash flows for
      the
      years ended December 31, 2007 and 2006, in conformity with U.S. generally
      accepted accounting principles.





We
      were
      not engaged to examine management's assertion about the effectiveness of EAU
      Technologies, Inc.’s internal control over financial reporting as of December
      31, 2007 and, accordingly, we do not express an opinion thereon.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 16 to the financial
      statements, the Company has a 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 Note 16. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





/s/
      HJ
& Associates, LLC





HJ
&
      Associates, LLC


Salt
      Lake
      City, Utah


March
      24,
      2008


F-2


**EAU
      TECHNOLOGIES, INC.**





BALANCE
      SHEETS




***ASSETS***


December
                  31,2007
              
              2006CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              1,413,744
              
              $
              206,094Accounts
                  receivable, net
              
              
              61,196
              
              
              134,225Accounts
                  receivable - related party, net
              
              
              357,615
              
              
              219,479Prepaid
                  expense
              
              
              30,600
              
              
              15,641Inventory,
                  net
              
              
              2,814,533
              
              
              2,502,263Total
                  current assets
              
              
              4,677,688
              
              
              3,077,702PROPERTY
                  AND EQUIPMENT, net of accumulated depreciation of $220,064 and
                  $406,919
              
              
              206,554
              
              
              633,477OTHER
                  ASSETSDeposits
              
              
              11,658
              
              
              27,344Restricted
                  cash
              
              
              240,000
              
              
              -Note
                  receivable
              
              
              150,000
              
              
              -Intellectual
                  property
              
              
              61,558
              
              
              1,191,238Total
                  other assets
              
              
              463,216
              
              
              1,218,582Total
                  assets
              
              $
              5,347,458
              
              $
              4,929,761


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
                31,2007
            
            2006CURRENT
                LIABILITIESAccounts
                payable
            
            $
            287,183
            
            $
            738,666Accrued
                expenses
            
            
            645,054
            
            
            560,166Warranty
                reserve
            
            
            122,000
            
            
            102,362Advance –
                related party
            
            
            500,000
            
            
            -Advance
                deposits on machine orders – related party
            
            
            697,500
            
            
            697,500Current
                portion of long-term debt
            
            
            19,841
            
            
            17,778Senior
                convertible note payable – related party, currentportion
                net of discounts of $708,333 and $0
            
            
            2,291,667
            
            
            -Total
                current liabilities
            
            
            4,563,245
            
            
            2,116,472LONG
                TERM LIABILITIESLong
                term debt, net of current portion
            
            
            59,045
            
            
            79,424Senior
                convertible note payable – related party, net ofdiscounts
                of $0 and $1,708,333
            
            
            -
            
            
            1,291,667Deferred
                licensing revenue – related party
            
            
            541,667
            
            
            741,667Derivative
                liability – related party
            
            
            6,758,074
            
            
            4,639,312Total
                long term liabilities
            
            
            7,358,786
            
            
            6,752,070Total
                Liabilities
            
            
            11,922,031
            
            
            8,868,542STOCKHOLDERS’
                EQUITY (DEFICIT)Common
                stock, $.0001 par value; 50,000,000 shares authorized;
                15,105,650and12,313,341issued and outstanding, respectively
            
            
            1,511
            
            
            1,232Additional
                paid in capital
            
            
            35,406,545
            
            
            27,151,279Accumulated
                deficit
            
            
            (41,982,629
            )
            
            (31,091,292
            )Total
                stockholders’ equity (deficit)
            
            
            (6,574,573
            )
            
            (3,938,781
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            5,347,458
            
            $
            4,929,761





The
      accompanying footnotes are an integral part of these financial
      statements


F-4


**EAU
      TECHNOLOGIES, INC.**





STATEMENTS
      OF OPERATIONS





**For
                the Year Ended****December
                31,****2007**
            
            **2006**SALES,
                NET – RELATED PARTY
            
            $
            717,503
            
            $
            1,124,560SALES,
                NET
            
            
            161,096
            
            
            25,912TOTAL
                SALES
            
            
            878,599
            
            
            1,150,472COST
                OF GOODS SOLD
            
            
            519,751
            
            
            782,603GROSS
                PROFIT
            
            
            358,848
            
            
            367,869OPERATING
                EXPENSESDepreciation
                and amortization
            
            
            210,463
            
            
            93,814Research
                and development
            
            
            140,944
            
            
            335,853General
                and administrative
            
            
            8,260,609
            
            
            6,638,052Total
                operating expenses
            
            
            8,612,016
            
            
            7,067,719LOSS
                FROM OPERATIONS
            
            
            (8,253,168
            )
            
            (6,699,850
            )OTHER
                INCOME (EXPENSE)Interest
                expense
            
            
            (1,122,930
            )
            
            (1,161,485
            )Interest
                income
            
            
            31,272
            
            
            22,778Sale
                of technology license
            
            
            500,000
            
            
            -Gain
                (loss) on derivative liability
            
            
            (2,118,761
            )
            
            714,404Gain
                (loss) on sale of assets
            
            
            (1,816
            )
            
            72,736(Loss)
                on investments
            
            
            -
            
            
            (374,075
            )Other
                income (expense)
            
            
            39,024
            
            
            (9,448
            )Total
                other income (expense)
            
            
            (2,673,211
            )
            
            (735,090
            )LOSS
                BEFORE PROVISION FOR INCOME TAXES
            
            
            (10,926,379
            )
            
