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, 2004

[  ]

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

1934

For the transition period from _________________ to _________________

Commission File Number: 333-86830

ELECTRIC AQUAGENICS UNLIMITED, INC.

(name of small business issuer in its charter)

Delaware                                                                          87-0654478

(State or other jurisdiction of incorporation or organization)           (I.R.S. Employer Identification No.)



1464 W. 40 S. Suite #200, Lindon, Utah       84042-1629

(Address of principal executive offices)        (Zip Code)



Issuers telephone number: (801) 443-1031



Securities registered under Section 12(b) of the Act:

Title of each class                                                Name of each exchange on which registered

None                                                                                      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.  [  ] Yes  [ X ] 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.   [X]

Issuers revenues for its most recent fiscal year: $325,000.

Since the registrant does not presently have an active trading market, a market value of the voting stock held by non-affiliates cannot be determined.



As of April 14, 2005 the registrant had 8,008,373 shares of common stock, par value $0.0001, outstanding.



Documents incorporated by reference: None

Transitional Small Business Disclosure Format (check one):  [ ] Yes   [X] No





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TABLE OF CONTENTS

Page

PART I



ITEM 1.

DESCRIPTION OF BUSINESS.

4

ITEM 2.

DESCRIPTION OF PROPERTY.

13

ITEM 3.

LEGAL PROCEEDINGS.

13

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

13

PART II



ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

13

ITEM 6.

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

13

ITEM 7.

FINANCIAL STATEMENTS

17

ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING

AND FINANCIAL DISCLOSURE.

17

ITEM 8A.

CONTROLS AND PROCEDURES.

18

ITEM 8B

OTHER INFORMATIION.

18



PART III



ITEM 9.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

19

ITEM 10.

EXECUTIVE COMPENSATION.

21

ITEM 11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

22

ITEM 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

24

ITEM 13.

EXHIBITS.

25

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

27



SIGNATURES.

29



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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 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.



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PART I

ITEM 1.     DESCRIPTION OF BUSINESS



We are in the business of developing, manufacturing and marketing equipment that uses water electrolysis to create fluids that clean, disinfect, remediate, and hydrate; and developing, manufacturing and marketing consumer products that support a healthy lifestyle. The fluids generated by our machines are environmentally safe and free from toxins and harmful residues associated with chemical based disinfecting and cleaning agents. The electrolyzed fluids generated by our machines will replace many of the traditional products used in commercial, industrial and residential disinfecting and cleaning.

Our business operations are evolving beyond the manufacture and sale of electrolyzed water making machines to franchisedcarpet cleaning companies. Today we also focus on product and equipment to discover and test new uses for electrolyzed water in commercial and residential applications and obtaining governmental approval when required or prudent.  We seek patent protection, where feasible, for our new water electrolyzing machine designs, for commercial products and for applications of our electrolyzed fluids and supplements.  Our revenues in the past have been derived primarily from equipment sales. Our current plans include a required package of services for each industrial customer from which we will derive a number of revenue streams. These include equipment installation fees, metered by-the-gallon or per item charges and an ongoing service agreement. Our expansion plans include the development of strategic relationships within key industries that will hasten the growth of our market penetration within each market segment.



We currently fund our operations primarily from investor funding and some from equipment sales.



The majority of our historic equipment sales have been to an affiliated company (Zerorez Franchising Systems, Inc., referred to as Zerorez). Zerorez is a national carpet cleaning company that currently has 26 franchisees. Zerorez franchisees employ our machines to make electrolyzed water that is used to clean and sanitize carpets and other living surfaces.  Zerorez is expanding rapidly to meet its market penetration goal of selling forty five (45) new franchises by December 2005.

We are continuing to progress in our efforts to diversify into other high demand areas such as poultry processing, consumer products and grocery produce spraying systems. Our diversification efforts have allowed us to secure a foothold in six of the eight market channels identified in our business plan.  We are focused on these six market channels as they appear to offer the greatest opportunity for accelerated revenue growth. We are currently generating revenues in carpet cleaning, poultry processing, consumer products, including bottled drinking water. Additional marketing and sales channel opportunities are still in their early stages of development.

Products

Electrolyzed Fluids and Generators

One of our sales and marketing directives is to convert the electrolyzed fluid flow produced by our on-site generators at commercial food processing facilities, into a consistent and predictable source of revenue. The electrolyzed sanitizing fluids can be metered and each client company will pay for our fluid on a per gallon basis, or at a rate based on the number of items, (e.g., animal carcasses) processed in a given period. In addition each customer will be required to pay for an ongoing service and maintenance contract. We have successfully placed generators at several commercial manufacturing facilities, for in-plant beta testing and have other formal arrangements to expand this process as a necessary step to achieving revenues. We expect revenue levels to increase now that successful tests in various markets have been, and are being, completed.



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Currently, revenue is generated primarily from the selling or leasing of water electrolyzing machines, which we refer to as generators. We maintain an inventory of approximately one to two-dozen generators ready for resale or lease.



We have recently developed a new model water-electrolyzing generator that we assemble with components supplied by third parties.  We intend to expand the sale, lease or placement of these machines in manufacturing facilities in the coming twelve months. These new generators produce higher levels of HOCl and a stabilized acid water unavailable before. Higher volume generators are in the design stage and are expected to be available within the next 6 months. There are seven generator models currently produced, within the following categories:

·

Commercial Generators.  We generally sell our commercial generators, or place them on-site and receive payments based on the amount of fluids produced or the volume of items treated with the fluids.  Some units are sold to Zerorez Franchising Systems, Inc. and/or its franchisees.  We warrant each commercial generator for repair and parts replacement for a period of three years. The various models range in price from $12,000 to over $300,000.

·

Residential Generators.  We have the capacity to manufacture residential generators that produce both alkaline water and acidic water.  These fluids can be used, respectively, for cleaning and disinfecting in a home or office environment. The price range of the residential generators is from $600 to $2,000. To date, we have not manufactured a residential generator for resale, but intend to complete further research and development and determine the viability of entering this market.

Electrolyzed water can be made in varying strengths and with specific properties.  We have, for example, created products by testing the cleaning and sanitizing effects of electrolyzed water by varying ORP, pH levels and ppm of HOCl.  We are able to customize our generators to produce electrolyzed water that may kill a specific microorganism, for example. Our current fluid formulas and their disinfectant and cleaning applications are as follows:

·

Primacide Ais a disinfecting and sanitizing fluid that kills bacteria, yeast, molds and viruses, including e-coli, salmonella, staphylococcus, streptococcus, lysteria, camphlyobacter, vibrio vulnificus, and hundreds of other organisms.  It is highly oxidative and acidic due to its pH of 2.4 and positive 1150 milivolt ORP and HOCl of 10 to 150 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 and Poultry Science Departments, indicate that Primacide A can be used to sanitize and wash meat carcasses, strawberries, lettuce, cabbage, carrots and other vegetables. Although we have not applied for governmental approvals for using Primacide A in a medial of heath care environment, Primacide A can effectively clean surfaces such as floors in hospital operating rooms, bench tops, treatment tables, cutting boards and other surfaces. We have now received a patent for using Primacide B in carpet cleaning and using Primacide A in sanitizing eggs.  Several more applications for use of our fluids in various applications have also been submitted under utility processes and applications.



5









·

Primacide B is an alkaline based cleaner.  Primacide B is created in the electrolysis process with a sodium hydroxide ion as the active ingredient.  It saponifies surfaces of 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, which is very alkaline.  Its alkaline nature and its negative 860-milivolt ORP result in a product that is effective in cutting oil and grease and as a pre-spray on beef and poultry carcasses.  Primacide B is primarily a cleaner with some bacteria killing properties, but is significantly slower and less effective as a bacteria killer than Primacide A.  We have submitted a provisional patent application to the United States Patent and Trademark Office to Primacide B for all uses. We recently applied to the U.S. Patent and Trademark Office for a utility patent relating to Primacide A and Primacide B as a cleaner and sanitizer of all hard surfaces.

·

Primacide Cis a disinfecting and sanitizing fluid similar to Primacide A, but with the pH elevated to the 5.5 range  This change in pH stabilizes the fluid so that it has a longer shelf life and is not as corrosive as Primacide A.  The process to create this stabilized electrolyzed oxidative water was developed by Dr. Yen Con Hung at the University of Georgia.  This process has been submitted to the U.S. Patent and Trademark Office and the application is currently pending.  We hold an exclusive, worldwide license for this patent pending technology from the University of Georgia for the life of the patent.  This fluid can be created in a variety of strengths depending on the application requirements.  The range of concentrations of HOCl (the active ingredient) is from 10 ppm to 120 ppm.  It is currently being tested as a spray on produce in grocery stores.  Its longer shelf life will enable us to create disinfecting products for the consumer market.

We intend to develop further products for use in commercial cleaning and sanitizing by varying ORP and pH levels and HOCl content.  The products will primarily be sold via leased machines, joint ventures, distributorships or metering systems. We intend to create products that can be used in the commercial storage, processing and shipping of fruits, vegetables and meat, as well as in consumer health and beauty products such as body care, health care, day care and mold control; however, we have not commenced development of all of these products, and may never commence their development.  Substantial additional capital and some regulatory approval will be needed for us to effectively sell these products even if they are developed. Failure to secure sufficient funding and receive regulatory approval for these products will hinder our ability to bring them to market and would have a negative impact on our business.

Aquagen Products and Other Commercial Products

We currently market other products for personal use and for commercial and residential applications. We sell the Aquagen® oxygen supplement and wellness products in the health food and nutraceutical markets. We maintain a significant inventory of the Aquagen® products. We have constructed a water bottling facility at the site of our corporate offices to produce Perfect Empowered Drinking WaterTM, a commercial drinking water. We intend to market the Aquagen®products in new market channels and to develop other personal use products, such as skin care products, periodontal products and a hand sanitizer product. We also intend to develop and market commercial and residential cleaning products, such as a bottled surface cleaning product

·

EAUs subsidiary, Aquagen International,manufactures and markets

products that include, our oxygen supplement products: Aquagen®, Maximum Strength, Aquagen®, Revitalized and Aquagen®, Essential; OxyTime+®, a pre sports energy drink; and Oxytime®, a colon detox product.



6







·

Perfect Empowered Drinking WaterTM -EAU has combined the technologies of Aquagen® with its own purified, remineralized, ionized and micro-structured water to create Perfect Empowered Drinking WaterTM (“Perfect Water”). EAU’s research has shown that Perfect Water increases hydration, energy and alertness. These benefits enhance the immune system, reduce acidity levels (pH 9.0), and oxygenate the body like no other water available.  The high quality of the Companys water has attracted the interest of several major fitness chains, an international MLM organization, and health and grocery stores.  EAU expects to gain significant market share in the $8.3 billion dollar retail bottled water market from the launch of Perfect Empowered Drinking WaterTM early in the 2nd Quarter of 2005.



·

Germ Free 60 is an FDA approved non-toxic hand sanitizer that kills all forms of bacteria on contact. The technology is owned by Coating Systems Laboratories, of Chandler, Arizona. We expect to sign an exclusive agreement to sell and market the Germ Free 60 product by February 2005.



We intend to develop other personal care products for personal, commercial and residential uses through further research and testing into the cleaning and sanitizing characteristics of electrolyzed water and Aquagen®. These products will be marketed and sold through typical retail distribution channels. However, we have not commenced development of all of these products, and may never commence development.  Substantial additional capital and some regulatory approval will be needed for us to effectively sell these products even if they are developed. Failure to secure sufficient funding and receive regulatory approval for these products will hinder our ability to bring them to market and would have a negative impact on our business.

Marketing & Sales

We intend to produce future revenue by pursuing the sale or lease of generators within the commercial cleaning and sanitizing markets described above, namely, professional carpet cleaning, poultry industry, beef industry, home carpet and floor cleaning, food packaging and disaster cleanup and mold remediation, citrus, fish, oysters, and produce industries.  We also intend to roll out commercial products, including our Perfect Empowered Drinking Water, the Aquagen products, residential cleaning products, periodontal products and a line of skin care products in the next twenty-four (24) months.

In the foreseeable future, we expect to rely on our employees to market our products. Currently, four individuals are involved in marketing efforts, three are involved in R & D, design and assembly, three work in the accounting function.  We have two employees that manage our public relations. The majority of our public relation functions are outsourced. Manufacturing of the Generators is, and will be, out-sourced to multiple entities in the United States and abroad. We manufacture our Aquagen® products and Perfect Water at our facilities in Lindon, Utah. Our OxyTime+ product is manufactured at Wasatch Laboratories in Salt Lake City, Utah. We intend to hire others to assist these efforts in the coming months.

Markets

The cleaning and sanitation market is characterized by diverse products and multiple developing product enhancements, evolving industry standards and frequent new product introductions, and if we fail to enhance our existing products, develop new and more technologically advanced products and successfully market these products, our operations will suffer. We believe that our future success will depend, in part, on our continued ability to enhance our current products and to introduce new products and features to meet changing customer requirements and evolving industry standards.  Our present products are based on the application of electrolyzed water to kill bacteria, viruses and fungus and to clean the living environment without the use of toxic chemicals and on the efficacy of Aquagen as a stabilized oxygen supplement for use in certain products.



7







The use of electrolyzed water to kill bacteria, viruses and fungus in agricultural, meat in commercial applications and its cleaning and sanitizing applications in consumer products is a relatively new and evolving market.  Our future growth will depend in large part upon our ability to predict and respond to the sales and marketing cycles inherent in these markets.  Because we are still in the early stages of the development of the electrolyzed water as a sanitizer, the demand for, and market acceptance of, our products, is subject to a high degree of uncertainty.  If market growth rates do not meet our expectations, or if we are unsuccessful in identifying and penetrating those segments, our business may suffer.