            (7,434,940
            )PROVISION
                FOR INCOME TAXES
            
            
            -
            
            
            -LOSS
                FROM CONTINUING OPERATIONS
            
            
            (10,926,379
            )
            
            (7,434,940
            )





The
      accompanying footnotes are an integral part of these financial
      statements


F-5


**EAU
      TECHNOLOGIES, INC.**





STATEMENTS
      OF OPERATIONS(continued)





**For
                the Year Ended****December
                31,****2007**
            
            **2006**DISCONTINUED
                OPERATIONS:Loss
                from operations of discontinued operations (Net of $0 in income
                taxes)
            
            
            (604,985
            )
            
            (1,080,367
            )Gain
                (Loss) on disposal of discontinued operations (Net of $0 in income
                taxes)
            
            
            640,027
            
            
            (50
            )GAIN
                (LOSS) FROM DISCONTINUED OPERATIONS
            
            
            35,042
            
            
            (1,080,417
            )NET
                LOSS
            
            $
            (10,891,337
            )
            $
            (8,515,357
            )GAIN
                (LOSS) PER SHAREContinuing
                operations
            
            
            (0.79
            )
            
            (0.71
            )Discontinued
                operations
            
            
            0.00
            
            
            (0.10
            )Total
                net loss per share
            
            $
            (0.79
            )
            $
            (0.81
            )WEIGHTED
                AVERAGE OF SHARES OUTSTANDING
            
            
            13,837,978
            
            
            10,541,203





The
      accompanying footnotes are an integral part of these financial
      statements


F-6


**EAU
      TECHNOLOGIES, INC.**





STATEMENTS
      OF
      STOCKHOLDERS’ EQUITY(DEFICIT)





**ADDITIONAL****COMMON
                STOCK**
            
            **PAID
                IN**
            
            **ACCUMULATED****SHARES**
            
            **AMOUNT**
            
            **CAPITAL**
            
            **DEFICIT**
            
            **TOTAL**Balance,
                December 31, 2005
            
            
            9,322,825
            
            $
            933
            
            $
            19,838,331
            
            $
            (22,575,935
            )
            $
            (2,736,671
            )Issuance
                of 76,670 shares for services at $2.58 per share
            
            
            76,670
            
            
            8
            
            
            197,801
            
            
            -
            
            
            197,809Issuance
                of 25,000 shares for services at $2.30 per share
            
            
            25,000
            
            
            3
            
            
            57,497
            
            
            -
            
            
            57,500Issuance
                of 1,600,000 shares for cash of $4,000,000, less offering costs of
                $240,000
            
            
            1,600,000
            
            
            160
            
            
            3,759,840
            
            
            -
            
            
            3,760,000Issuance
                of 75,000 shares for cash option exercise of $0.01 per
                share.
            
            
            75,000
            
            
            7
            
            
            743
            
            
            -
            
            
            750Adjustment
                to reconcile prior PIPE offering
            
            
            -
            
            
            -
            
            
            (3
            )
            
            -
            
            
            (3
            )Issuance
                of 60,000 shares to pay liability valued at $205,200
            
            
            60,000
            
            
            6
            
            
            205,194
            
            
            -
            
            
            205,200Issuance
                of 1,153,846 shares for cash of $1,500,000, less offering costs of
                $30,000
            
            
            1,153,846
            
            
            115
            
            
            1,469,885
            
            
            -
            
            
            1,470,000Issuance
                and vesting of options and warrants for services
            
            
            -
            
            
            -
            
            
            1,621,991
            
            
            -
            
            
            1,621,991Net
                loss for the year ended Dec. 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            (8,515,357
            )
            
            (8,515,357
            )Balance,
                December 31, 2006
            
            
            12,313,341
            
            $
            1,232
            
            $
            27,151,279
            
            $
            (31,091,292
            )
            $
            (3,938,781
            )





The
      accompanying footnotes are an integral part of these financial
      statements


F-7


**EAU
      TECHNOLOGIES, INC.**





STATEMENTS
      OF
      STOCKHOLDERS’ EQUITY(DEFICIT)





**ADDITIONAL****COMMON STOCK**
            
            **PAID
                IN**
            
            **ACCUMULATED****SHARES**
            
            **AMOUNT**
            
            **CAPITAL**
            
            **DEFICIT**
            
            **TOTAL**Balance,
                December 31, 2006
            
            
            12,313,341
            
            $
            1,232
            
            $
            27,151,279
            
            $
            (31,091,292
            )
            $
            (3,938,781
            )Issuance
                of 1,153,846 shares for cash of $1,500,000
            
            
            1,153,846
            
            
            115
            
            
            1,499,885
            
            
            -
            
            
            1,500,000Issuance
                of warrants to Water Sciences, a related party (See Note 10)
            
            
            -
            
            
            -
            
            
            3,974,885
            
            
            -
            
            
            3,974,885Issuance
                100,000 shares for cash of $50,000 or $0.50 per share due to exercise
                of
                warrants
            
            
            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 various options for services during the year
            
            
            -
            
            
            -
            
            
            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
            )





The
      accompanying footnotes are an integral part of these financial
      statements


F-8


**EAU
      TECHNOLOGIES, INC.**





STATEMENTS
      OF CASH FLOWS


**For
                  the Year ended**
                **December
                  31,****2007**
              
              **2006**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (10,891,337
              )
              $
              (8,515,357
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Depreciation
              
              
              210,463
              
              
              93,814Bad
                  debt expense
              
              
              6,594
              
              
              13,197Common
                  stock issued for services
              
              
              -
              
              
              255,309Warrants
                  and options granted
              
              
              4,705,545
              
              
              1,621,991Discount
                  of note payable
              
              
              1,000,000
              
              
              1,000,000(Gain)
                  Loss on disposal of discontinued operations
              
              
              (640,024
              )
              
              50Loss
                  on disposal of assets
              
              
              1,816
              
              
              98,827Loss
                  on investments
              
              
              -
              
              
              374,075Gain
                  on settlement of debt
              
              
              -
              
              
              (14,597
              )Changes
                  in operating assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              (28,096
              )
              
              83,492(Increase)
                  decrease in accounts receivable - related party
              
              
              (138,136
              )
              
              (218,418
              )(Increase)
                  in pre-paid expense
              
              
              (14,959
              )
              
              (15,641
              )Decrease
                  (increase) in inventory
              
              
              (325,479
              )
              
              (466,756
              )(Increase)
                  decrease in deposits
              
              
              1,658
              
              
              (10,000
              )(Increase)
                  in restricted cash
              
              
              (240,000
              )
              
              -Increase
                  (decrease) in accounts payable
              
              
              (296,020
              )
              
              (592,329
              )Increase
                  (decrease) in accrued expenses
              
              
              110,830
              
              
              418,607Increase
                  (decrease) in warranty reserve
              
              
              19,638
              
              
              5,562Increase
                  in advance deposits on machine orders - related party
              
              
              -
              
              
              697,500(Decrease)
                  in deferred revenue
              
              
              (200,000
              )
              
              (200,000
              )Increase
                  (decrease) in derivative liability
              
              
              2,118,762
              
              
              (714,404
              )Net
                  cash used in continuing operations
              
              
              (4,598,745
              )
              
              (6,085,078
              )Net
                  cash used in discontinued operations
              
              
              (116,453
              )
              
              (19,510
              )Net
                  cash used in operating activities
              
              
              (4,715,198
              )
              
              (6,104,588
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESProceeds
                  from sale of assets
              
              
              2,150,000
              
              
              -Acquisition
                  of property and equipment
              
              
              (84,958
              )
              
              (49,771
              )Investments
              
              
              -
              
              
              456,201Issuance
                  of note receivable
              
              
              (150,000
              )
              
              -Intellectual
                  property disbursements
              
              
              (16,988
              )
              
              (8,415
              )Net
                  cash provided in continuing operations
              
              
              1,898,054
              
              
              398,015Net
                  cash provided (used) in discontinued operations
              
              
              (6,890
              )
              
              31,847Net
                  cash provided (used) in investing activities
              
              
              1,891,164
              
              
              429,862CASH
                  FLOWS FROM FINANCING ACTIVITIESPayments
                  on notes payable
              
              
              (18,316
              )
              
              (31,275
              )Advances
                  for purpose of exercising warrants - related party
              
              
              500,000
              
              
              -Proceeds
                  from issuance of common stock - related party
              
              
              3,500,000
              
              
              5,230,747Proceeds
                  from issuance of common stock
              
              
              50,000
              
              
              -Net
                  cash provided by financing activities
              
              
              4,031,684
              
              
              5,199,472NET
                  INCREASE (DECREASE) IN CASH
              
              
              1,207,650
              
              
              (475,254
              )CASH
                  and cash equivalents, beginning of period
              
              
              206,094
              
              
              681,348CASH
                  and cash equivalents, end of period
              
              $
              1,413,744
              
              $
              206,094


The
      accompanying footnotes are an integral part of these financial
      statements


F-9


**EAU
      TECHNOLOGIES, INC.**





STATEMENTS
      OF CASH FLOWS


*(Continued)*





Year ended December 31,2007
            
            2006**Supplemental
                Disclosures of Cash Flow Information**Cash
                paid during the period for:Interest
            
            $
            37,296
            
            $
            57,463Income
                Taxes
            
            $
            -
            
            $
            -**Supplemental
                Disclosures of Non-cash Investing and Financing
                Activities**Common
                stock issued on conversion of liabilities
            
            $
            -
            
            $
            205,200Common
                stock issued for services
            
            $
            -
            
            $
            255,309Warrants
                and stock options granted
            
            $
            4,705,545
            
            $
            1,621,991





The
      accompanying footnotes are an integral part of these financial
      statements


F-10


**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 is a successor enterprise to another company,
      Primacide, LLC, which was founded by certain of the Company’s founders in 1998.
      The Company was organized with an insignificant carrying amount of the assets of
      Primacide, LLC. 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 five years. Depreciation expense
      for
      the years ended December 31, 2007 and 2006 was $210,463 and $93,814,
      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-11


**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 $112,000 and $250,000, during the years ended December 31, 2007
      and 2006, 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 some portion 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, 2007 and 2006 were
      approximately $141,000 and $349,000, 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 in force to begin amortizing. Intellectual property with indefinite
      lives is not amortized, but the carrying amounts of these assets are reviewed
      for impairment at least annually. The Company reviewed these assets for
      impairment at December 31, 2007 and determined the no impairment was
      indicated.


F-12


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





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





***Comprehensive
      Loss –*** The
      Company adopted SFAS No. 130, *“Reporting
      Comprehensive Income”* (“SFAS
      130"). SFAS 130 establishes standards for the reporting and display of
      comprehensive income or loss, requiring its components to be reported in the
      financial statements. For the year ended December 31, 2007 and 2006, the Company
      had no other component of comprehensive income or loss other than the net loss
      as reported in the statement of operations.