Channel Markets and Joint Venture Relationships

In 2004, we retained several joint venture relationships to assist us in product development and market introduction within the six market channels previously identified. We initially intend to focus our product development and marketing on the following market areas:

·

Professional Carpet Cleaning.  The market for professional carpet care is large.  In March, 2001, we entered into a five-year exclusive agreement with Zerorez Franchising Systems, Inc. (formerly H20 AquaCare Franchising Systems, Inc.) (AquaCare), which provides that Zerorez franchisees will purchase our generators to produce Primacide B for use in their carpet cleaning businesses.  The franchisees are required to use only our generators during the five-year term of the agreement or any renewals of the agreement.  Zerorez is a developmental stage company and is currently selling franchises with growing success.  There are currently 26 operating franchises domestically.  Zerorez has entered into a contract to purchase a large number of generators.  In 2004 we sold 13 generators to Zerorez.

·

Poultry Industry.  In March, 2001, under the direction of Dr. Scott Russell of the Department of Poultry Science, University of Georgia, tests relative to the effectiveness of Primacide A in the cleaning and sanitizing chicken carcasses were completed.  These tests showed a 6-log pathogen reduction (1,000,000 count down to 1) in the chiller process.  In-line reprocessing tests are now being conducted for FSIS approval. In 2004 we installed generators in Murrays Chicken to clean and sanitize its plants. In September 2004, we booked our first revenues from Murray’s Chicken. Chicken currently distributed by Murray’s has been treated with our Empowered Water28TM. We have also successfully completed beta tests at Amick Farms, Batesburg South Carolina.  We are in the process of identifying facilities in which we can install our generators in 2005. The primary factors in this process are: size of the facility, the number of chickens processed annually, current technologies in place at the facility and the facilitys ability to adapt its processing system to integrate with our generators in a manner that will ensure maximum effectiveness. 32

·

Mold Remediation.  This is a large industry that consists of home and commercial cleanup and reconstruction following disasters such as floods or fires. Aquasafe  Enviro Recovery, Inc. (AER) is in the disaster cleanup and reconstruction business.  AER uses our generators in its Utah and Texas offices.  It has licensed the technology for use in the mold remediation industry and will sub license the technology to a national restoration services market.  We also entered into a joint venture agreement with American Mold Guard to promote, distribute and sell American Mold Guard mold remediation products to the Zerorez franchisees and to promote and market our products to American Mold Guard's customers. Management believes that our joint venture agreement with American Mold Guard will lead to a greater use of our products in the mold remediation industry.



8







·

Oysters.  We intend to explore applications for Primacide A as a sanitizer in seafood processing plants.  Oyster tests are now being conducted through the University of Georgia, Oregon State University and LSU.  In addition, we are being advised by Dr. Yen-Con Hung, Professor of Food Engineering at the University of Georgia concerning a wide range of other applications, such as vegetable washing and surface sanitization, in the food packing industry.  Dr. Hung is a recognized researcher in these areas.

·

Grocery Store Meat Departments. We recently granted an exclusive distributorship to KES Science & Technology, Inc. of Atlanta, Georgia (KES) to add Primacide C to its current produce spraying systems now in place in over 115,000 grocery stores. KES will  market our products into the grocery produce spraying, childcare, dental and physician offices markets.  Using our electrolyzed fluids, processing machinery and floor surfaces can be cleaned and sanitized without the use of toxic chemicals. KES provides products and services to wholesale and retail grocery stores and cold storage warehouses and florists, both nationally and internationally.  Its products and services consist of post-harvest technologies for produce, meat and the floral industry to preserve and extend shelf life.

·

Air Sanitation.An affiliate of KES known as KesAir Technologies, LLC, is currently introducing its AiroCideTMair pathogen removal technology into medical healthcare, childcare, mold remediation and other industries. KesAir's AiroCideTMtechnology complements our products for surface cleaning and disinfecting without toxicity.  EAU has invested $300,000 in KesAir Technologies, LLC, in exchange for a 2% ownership interest and distribution rights.

·

Fish.  Tests are being conducted by a group of scientists from New Zealand on tuna and other deep-sea fish.  Discussions are underway with a Cook Island based company to market our products into the fish processing industry to increase the rate of successful delivery of decontaminated fish to world markets. Currently, a large percentage of the TAC (Total Allowable Catch) is lost because of inadequate processes and systems to reduce seafood contamination. We entered into a joint venture arrangement with a Louisiana shrimp and oyster producer to provide equipment that will produce electrolyzed fluid to clean and sanitize oysters, and we are continuing to conduct tests with respect to the use of our products to clean and sanitize fish and other seafood products.  Our generators have been installed at the University of Georgia, Food Science Department to conduct the preliminary tests for oyster depuration.  These tests have been very successful in killing the vibrio organism in oysters.  A second generator will soon be installed at Oregon State University to complete the oyster protocols that will be used for market operations.  We will work on further developing this marketing channel in 2005.

·

Commercial Products. We intend to market and distribute our Perfect Empowered Drinking WaterTM to retail locations worldwide. We expect to roll out the drinking water in 2005. We also intend to develop and formulate other commercial products, such as baby wipes, commercial cleaning products, periodontal products and an all-purpose surface cleaning product. Also, in conjunction with Aquagen, we intend to sell its oxygen supplement products domestically and internationally to its current markets and to open up new markets in 2005. Aquagen currently markets and sells its products in the United States, Mexico, Russia, Europe, Asia, Australia, Scandinavia and Africa.

In the future we intend to develop electrolyzed water products with a variety of new industrial, consumer and medical applications.  In addition, substantial additional capital and medical regulatory approval will be needed for us to effectively create, manufacture and sell such products.



9







Manufacturing and Sources of Supply

We intend to outsource the majority of electrolyzed water generator manufacturing and assembly to third parties.  In the past, outsourcing generator manufacturing and assembly has enabled us to benefit from the production capabilities of others without the capital cost to us.  We are in discussions with a major West Coast generator manufacturer to be our exclusive contract manufacturer here in the US. We have no assurance that we can find alternative manufacturers in the event we cannot negotiate reasonable terms with our present manufacturers. Failure to find manufacturers to build our generators would have a negative impact on our business.

We manufacture and bottle our Perfect Empowered Drinking Water in house. As demand increases we will either add to our bottling capacity or out source manufacturing and distribution.

We also manufacture and bottle other Aquagen® products in-house. We intend to out source the bottling of the Aquagen® oxygen supplement products in the future. Wasatch Laboratories currently manufactures our OxyTime+, pre sports drink product and Propac Laboratories manufactures our Oxyzone, colon detox product.