***Earnings
      Per Share –*** The
      Company adopted SFAS No. 128, *“Earnings
      per Share”* (“SFAS
      128"), which is effective for annual periods ending after December 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
      May
      2005, the FASB issued Statement of Financial Accounting Standards No. 154 *“Accounting
      Changes and Error Corrections, an amendment of APB Opinion 20 and FASB Statement
      No. 3,”* which
      changes the requirements for accounting for and reporting on a change in
      accounting principle. This statement is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      We
      believe that the adoption of SFAS No. 154 will not have a material impact on
      our
      results of operations.





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





In
      June
      2006, the FASB issued Financial Interpretation No. (FIN) 48, “ *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      109* .”
FIN
      48
      prescribes a recognition threshold and a measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This interpretation also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. We have noted that the Company has
      one
      item that would be subject to FIN 48, in that the Company has yet to file past
      tax returns. The Company is working with the accounting firm to have all returns
      filed no later than the end of the second quarter. We believe that the adoption
      of FIN 48 will not have a material impact on our results of operations due
      to
      the ongoing net losses incurred by the Company, which will offset any taxable
      income that may arise.


F-13


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





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





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ,”
that
      provides guidance for using fair value to measure assets and liabilities. Under
      SFAS 157, fair value refers to the price that would be received to sell an
      asset
      or paid to transfer a liability in an orderly transaction between market
      participants in the market in which the reporting entity transacts. SFAS 157
      establishes a fair value hierarchy that prioritizes the information used to
      develop the assumptions that market participants would use when pricing the
      asset or liability. The fair value hierarchy gives the highest priority to
      quoted prices in active markets and the lowest priority to unobservable data.
      In
      addition, SFAS 157 requires that fair value measurements be separately disclosed
      by level within the fair value hierarchy. This standard will be effective for
      financial statements issued for fiscal periods beginning after November 15,
      2007
      and interim periods within those fiscal years. The Company is currently
      evaluating the impact of applying the various provisions of SFAS
      157.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Liabilities” (SFAS 159). SFAS 159 permits entities to
      choose to measure many financial instruments and certain other items at fair
      value that are not currently required to be measured at fair value. SFAS 159
      also establishes presentation and disclosure requirements designed to facilitate
      comparisons between entities that choose different measurement attributes for
      similar types of assets and liabilities. SFAS 159 is effective as of the
      beginning of an entity’s first fiscal year that begins after November 15,
      2007. We are currently evaluating the impact the adoption of SFAS 159 may have
      on our financial statements.





***Reclassification*** **–** The
      financial statements for periods prior to December 31, 2007, have been
      reclassified to conform to the headings and classifications used in the December
      31, 2007, financial statements.





**NOTE
      2 – CONCENTRATIONS OF CREDIT RISK**





The
      Company occasionally maintains cash balances in excess of the $100,000 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, 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.





For
      the
      year ended December 31, 2006, sales to one customer, a related party,
      represented approximately 56% of the Company’s total net sales. Approximately
      78% of the Company’s outstanding receivables were attributable to two customers,
      one related party and one non-related party, as of December 31,
      2006.





**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 $9,540 in interest income from the escrow account for the year ended
      December 31, 2007.


F-14


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      4 – TRADE ACCOUNTS RECEIVABLE**





Trade
      accounts receivable consist of the following at December 31:




2007
            
            2006Trade
                Accounts Receivable
            
            $
            86,196
            
            $
            159,225Trade
                Accounts Receivable - Related Party
            
            
            357,615
            
            
            219,479Less
                allowance for doubtful accounts
            
            
            (25,000
            )
            
            (25,000
            )$
            418,811
            
            $
            353,704





Bad
      debt
      expense for the years ended December 31, 2007 and 2006 was $6,894 and $13,197,
      respectively.





**NOTE
      5 – INVENTORIES**





The
      composition of inventories is as follows at December 31:




2007
            
            2006Finished
                goods
            
            $
            1,887,934
            
            $
            543,336Raw
                materials
            
            
            1,326,599
            
            
            2,375,062Allowance
                for obsolete inventory
            
            
            (400,000
            )
            
            (416,135
            )$
            2,814,533
            
            $
            2,502,263





The
      Company has established an allowance for obsolete inventory. Expense for
      obsolete inventory was $132,613 and $121,303, for the years ended December
      31,
      2007 and 2006, respectively, and is included in Cost of Goods Sold.





**NOTE
      6 – PROPERTY AND EQUIPMENT**





P roperty
      and equipment consisted of the following at December 31:





2007
            
            2006Machinery
                and equipment
            
            $
            287,710
            
            $
            754,921Vehicles
            
            
            19,966
            
            
            4,650Furniture
                and fixtures
            
            
            64,442
            
            
            50,824ER
                Systems
            
            
            22,364
            
            
            -Leasehold
                improvements
            
            
            32,136
            
            
            230,001Total
                property and equipment
            
            
            426,618
            
            
            1,040,396Less:
                accumulated depreciation
            
            
            (220,064
            )
            
            (406,919
            )Property
                and equipment, net
            
            $
            206,554
            
            $
            633,477


F-15


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      7 – PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY**





P atents,
      trademarks and intellectual property consisted of the following at:




December
                31,2007
            
            2006Patents
                and trademarks
            
            $
            61,558
            
            $
            68,380Intellectual
                property
            
            
            -
            
            
            1,122,858Net
            
            $
            61,558
            
            $
            1,191,238





**NOTE
      8 – 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, 2007 and 2006. 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, 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, 2007. In connection with the sales
      of
      the machines and products, the Company has recorded approximately $357,615
      in
      accounts receivable at December 31, 2007. During
      the year ended December 31, 2006, the Company sold four large water generators,
      one small water generator and related parts to Water Science for $660,141. The
      Company also sold approximately $239,419 in products to an entity related to
      Water Science.





***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 10). Due to the discount of this
      note and the beneficial conversion feature, the Company has recognized
      $1,000,000 in interest expense for the years ended December 31, 2007 and 2006.
      The exercise price of these warrants is to be adjusted if the Company should
      issue stock for less than the original exercise price. Due to this feature
      wherein the conversion price is reset if shares are issued at a price less
      than
      the fixed conversion price, and pursuant to EITF 00-19, the Company 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 $2,118,761 due to the issuance of new warrants to Water Science in
      May
      2007 (see Note 10) and the change in the fair market value at December 31,
      2007.
      The Company recorded a gain of $714,404 in the change of the derivative
      liability to fair market value for the year ended December 31, 2006.





***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, 2007 and 2006.





***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.


F-16


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      8 – RELATED PARTY TRANSACTIONS** **(Continued)**





***Escrow
      Arrangement with Chief Executive Officer –*** In
      October 2006, the Company entered into an escrow agreement with the Chief
      Executive Officer. Pursuant to the escrow agreement, to secure the Company’s
      obligation to make the Severance Payment, the Company is required to deposit,
      at
      its election, either (1) cash in the amount of $240,000 or (2) an irrevocable
      letter of credit with a face amount of $240,000, with an agreed upon escrow
      agent who shall hold such funds (or letter of credit) in escrow. In January
      2007, the Company deposited $240,000 in cash with an escrow agent.





***Advances*** –
      Periodically throughout the year, the Company advances officers and employees
      cash for certain reimbursable expenses. As of December 31, 2007 and 2006, the
      Company had advances to employees or officers in the amount of $5,500 and
      $1,000, 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 $19,594
      during the year ended December 31, 2007.





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 $33,892
      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 12)





***Product
      Supplier Agreement*** ****** –
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. The Company did not make any sales to Zerorez during 2007. The
      Company received $25,000 from sales of machines to Zerorez in 2006.





**NOTE
      9 – 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:


F-17




**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      9 – WARRANTY RESERVE (Continued)**





For the Year Ended December 31,2007
            
            2006Warranty
                reserve at beginning of period
            
            $
            102,362
            
            $
            96,800Costs
                accrued for additional warranties
            
            
            44,000
            
            
            62,000Service
                obligations honored
            
            
            (24,362
            )
            
            (56,438
            )Warranty
                reserve at end of period
            
            $
            122,000
            
            $
            102,362





**NOTE
      10 – 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. No principal or
      interest payments need to be paid during the loan period. The Note may be
      converted into 1,000,000 shares of the Company’s $0.0001 par value common stock
      prior to the maturity date, and at any time, by the holder at a price per share
      equal to $3.00 per share, subject to certain other conversion adjustments.
      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 has a right to require Water Science to exercise 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
      exercise price of these warrants is to be adjusted if the Company should issue
      stock for less than the original exercise price. Due to this feature wherein
      the
      conversion price is reset if shares are issued at a price less than the fixed
      conversion price, and pursuant to EITF 00-19, the Company has elected to
      bifurcate the conversion feature from the debt host, and accounts for the
      feature as a derivative liability with changes in fair value being recorded
      in
      the income statement. As of December 31, 2007 and 2006, the value of the
      derivative liability was $6,758,074 and $4,639,312. The Company recorded a
      loss
      of approximately $2,118,761 in the change of the derivative liability to fair
      market value for the year ended December 31, 2007 and a gain of $714,404 in
      the
      change of the derivative liability to fair market value for the year ended
      December 31, 2006.




F-18


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      11 – LONG TERM DEBT**





Long-term
      debt consisted of the following at:




December 31,2007
            
            2006Unsecured
                note payable to unrelated third party, payable in monthly installments
                of
                $1,500, including interest of approximately 22%, due October
                2012
            
            $
            39,443
            
            $
            48,601Unsecured
                note payable to unrelated third party, payable in monthly installments
                of
                $1,500, including interest of approximately 22%, due October
                2012
            
            
            39,443
            
            
            48,601Total
                debt
            
            
            78,886
            
            
            97,202Less:
                current portion
            
            
            (19,841
            )
            
            (17,778
            )Long
                term debt
            
            $
            59,045
            
            $
            79,424





Maturities
      of the notes payable are as follows:





**Year
                Ending December 31,**
            
            **Amount**2008
            
            
            19,8412009
            
            
            25,5652010
            
            
            33,4802011
            
            
            -Thereafter
            
            
            -$
            78,886




**NOTE** **12** **–
      COMMON STOCK**





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





On
      May 9,
      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.