Distribution

Currently, we coordinate the distribution of goods from our corporate offices.  In the past, we have taken custody of generators after their manufacture by subcontractors and distributed them directly from our headquarters.  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, consisting primarily of our employees and also third party distributors and joint venture partners with established distribution channels to assist with the marketing of our products.

Competition

There is significant well-established competition in the market for disinfecting, sanitizing, and surface cleaning products. Many of our competitors are extremely large, financially healthy companies, 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 products and introduce new products, and diversify product offerings.  These competitors other companies with substantially greater financial, creative and marketing resources, and proven histories, may decide to enter and compete in our target markets, which could adversely affect our operations.

We believe our products are unique due to their effectiveness, price, and environmentally safe non-toxic character.  Because of our unique products and potential marketing outlets there is a good possibility that we will be able to initially capture a portion of this niche market for environmentally safe and non-toxic cleaning products.  However, other companies with substantially greater financial, creative, and marketing resources, and proven histories, may enter into and effectively compete in this market.

Although there are other oxygen supplement products in the market, we believe that our Aquagen® products are unique and that there is no dominant company in this space. There is, however, significant competition in the bottled drinking water market. Many of our competitors are large, financially healthy companies, with 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 products and introduce new products, and diversify product offerings.  These competitors may decide to enter and compete in our target markets, which could adversely affect our operations.



10







Governmental Regulation

Because our products have applications related to food and personal care, current governmental regulations may impact our new products.  We frequently will be required to get approval or favorable designations from governmental agencies, such as the United States Food & Drug Administration, USDA, EPA etc. in order to bring new products to market.  We believe that our current applications for electrolyzed water products are subject to sections of the United States Code of Federal Regulations that contain the regulations created by the U.S. Food & Drug Administration.  We have received approval of our products from the FDA, USDA and the EPA. Additional toxicity tests have been performed by commercial laboratories such as NAMSA.  No toxicity has been found in the products at the levels we offer.  Further approvals will be required when we introduce our products into the medical and certain health care markets.  These approvals can be costly and time consuming.  We will approach each sector based on market demand and capital availability.

The active ingredient in our electrolyzed fluids, Primacide A and C, is hypochlorus acid.  Hypochlorus acid when combined with the oxidation-reduction potential of a positive 1,160 plus millivolts makes Primacide A and C effective disinfectants.   We have established, through the FDA, that our particular method of creating HOCl by electrolysis is generally recognized as safe.

We have submitted a request to the Environmental Protection Agency to register our commercial fluid generator as a pesticide device.  The Environmental Protection Agency concluded that our generators do not require registration except when used as a direct food additive or contact substance on fruits and vegetables. We are in the process of registering with the EPA for this use.

Research and Development

The goal of our research and development activities is to continue to seek environmentally safe products for our customers that address the limitations and dangers caused by chemical sanitizers.  Our efforts are also 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 slower oxidation rate;

·

Sanitize agricultural products;

·

Enhance current products for further use in carpet cleaning;

·

Sanitize and disinfect hard and soft surfaces;

·

Provide superior personal care;

·

Create more effective and easier to use home surface sanitation products; and

·

Develop new products that benefit from our Empowered Water® and Aquagen® technologies.

·

Provide a superior drinking and commercial-use water product.

Our research and development expenditures totaled $405,397 in 2004, $206,500 in 2003, and $162,251 in 2002.



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Trademarks

The names Primacide, Aquagen, OxyTime and Oxyzone are registered with the U.S. Patent and Trademark Office.  The names Primacide A,  Primacide B, Primacide C,  EAU, and Electric Aquagenics Unlimited are also our trademarks. Additionally, the term Empowered Water and Empowering Water and Perfect Empowered Drinking Water, have also been or are in the process of being registered and trade marked.

Proprietary Rights

Our future success and ability to compete are dependent, in part, upon our proprietary technology.  We rely on patent, trade secret, trademark and copyright law to protect our intellectual property.  We currently have one U.S. patent issued by the U.S. Patent and Trademark Office.   Individuals associated with us have assigned to us rights to regular patent applications submitted to the U.S. Patent and Trademark Office for the use of Primacide A, B and C in a wide variety of applications,.  We will have full rights to the patents when they are granted. We have also filed with the U.S. Patent and Trademark Office a provisional patent application for a new electrolyzed water generator that can regulate the pH of Primacide A and increase its stability. In addition, we license a certain technology from the University of Georgia for stabilizing acid water (Primacide C).  We cannot be sure that any patents will be issued pursuant to future patent applications or that patents issued to us will not be invalidated, circumvented, challenged or licensed to others.  In addition, we cannot be sure that the rights granted under any such patents will provide us with competitive advantages or that any patents issued to us will be adequate to stop unauthorized third parties from copying our technology, designing around our patents or otherwise obtaining and using our products, designs or other information.  In addition, we cannot be sure that others will not develop technologies that are similar or superior to our technology.  Furthermore, we believe that factors such as the technological and creative skills of our personnel, new product developments, product enhancements and marketing activities are just as essential as the legal protection of proprietary rights to establishing and maintaining a competitive position.

In addition to seeking patent protection, we rely on non-patented trade secrets and know-how and proprietary technological innovation and expertise, all of which are protected in part by confidentiality and invention assignment agreements with our employees and consultants, and, whenever possible, our suppliers.  We cannot make any assurances that these agreements will not be breached, that we will have adequate remedies for any breach, or that our non-patented proprietary intellectual property will not otherwise become known or independently discovered by competitors.  We also cannot make any assurances that persons not bound by an invention assignment agreement will not develop relevant inventions.

Many participants in the sanitation and cleaning market have a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement.  We have not received notices relating to alleged infringement, but we cannot be sure whether future claims will arise, nor whether such future claims can be resolved on commercially reasonable terms.  Failure to resolve such claims on such terms could result in a material adverse effect on our business, financial condition and results of operations.  We expect that companies will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps.  Responding to such claims, regardless of merit, could cause product shipment delays or require us to enter into royalty or licensing arrangements to settle such claims.  Any such claims could also lead to time-consuming, protracted and costly litigation, which would require significant expenditures of time, capital and other resources by our management.  Moreover, we cannot be sure that any necessary royalty or licensing agreement will be available or that, if available, such agreement could be obtained on commercially reasonable terms.



12







Customers

Historically, a substantial portion of our revenue has come from large purchases by a small number of customers.  If we lose one or more of our key customers or experience a delay or cancellation of a significant order or a decrease in the level of purchases from any of our key customers, our net revenues could decline and our operating results and business could be harmed. During the twelve months that ended December 31, 2004, fewer than 11 customers accounted for all of our net revenues.

Employees

We currently have 30 full-time employees, 3 part-time employee and 3 consultants.  As our business grows, we anticipate that we will need to employ additional salaried clerical staff and sales personnel.



ITEM 2.

DESCRIPTION OF PROPERTY



Our corporate headquarters are located in leased office space at 1464 W. 40 S. Suite #200 Lindon, Utah 84042.  We have a satellite office for Investor Relations and Public Relations at 1 West Street, Suite #100, New York, NY 10004. 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



We are not a party to any material legal proceeding.



ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is presently listed on the OTC Bulletin Board public trading market.  We have not declared dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future.



Other than those sales that have been previously reported, there were no sales of unregistered securities for the period ended December 31, 2004.  The registrant has not purchased any of its securities for the period ended December 31, 2004.





ITEM 6.

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



We are in the business of developing, manufacturing and marketing equipment and machinery that use water electrolysis to create fluids that clean, disinfect, remediate, and hydrate. The fluids generated by our machines are environmentally safe and free from toxins and harmful residues associated with traditional chemical based disinfecting and cleaning agents. The electrolyzed fluids generated by our machines are intended to replace many of the traditional methods used in commercial, industrial and residential disinfecting and cleaning.



13







So far, most of our sales have been to franchisees of Zerorez, a carpet cleaning franchisor with which we are affiliated.  We are diversifying into other critical areas, particularly in the poultry processing, consumer products, consumer drinking water and grocery produce spraying. Our diversification efforts have now resulted in securing six of the eight market channels identified in our business plan. These initial six channels are the beginning of our products'6465 applications for marketing and sales. Our focus within these six market channels is on those that will generate revenues in the shortest amount of time. Additional sales channels are available, but are still in their early stages, with negotiations underway with several potential strategic and joint venture partners.



One of our joint venture arrangements, Covenant Water Systems, LLC, a Georgia limited liability company of which the Company is a member. Our Poultry Processing efforts have resulted in the placement of our equipment in one poultry processing plants: Murray's Chicken, a poultry plant in South Fallsburg, New York. Although operations using electrolyzed fluid from our equipment in this plant are just beginning, reports on the efficacy of the fluid in killing common poultry pathogens have been encouraging. We intend to alter our relationship with Covenant in 2005 by canceling the joint venture relationship and bringing poultry sales in house.



We also entered into a joint venture agreement with Aquagen International, Inc. to form Aquagen, LLC, a Nevada limited liability company, of which the Company is a member. On or about December 31, 2004,  the Company and Aquagen agreed to merge the two companies in a transaction that will involve the issuance of 321,049 shares of our common stock.



We entered into a license agreement with Innovative Oyster Processing Systems, LLC, to market our equipment to the oyster processing industry. We also entered into a joint venture agreement with American Mold Guard to promote, distribute and sell American Mold Guard mold remediation products to the Zerorez franchisees and to promote and market our products to American Mold Guards customers.



We entered into a joint venture arrangement with a Louisiana shrimp and oyster producer to provide equipment that will produce electrolyzed fluid to clean and sanitize oysters, and we are continuing to conduct tests with respect to the use of our products to clean and sanitize fish and other seafood products.  Our generators have been installed at the University of Georgia, Food Science Department to conduct the preliminary tests for oyster depuration.



We recently granted an exclusive distributorship to KES Science & Technology, Inc. of Atlanta, Georgia to market our products into the grocery produce spraying market, childcare, dental and physician offices industries.



KES provides products and services to wholesale and retail grocery stores and cold storage warehouses and florists, both nationally and internationally.  Its products and services consist of post-harvest technologies for produce, meat and the floral industry that preserve and extend the life of products that have a limited shelf life.  An affiliate of KES known as KesAir Technologies, LLC, is currently introducing its AiroCideTMair pathogen removal technology into medical healthcare, childcare, mold remediation and other industries. KesAir's AiroCideTMtechnology complements our products for surface cleaning and disinfecting without toxicity.  The Company has invested $300,000 in KesAir Technologies, LLC, in exchange for a 2% ownership interest.



The Company recently invested capital to acquire a 40% ownership interest in ByoCoat Strategies Corporation, Inc., a company involved in developing products to control or eliminate Lysteria and biofilm in cooked and ready to eat (RTE) meats in exchange for a total cash payment of $400,000.  To date, $288,500 has been paid. The balance is being paid in $22,000 monthly installments.



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



14







Results Of Operations



Net revenues for the year ended December 31, 2004 increased by $100,000, or 44%, to $325,000, compared to revenues of $225,000 for the year ended December 31, 2003.  The increase in revenues was due to an increase in sales of generators to carpet cleaning franchisees of Zerorez Franchising Systems, Inc., an affiliate of the Company.  Zerorez began selling carpet cleaning franchises in earnest toward the end of 2003.  Each Zerorez franchisee is required to purchase at least one of the Companys generators.  It is anticipated that franchise sales will continue to increase and that our revenue from sales of generators to Zerorez franchisees will likewise continue to increase.



Our cost of sales decreased by $36,183, to $78,600, for the year ended December 31, 2004.  This is a 46% decrease over the $114,783 cost of sales during the year ended December 31, 2003.  As a percentage of revenues, the cost of sales decreased from 51% of revenue during the year 2003 to 24% of revenue during the year 2004.  The decrease in cost of sales is attributable to the re-allocation of true inventory costs related to the Primacide generators in 2004 against inventory representing older models that have been technologically superseded or models that have been used as demos requiring repair.  It is believed that cost of sales will decline as we develop more organized and cost effective manufacturing processes and procedures.



We continued to increase our research and development expenditures during 2004.  Our research and development expenses for the year ended December 31, 2004 were $405,397, an increase of $198,897, or 96%, over the expenses of $206,500 for the year ended December 31, 2003.  The increase in research and development expenditures reflects our continued emphasis in developing, designing and testing new products.  We expect that our research and development expenses will continue to increase for the indefinite future as we continue to develop larger and more industry specific products.



During the year ended December 31, 2004 the Company expended $1,819,165 in management, legal and consulting fees paid to affiliates or shareholders.  This was an increase of $1,572,108, or 636%, from the $247,057 spent in 2003.  This increase is primarily due to the issuance of 1,085,276 shares of common stock for services rendered to the Companys management.  The Company recorded these issuances at fair value at the date of issuance in accordance with generally accepted accounting principles.  While these charges are required to be expensed, the Company paid no cash related to them.  Cash paid to management for services was $342,500.



Our other general and administrative costs totaled $1,289,519 during the year ended December 31, 2004, as compared to $419,372 for the year ended December 31, 2003.  This 207% increase is a result of increased travel and related expenses associated with the companys growth strategy, increased costs associated with the development of new products in new industries, increased legal and professional fees, and added employees.



The Company has been very active in its efforts to raise additional capital in order to allow it to accumulate sufficient working capital to actively pursue all of its business plans and objectives. While these financing efforts have been largely successful, they have required large time commitments from our management team. With additional working capital, we have been able to enter into several joint ventures, distributorship and other strategic relationships in which our products may be used, marketed and sold.



Although revenues increased from December 31, 2003 to December 31, 2004 and the Company has been successful in attracting promising strategic relationships, the time and energies spent in that effort are non-revenue generating. This significant effort on the part of management has also diverted some of management's energy and attention from activities that might result in more immediate revenue generation.