F-19


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE** **12** **–
      COMMON STOCK – (Continued)**





On
      May 7,
      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
      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
      October 2006, the Company granted 500,000 options to Wade R. Bradley in
      connection with the appointment of Mr. Bradley as Chief Executive Officer and
      President. 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 4.71%, volatility at 81.29% and the stock price
      at $1.46. The value of each warrant is approximately $1.25 per warrant. The
      Company recognized $332,533 and $63,216 during the years ended December 31,
      2007
      and 2006, respectively, as consulting expense.





In
      October 2006, the Company sold and issued to Peter F. Ullrich, the managing
      director of Water Science, LLC and a major shareholder, a total of 1,153,846
      shares of the Company’s $0.0001 par value common stock for a total of $1.5
      million cash, or $1.30 per share. As part of the transaction, Mr. Ullrich and
      Water Science agreed that this transaction would not cause an adjustment to
      the
      conversion price of the Senior Convertible Note issued to Water Science in
      September 2005, nor would it cause an adjustment to the exercise price of the
      warrants granted to Water Science in September 2005. The Company paid $30,000
      to
      a placement agent in connection with this stock sale, which was netted against
      the proceeds.





In
      August
      2006, the Company issued 75,000 shares of the Company’s common stock to three
      employees (25,000 shares each) upon their exercising of outstanding stock
      options. Each option was exercised at $0.01 per share. The Company received
      proceeds of $750.





In
      May
      2006, the Company sold and issued to Water Science, LLC, a Florida limited
      liability company (“Water Science”), a total of 1,600,000 shares of the
      Company’s $0.0001 par value common stock for a total of $4 million cash, or
      $2.50 per share. As part of the transaction, Water Science agreed that this
      transaction would not cause an adjustment to the conversion price of the Senior
      Convertible Note issued to Water Science in September 2005, nor would it cause
      an adjustment to the exercise price of the warrants granted to Water Science
      in
      September 2005. The Company also granted to Water Science warrants to purchase
      up to 6,400,000 shares of the Company’s $0.0001 par value common stock in
      exchange for the payment of $2.76 per share.  The Company paid $240,000 to
      a placement agent in connection with this stock sale, which was netted against
      the proceeds.





In
      May
      2006, the Company granted 500,000 warrants to purchase common stock for
      consulting services. The warrants are for a term of five (5) years and have
      an
      exercise price of $2.76 per share. The warrants were valued using the
      Black-Scholes model with the following assumptions: risk free rate of 4.99%,
      volatility at 59.76% and the stock price at $1.95. The value of each warrant
      is
      approximately $0.92 per warrant. The Company recognized $459,552 in the second
      quarter of 2006 as consulting expense.





In
      April
      2006, the Company issued 25,000 shares of the Company’s common stock to an
      employee for services valued at $2.00 per share, or $57,500.





F-20


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE** **12** **–
      COMMON STOCK (continued)**





In
      January 2006, the Company issued a total of 76,670 shares of the Company’s
      common stock for services to three consultants valued at $2.58 per share or
      $197,809.





During
      the year ended December 31, 2006, the Company granted 775,000 options to
      employees to purchase common stock in the Company for services. The Company
      also
      recognized an expense of $1,162,439 related to past options granted to employees
      pursuant to FAS 123(R).





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, 2007 the Company issued 480,260 options under
      the
      plan.




A
      summary
      of the status of the options and warrants granted at December 31, 2007 and
      2006,
      and changes during the years then ended is presented below.





For the years ended December 31,2007
            
            2006Shares
            
            Weighted
              Average
              Exercise
              Price
            
            Shares
            
            Weighted
              Average
              Exercise
              PriceOutstanding
                at beginning of period
            
            
            11,925,793
            
            
            2.57
            
            
            4,678,293
            
            
            2.77Granted
            
            
            9,410,260
            
            
            3.21
            
            
            7,900,000
            
            
            2.58Exercised
            
            
            (1,638,463
            )
            
            1.25
            
            
            (75,000
            )
            
            0.01Expired
                or cancelled
            
            
            (9,055,751
            )
            
            2.76
            
            
            (577,500
            )
            
            3.00Outstanding
                at end of period
            
            
            10,641,839
            
            
            1.55
            
            
            11,925,793
            
            
            2.57Weighted
                average fair value of options exercisable
            
            
            9,331,579
            
            
            1.58
            
            
            11,425,793
            
            
            2.57





A
      summary
      of the status of the options and warrants outstanding at December 31, 2007
      is
      presented below:





Options and Warrants Outstanding
            
            Options and Warrants ExercisableRange of
              Exercise
              Prices
            
            Number
              Outstanding
            
            Weighted-Average
              Remaining
              Contractual Life
            
            Weighted-Average
              Exercise
              Price
            
            Number
              Exercisable
            
            Weighted-Average
              Exercise
              Price$.01-.50
            
            
            535,000
            
            
            1.7
                years
            
            $
            0.03
            
            
            535,000
            
            $
            0.031.00
                - 1.99
            
            
            8,586,797
            
            
            3.3
                years
            
            
            1.31
            
            
            7,276,537
            
            
            1.312.00
                - 2.99
            
            
            695,000
            
            
            6.7
                years
            
            
            2.65
            
            
            695,000
            
            
            2.653.00
                - 3.99
            
            
            306,666
            
            
            5.6
                years
            
            
            3.43
            
            
            306,666
            
            
            3.434.00
                - 4.99
            
            
            255,000
            
            
            1.9
                years
            
            
            4.00
            
            
            255,000
            
            
            4.005.00
                - 5.50
            
            
            263,376
            
            
            1.9
                years
            
            
            5.15
            
            
            263,376
            
            
            5.15$.01-5.50
            
            
            10,641,839
            
            
            3.5
                years
            
            $
            1.55
            
            
            9,331,579
            
            $
            1.58


F-21


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE** **12** **–
      COMMON STOCK (continued)**





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%. The following assumptions were used
      for
      options granted during 2006: risk-free interest rate of between 4.60% and 5.02%,
      expected dividend yield of zero, expected lives of three to ten years and
      expected volatility of between 59.76% and 91.21%.





**NOTE
      13 – 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, 2007
      and
      2006, the total of all deferred tax assets was approximately $12,521,000 and
      $10,361,000, 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 $12,521,000 and $10,361,000
      as of December 31, 2007 and 2006, respectively, which has been offset against
      the deferred tax assets. The net change in the valuation allowance during the
      year ended December 31, 2007, was $2,160,000.





The
      Company has available at December 31, 2007, unused tax operating loss
      carryforwards of approximately $25,500,000, which may be applied against future
      taxable income and expire in various years through 2027.





The
      components of income tax expense from continuing operations for the years ended
      December 31, 2007 and 2006 consist of the following:




Year Ended December 31,2007
            
            2006Current
                income tax expense:Federal
            
            $
            -
            
            $
            -State
            
            
            -
            
            
            -Net
                current tax expense
            
            
            -
            
            
            -Deferred
                tax expense (benefit) arising from:Excess
                of tax over financial accounting depreciation
            
            $
            66,786
            
            $
            32,024Accrued
                compensation and taxes
            
            
            (95,354
            )
            
            69,826Reserve
                for bad debts
            
            
            -
            
            
            1,865Derivative
                liability
            
            
            (2,520,762
            )
            
            -Warranty
                reserve
            
            
            (7,325
            )
            
            (2,075
            )Deferred
                income
            
            
            74,600
            
            
            74,600Obsolete
                inventory
            
            
            6,018
            
            
            (35,858
            )Net
                operating loss carryforwards
            
            
            (1,413,806
            )
            
            (2,468,710
            )Other
            
            
            (62,432
            )
            
            -Valuation
                allowance
            
            
            3,952,273
            
            
            2,328,328Net
                deferred tax expense
            
            $
            -
            
            $
            -




F-22


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***




**NOTE
      13 – INCOME TAXES** **(continued)**





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





The
      temporary differences gave rise to the following deferred tax asset (liability)
      at December 31, 2007 and 2006:




December 31,2007
            
            2006Excess
                of tax over book accounting depreciation
            
            $
            (87,811
            )
            $
            (21,025
            )Obsolete
                inventory
            
            
            149,200
            
            
            155,218Accrued
                compensation and payroll taxes
            
            
            102,068
            
            
            6,714Warranty
                reserve
            
            
            45,506
            
            
            38,181Contribution
                carryover
            
            
            7,124
            
            
            7,124Deferred
                income
            
            
            202,042
            
            
            276,642Reserve
                for bad debt
            
            
            9,325
            
            
            9,325NOL
                carryforwards
            
            
            9,510,814
            
            
            8,097,009Derivative
                liability
            
            
            2,583,192
            
            
            -




The
      Company files income tax returns in the U.S. federal jurisdiction, and North
      Carolina, Georgia, and Utah. With few exceptions, the Company is no longer
      subject to U.S. federal, state and local, or non-U.S. income tax examinations
      by
      tax authorities for years before 2003. The Company has not filed a tax return
      since the 2003 year. Minimum state tax payments have accrued in states for
      which
      the company has operated since 2004. Upon filing all amounts paid will be
      subject to penalties and interest according to the state tax jurisdiction.
      The
statuteof limitations remains open on all years from 2004 going forward. The
      statute will not begin to run until the Company files the tax returns. 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 to
      the
      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
                at January 1, 2007
            
            $
            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, 2007
            
            $
            0




F-23


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***




**NOTE
      13 – INCOME TAXES** **(continued)**





At
      December 31, 2007, there are no ****** tax
      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 of the 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.





The
      Company’s policy is to recognize interest accrued related to unrecognized tax
      benefits in interest expense and penalties in operating expenses. During the
      years ended December 31, 2007 and 2006, the Company recognized approximately
      $1,127,296, and $1,134,796 in interest. The Company had approximately $6,964,074
      and $4,755,312 for the payment of interest accrued at December 31, 2007 and
      2006, respectively.





**NOTE** **14** **–
      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 $524,000.





**NOTE
      15** **–
      DISCONTINUED OPERATIONS**





In
      August
      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.


F-24


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      15** **–
      DISCONTINUED OPERATIONS (continued)**





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 and $1,108,615
      for the years ended December 31, 2007 and 2006, respectively. 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,****2007**
            
            **2006**Sales,
                net
            
            $
            722,244
            
            $
            799,237Cost
                of goods sold
            
            
            336,337
            
            
            476,912Gross
                profit
            
            
            385,907
            
            
            322,325Operating
                expenses
            
            
            989,137
            
            
            1,441,582Loss
                from operations
            
            
            (602,230
            )
            
            (1,119,257
            )Other
                income (expense)
            
            
            (1,755
            )
            
            10,642Loss
                from discontinued operations
            
            
            (604,985
            )
            
            (1,108,615
            )Gain
                on disposal of discontinued operations
            
            
            640,027
            
            
            -Net
                income (loss) on discontinued operations
            
            $
            35,042
            
            $
            (1,108,615
            )