15









During 2004, the Company has continued to lay the groundwork for what it hopes will be a rapid growth phase in the near future. This groundwork includes the continued testing and analysis of the efficacy of the Company's products, development and refinement of the Company's business plan, and continued development of a network of business contacts that will, presumably, lead to future revenues. The Company also intends to maximize its strategic relationships and partnerships and market its products to achieve greater and more diverse sales in 2005.



Our net loss for the year ended December 31, 2004 was $3,961,195, which is $3,090,101 more than the $871,094 net loss for the fiscal year ended December 31, 2003.  This increase of 355% in the net loss is attributable to many factors, including the non-cash charge of $1,517,415 related to the issuance of shares of common stock for services, the Companys continued design and development of new products, general expansion necessary to promote and market its products, and the active pursuit of joint ventures, acquisitions and other business opportunities.



Liquidity And Capital Resources



At December 31, 2004, we had cash and cash equivalents of $382,889, a decrease of $210,286 over the $593,175 cash on hand at December 31, 2003.  We have had continuing operating losses of $3,961,195 through the year ended December 31, 2004, $871,094 through the year ended December 31, 2003, in addition to a net loss of $673,925 for the year ended December 31, 2002.  During the year 2004, we successfully raised approximately $4,000,000 through registered private offerings of 2,250,000 shares of our common stock.  The increase in the Company's cash and cash equivalents during the first quarter of 2004 was largely attributable to the completion in the first quarter of 2004 of a private offering of the Company's common stock, in which the Company raised $1.7 million in capital. The decrease in cash and cash equivalents during the second quarter was largely attributable to the Company's increased expenses incurred in finding and negotiating appropriate strategic relationships, and the lack of revenues during the second quarter of 2004. The increase in the Company's cash and cash equivalents during the third quarter of 2004 was largely attributable to a private offering of the Company's private stock, in which the Company raised $2,687,176 through September 30, 2004. The Company raised an additional $250,000 through December 31, 2004 under this private offering.



Management recognizes that it will likely need to raise additional capital during 2005 in order to continue operations.  If the Company is unable to raise such additional capital, it may not be able to fund expansion, take advantage of future opportunities, meet its existing debt obligations or respond to competitive pressures or unanticipated requirements.  Future financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms.  However, inability to establish a public market for our common stock, or once we have a market for our common stock, a subsequent decline in the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult for us to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock.





16







In October, 2004, the Company entered into a Standby Equity Distribution Agreement with a third party pursuant to a Standby Equity Distribution Agreement.  Under that arrangement, the Company could, at its discretion, periodically sell to the third party shares of its common stock for a total purchase price of up to $10.0 million. For each share of common stock purchased under the Standby Equity Distribution Agreement, the third party would pay 98% of the lowest closing bid price of our common stock for the 5 days immediately following the notice date. In addition, we engaged a registered broker-dealer, to act as placement agent and advise us in connection with the Standby Equity Distribution Agreement. For its services, the broker-dealer received a fee of $10,000, payable by the issuance of 2,500 shares of our common stock.



In February, 2005, the Company determined that it would not draw down any equity on the Standby Equity Distribution Agreement and we therefore cancelled the Agreement.



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

On October 28, 2004, Child Sullivan & Company was dismissed as our independent public accounting firm.



The audit reports issued by Child, Sullivan & Company with respect to the Registrants financial statements for fiscal years ending December 31, 2003 and December 31, 2002, did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except for Child, Sullivan & Companys issuance of going concern opinions on the financial statements for the fiscal years ending December 31, 2003 and December 31, 2002. During Registrants fiscal years ending December 31, 2003 and December 31, 2002 and from January 1, 2004 through October 28, 2004, when the relationship with Child, Sullivan & Company ended, there were no disagreements between the Registrant and Child, Sullivan & Company on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-B), if not resolved to the satisfaction of Child, Sullivan & Company would have caused such firm to make a reference to the subject matter of such disagreement in connection with its reports, and there occurred no events as defined in Item 304(a)(1)(iv)(B) of Regulation S-B., if not resolved to the satisfaction of Child, Sullivan & Company, would have caused it to make a reference to the subject matter of the disagreement in connection with its audit report.



The change in accountants does not result from any dissatisfaction with the quality of professional services rendered by Child, Sullivan & Company, as the independent accountants of the Registrant, nor does it result from any doubts in the quality of management or accounting records of the Registrant. A copy of Child, Sullivan & Companys letter confirming information set forth herein is attached as Exhibit 2 to our Report on Form 8-K/A filed on November 10, 2004.





17







ENGAGEMENT OF NEW INDEPENDENT PUBLIC ACCOUNTING FIRM



On October 28, 2004, our audit committee approved the engagement of Hall & Company as our independent public accounting firm effective for the fiscal year ended December 31, 2004.



During the two most recent fiscal years ended December 31, 2003 and December 31, 2002, and the later interim period through the date of our engagement with Hall & Company on October 28, 2004, neither the Company nor anyone on our behalf consulted with Hall & Company regarding any of the matters or events set forth in Item 304(a)(2)(i) of Regulation S-B.



ITEM 8A.

CONTROLS AND PROCEDURES



Gaylord Karren (the Company's principal executive officer and principal financial and accounting officer) has concluded, based on his evaluation as of a date within 90 days prior to the date of the filing of this report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.



There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.



ITEM 8B.

OTHER INFORMATION



None







18







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                                                                           
|-------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------
|Gaylord M. Karren
1464 W. 40 South, Suite 200
Lindon, Utah 84042           | 57  | Chairman, Chief Executive Officer, President, Chief Financial Officer, Principal Accounting Officer
|                                                                           |     |                                                                                                    
|John Hopkins
1464 W. 40 South, Suite 200
Lindon, Utah 84042                | 50  | Vice President, Director                                                                           
|                                                                           |     |                                                                                                    
|James K. Stone
1464 W. 40 South, Suite 200
Lindon, Utah 84042              | 39  | Vice President, Director                                                                           
|                                                                           |     |                                                                                                    
|William J. Warwick
2004 Balmoral Place
Wilmington, North Carolina 28405    | 70  | Director                                                                                           
|                                                                           |     |                                                                                                    
|Peter Whitfield
500 7th Street
Manhattan Beach, California 90266           | 57  | Director                                                                                           
|                                                                           |     |                                                                                                    
|Gail V. Anderson, Jr.
501 6th Place
Manhattan Beach, California 90266      | 56  | Director                                                                                           
|                                                                           |     |                                                                                                    
|Randy K. Johnson
60 E. South Temple, Suite 1800
Salt Lake City, Utah 84111 | 51  | Secretary                                                                                          



Gaylord Karren became the President and CEO in March, 2002. Other officers and directors were elected and appointed at the annual shareholders meeting and board of directors meeting held in September, 2003. The term of office of each officer and director is one year or until his successor is elected and qualified.