In
      September 2006, the Company sold their investment in Equilease, Inc.
      (“Equilease”) to EOWORP, L.L.C., (“EOWORP”) a related party. Equilease provided
      equipment financing for certain Zerorez franchisees, also related parties.
      The
      sole assets of Equilease were Notes Receivables. The Company was the sole owner
      of Equilease and had the operations of Equilease into the Company’s books. The
      terms of the agreement called for EOWORP to pay to the Company the current
      value
      of the Notes Receivables held by Equilease. Further, EOWORP agreed to pay off
      other certain payables owed to the Company by Zerorez, a related party. The
      total cash consideration paid to the Company was $452,559. The Company
      recognized income from operations of discontinued operations in the amount
      of
      $28,248 for the year ended December 31, 2006. The Company recorded a loss on
      disposal of discontinued operations in the amount of $50. The following is
      a
      summary of the results of operations for Equilease:





**For the Year**
              **Ended**
              **December 31,****2006**Interest
                Income
            
            $
            28,248Loss
                on discontinued operations
            
            
            (50
            )Net
                Income
            
            
            28,198




F-25


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      16** **–
      GOING CONCERN**




The
      Company has incurred significant losses and has had negative cash flows from
      operations. As a result, at December 31, 2007, the Company has had a high level
      of equity financing transactions and additional financing will be required
      by
      the Company to fund its future activities and to support its operations.
      Management is seeking to obtain sufficient funding for its operations through
      either debt or equity financing. However, there is no assurance that the Company
      will be able to obtain additional financing. Furthermore, there is no assurance
      that rapid technological changes, changing customer needs and evolving industry
      standards will enable the Company to introduce new products and services on
      a
      continual and timely basis so that profitable operations can be attained. The
      Company’s ability to achieve and maintain profitability and positive cash flows
      is dependent upon its ability to achieve positive sales and profit margins
      and
      control operating expenses. The Company estimates that it will need
      approximately $5,000,000 for the upcoming twelve months. Management plans to
      mitigate its losses in the near term through the further development and
      marketing of its trademarks, brand and product offerings.





**NOTE
      17 – 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 exercise or conversion of all
      potentially dilutive common shares outstanding. At December 31, 2006, 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. Dilutive loss per share was not presented,
      as the Company had no common stock equivalent shares for all periods presented
      that would affect the computation of diluted loss per share.





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





For the years ended
              December 31,2007
            
            2006Net
                loss from Continuing Operations
            
            $
            (10,926,379
            )
            $
            (7,434,940
            )Net
                income (loss) from Discontinued Operations
            
            
            35,042
            
            
            (1,080,417
            )Total
                net loss
            
            $
            (10,891,337
            )
            $
            (8,515,357
            )Net
                loss per share continuing operations
            
            
            (0.79
            )
            
            (0.71
            )Net
                Income (loss) per share discontinued operations
            
            
            0.00
            
            
            (0.10
            )Total
                net loss per share
            
            $
            (0.79
            )
            $
            (0.81
            )Weighted
                average number of commonsharesoutstanding
                used in loss per share for the period
            
            
            13,837,978
            
            
            10,541,203





F-26


**EAU
      TECHNOLOGIES, INC.**





***NOTES
      TO FINANCIAL STATEMENTS***





**NOTE
      17 – LOSS PER SHARE – (continued)**





Stock
      Based-Compensation Expense





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires
      the measurement and recognition of compensation expense for all share-based
      payments to employees and directors including employee stock options  and
      stock purchases related to the Company’s employee stock option and award plans
      based on estimated fair values. SFAS 123(R) supersedes the Company’s previous
      accounting under Accounting Principles Board Option No. 25, “Accounting for
      Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In
      March 2005, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied
      the provisions of SAB 107 in its adoption of SFAS 123(R).





The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006,
      the first day of the Company’s fiscal year 2006. The Company’s financial
      statements as of and for the year ended December 31, 2006 reflect the impact
      of
      SFAS 123(R). In accordance with the modified prospective transition method,
      the
      Company’s financial statements for the prior year have not been restated to
      reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation
      expense recognized under SFAS 123(R) for the year ended December 31, 2007 was
      $4,705,545 for stock options granted and vesting during the period. During
      the
      year ended December 31, 2006, the Company recognized $1,162,991 compensation
      expense related to other stock options.





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in our Statement of Operations.
      Stock-based compensation expense recognized in our Statements of Operations
      for
      the year ended December 31, 2007 assumes all awards will vest, therefore no
      reduction has been made for estimated forfeitures.





**NOTE
      18 – SUBSEQUENT EVENTS**





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
      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 Compensation Committee
      also
      granted 49,500 shares of restricted stock to various employees, which will
      vest
      one year from the date of grant.





In
      March
      2008, the Company and the University of Georgia Research Foundation entered
      into
      a Settlement and License Amendment (the “Amendment”). The Amendment settles a
      dispute among the parties regarding the amount of royalties due under the
      License Agreement dated as of June 18, 2002 in connection with the use of the
      licensed technology by Water Science LLC. Under the Amendment, to settle this
      dispute, the Company will pay to UGARF a total of $65,000, of which $25,000
      has
      been paid to date. The remaining $40,000 will be paid in four equal installments
      of $10,000 each due on the first day of the calendar quarters of 2008, aside
      from the initial payment, which is due within ten days of the effective date
      of
      the Amendment.




F-27