19







Biographical Information



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



Gaylord M. Karren is one of the Companys co-founders, and is currently the Companys chairman of the board and chief executive officer. Prior to founding the Company, Mr. Karren co-founded and managed Venturi Technologies, Inc., which up until the time of his resignation in February 2000, was one of the nation's largest independent and publicly traded carpet cleaning companies. He was chairman and chief executive officer of Venturi and its predecessors in interest from 1992 through February 2000. Mr. Karren holds a bachelor of science degree from Brigham Young University in finance and banking.



John Hopkins is one of the Companys co-founders, and was a founder, and is currently an advisor to H2O AquaCare Franchising Systems, Inc., an affiliate of the Company that is engaged in the sale and operation of carpet cleaning franchises utilizing products developed and manufactured by the Company.  Mr. Hopkins is the inventor on two patents related to carpet cleaning.  Prior to being a co-founder of the Company, Mr. Hopkins was a founder and President of Venturi Technologies, Inc., a floor and fabric care chain of over 25 locations throughout the United States.  Mr. Hopkins has also founded and managed an oil and gas service company, DASCO Technologies, as well as a successful multi-family property management company called Harbor Property Management.  He attended Utah State University.



James K. Stone is one of the Companys co-founders, and is currently the president and a member of the board of directors of H2O AquaCare Franchising Systems, Inc., an affiliate of the Company that is engaged in the sale and operation of carpet cleaning franchises utilizing products developed and manufactured by the Company.  Prior to founding the company, Mr. Stone was the owner and President of Venturi Flood & Fire Restoration, Inc., a company specializing in the cleaning and restoration of properties damaged by floods, fires and other natural disasters.  Prior to owning Venturi Flood & Fire Restoration, Inc., Mr. Stone was Vice President of Operations of Venturi Technologies, Inc., a floor and fabric care chain of over 25 locations in the U.S.  Prior to that, Mr. Stone was the founder and chief operating officer of Pro-Tech Restoration, Inc. and Stone Flood and Fire, which were acquired by Venturi Technologies, Inc. in 1996.  Mr. Stone has also founded a securities firm.



Peter Whitfield is Chairman, Chief Executive Officer and a major shareholder of Universal Air Cargo Pty Ltd., an international air cargo company with operations in the United States, Australia and New Zealand.  Prior to purchasing Universal Air Cargo Pty Ltd. in 1987, Mr. Whitfield owned and operated two separate air forwarding and air cargo companies in New Zealand and Australia.  From 1966 to 1975 he was employed in various sales management positions with air cargo and forwarding companies in New Zealand, the UK and Australia.  Mr. Whitfield also has financial interests in the wine, digital animation and computer peripheral industries.  He received a bachelors degree in Commerce and Administration from Victoria University in New Zealand.



Gail V. Anderson, Jr. is the Medical Director of the Harbor-UCLA Medical Center and Assistant Dean of the School of Medicine at UCLA.  From 2000-2002 he also served as the Acting Chief Medical Officer for the Department of Health Services of the County of Los Angeles.  Prior to 1998 he was Senior Vice President for Medical Affairs at the Grady Health System, and was Associate Dean of the School of Medicine at Emory University in Atlanta, Georgia.  Dr. Anderson has been a director of the American College of Emergency Physicians, and has served as the college representative to the Joint Commission on the Accreditation of Healthcare Organizations.  He has been an examiner for the American Board of Emergency Medicine for 16 years.  Dr. Anderson received a bachelors degree from Dartmouth College, a medical degree from the University of Southern California, and an MBA from the Emory University Business School.





20







Bill Warwick recently 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 a member of the International Cabinet 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.



Randy K. Johnson is a shareholder with the Salt Lake City law firm Kirton & McConkie.  Prior to joining Kirton & McConkie, he was Vice President, Secretary and General Counsel of Daw Technologies, an international company specializing in the design, fabrication and construction of clean rooms for the electronics and pharmaceutical industries.  From May 1999 to November 2000, Mr. Johnson was Executive Vice President, Secretary and General Counsel of Venturi Technologies, Inc., a publicly held national carpet cleaning roll-up company.  Prior to joining Venturi Technologies, Mr. Johnson was engaged in the private practice of law as Of Counsel with the Salt Lake City law firm of Mackey, Price & Williams from 1997 to May 1999, and as a partner in the Salt Lake City law firm of Fabian & Clendenin from 1988 to 1997.  During the period 1987 to 1988 he was associated with the San Jose, California, law firm Rosenblum, Parish and Bacagalupi; from 1985 to 1987 he was Securities Counsel for the Fox Group of Companies in San Mateo, California; and from 1983 to 1985 he was an associate with the San Francisco law firm Sedgwick, Detert Moran & Arnold.  From 1980 to 1983 Mr. Johnson was an associate with Snow, Christensen and Martineau in Salt Lake City.  Mr. Johnson is a member of the State Bar of California and the Utah State Bar.  He received an A.B. from the University of California at Berkeley and a J.D. from the Boalt Hall School of Law at the University of California at Berkeley.



Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, and the regulations of the Securities and Exchange Commission promulgated thereunder, require our directors, executive officers and persons who own more than 10% of a registered class of our equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission, and provide us with copies of such reports. Based solely on a review of the copies of the reports furnished to us, or written representations that no reports were required to be filed, we believe that during the fiscal year ended December 31, 2004 all Section 16(a) filing requirements applicable to our directors, officers, and greater than 10% beneficial owners were complied with.



ITEM 10.

EXECUTIVE COMPENSATION



Executive Compensation



The following table sets forth all compensation awarded, earned or paid for services to our Chief Executive Officer during fiscal years  2002, 2003 and 2004.  No other executive officer of the Company has received total annual salary and bonus in excess of $100,000 during any of those fiscal years.



Summary Compensation Table

|                                                                                                                               |                | Annual Compensation    |             | Long Term
Compensation
|------------------------------------------------------------------------------------------------------------------------------ | -------------- | ---------------------- | ----------- | ----------------------
|Name and Principal Position                                                                                                    | Year           | Salary ($) (1)         | Bonus ($)   |                       
|Gaylord Karren
President, chief executive officer, chief financial officer, chief accounting officer and chairman of the board | 2004
2003
2002 | 107,874
107,874
78,405 | ---
---
--- |                       

(1)

All payments to Mr. Karren were booked as consulting fees.



21











(2)

On April 6, 2004, a total of 450,482 shares of the Companys restricted stock were granted to EOWORP, LLC, a Utah limited liability company of which Mr. Karren is a member and one-third owner.  John Hopkins and James Stone,Vice Presidents of the Company and members of the Companys board of directors, are the other members of EOWORP, each owning one-third.  The shares were issued in recognition of otherwise uncompensated efforts of Messrs. Karren, Hopkins and Stone during the previous three years.



Options



We did not grant any options to our executive officers or directors during the fiscal year ended December 31, 2004.  None of our executive officers or directors held any options or warrants as of December 31, 2004.



Employment Agreements



We are not a party to any employment agreements.



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 is attached to this filing.

The Company undertakes to provide to any person, without charge, upon written or verbal request directed to Randy K. Johnson, the Companys secretary, at 60 E. South Temple, Suite 1800, Salt Lake City, Utah 84111; Telephone: (801) 328-3600.



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 31, 2005 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.



22







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 8,008,373 shares of common stock outstanding as of April 14, 2005.

|Name and Address of Beneficial Owner                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Number of Shares
Beneficially Owned |  | Percentage of Shares
Outstanding
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------- |  | --------------------------------
|Kirby D. Cochran (1)
692 E. 1780 N.
Orem, UT 84097                                                                                                                                                                                                                                                                                                                                                                                                                                   | 450,367                             |  | 5.62%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|Gaylord M. Karren (2)
1464 W. 40 South, Suite 200
Lindon, Utah 84042                                                                                                                                                                                                                                                                                                                                                                                                                 | 540,000                             |  | 6.74%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|John Hopkins (3)
1464 W. 40 South, Suite 200
Lindon, Utah 84042                                                                                                                                                                                                                                                                                                                                                                                                                      | 540,000                             |  | 6.74%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|James K. Stone (4)
1464 W. 40 South, Suite 200
Lindon, Utah 84042                                                                                                                                                                                                                                                                                                                                                                                                                    | 540,000                             |  | 6.74%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|William J. Warwick
2004 Balmoral Place
Wilmington, North Carolina 28405                                                                                                                                                                                                                                                                                                                                                                                                              | 130,000                             |  | 1.62%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|Peter Whitfield
500 7th Street
Manhattan Beach, California 90266                                                                                                                                                                                                                                                                                                                                                                                                                     | 100,000                             |  | 1.25%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|Gail V. Anderson, Jr.
501 6th Place
Manhattan Beach, California 90266                                                                                                                                                                                                                                                                                                                                                                                                                | 50,000                              |  | 0.62%                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|Randy K. Johnson
60 E. South Temple, Suite 1800
Salt Lake City, Utah 84111                                                                                                                                                                                                                                                                                                                                                                                                           | 0                                   |  | 0%                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                     |  |                                 
|All current directors and executive officers as a group (7 persons)

(1)
Kirby Cochran is a former member of our board of directors.
(2)
These shares are held by EOWORP, LLC, a Nevada limited liability company, of which Mr. Karren owns 33-1/3%.
(3)
These shares are held by EOWORP, LLC, a Nevada limited liability company, of which Mr. Hopkins owns 33-1/3%.
(4)
These shares are held by EOWORP, LLC, a Nevada limited liability company, of which Mr. Stone owns 33-1/3%. | 1,900,000                           |  | 23.73%                          





23







We are not aware of any arrangements that at a latter date may result in a change in our control.



ITEM 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following are certain transactions during the year ended December 31, 2004, 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.



Sale of Products to Affiliates of Shareholders



During the year ended December 31, 2004 we have sold our products to Zerorez Franchising Systems, Inc., a Nevada corporation in which Gaylord Karren, John Hopkins and James Stone are beneficial owners and officers/directors, and AquaSafe Enviro Recovery, LLC, a Utah limited liability company of which James Stone is a principal owner and managing member.  The sales prices of generators sold to affiliates of our directors/officers have been the same as the sales prices to unrelated third parties.  These sales to affiliates represented all of our revenue during the fiscal year ended December 31, 2003 and the majority of our revenue during the fiscal year ended December 31, 2004.



Funding of Affiliate Entities



During the year ended December 31, 2004, wecontinued to fund some of the operating expenses of Zerorez Franchising Systems, Inc., a company in which Gaylord Karren, John Hopkins, James Stone and Kirby Cochran are principal owners and in which Gaylord Karren, John Hopkins and James Stone are directors/officers.  The amounts paid by the Company to fund operating expenses of Zerorez Franchising Systems, Inc. are carried on our books as notes payable by a related party.  At December 31, 2004, Zerorez Franchising Systems, Inc. did not owe any money to the Company.



ITEM 13.

EXHIBITS

(a)(1) Financial Statements



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



Independent Auditors Report (Hall & Company)

Balance Sheet, December 31, 2004

Statements of Operations for year ended December 31, 2004

Statements of Changes of Stockholder Equity for year ended December 31, 2004

Statements of Cash Flow for year ended December 31, 2004

Notes to Financial Statements



Independent Auditors Report (Child, Sullivan & Company)

Balance Sheets, December 31, 2003 and 2002

Statements of Operations for years ended December 31, 2003 and 2002

Statements of Changes of Stockholder Equity for years ended December, 2003 and 2002

Statements of Cash Flow for years ended December, 2003 and 2002

Notes to Financial Statements







24







(a)(2) Exhibits



Exhibit No.

Identification of Exhibit

3.1

Articles of Incorporation (incorporated by reference from registration statement on Form SB-2 filed with the SEC on July 29, 2002)

3.2

Certificate of Amendment of Certificate of Incorporation (incorporated by reference from registration statement on Form SB-2 filed with the Securities and Exchange Commission on July 29, 2002)

3.3

Bylaws (incorporated by reference from registration statement on Form SB-2 filed with the Securities and Exchange Commission on April 24, 2002)

14

Code of Ethics

23

Consent of Child, Sullivan & Company

31

Certification pursuant to Rule 13a-14(a)

32

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350)

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES



AUDIT FEES



During the fiscal year ended December 31, 2004, Hall & Company billed us in the aggregate amount of $56,523 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Form 10-KSB for the year ended December 31, 2004.  During the fiscal year ended December 31, 2003, Child, Sullivan & Company billed us in the aggregate amount of $30,240 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Form 10-KSB for the year ended December 31, 2003.



AUDIT-RELATED FEES



Hall & Company did not bill us for, nor perform professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Companys financial statements for the fiscal year ended December 31, 2004.  Child, Sullivan & Company did not bill us for, nor perform professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Companys financial statements for the fiscal year ended December 31, 2003.



FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES



For the fiscal year ended December 31, 2004 Hall & Company did not bill us for, nor perform, any financial information systems design or implementation.  For the fiscal year ended December 31, 2003 Child, Sullivan & Company did not bill us for, nor perform, any financial information systems design or implementation.  For the fiscal years ended December 31, 2004, and December 31, 2003, we were not billed for professional services from any other accounting firm for information systems design or implementation.





25







TAX FEES



Hall & Company did not bill us for, nor perform professional services rendered for tax related services for the fiscal year ended December 31, 2004.  Child, Sullivan & Company did not bill us for, nor perform professional services rendered for tax related services for the fiscal year ended December 31, 2003.



ALL OTHER FEES



We were not billed for any other professional services by either Hall & Company or Child, Sullivan & Company for the fiscal years ended December 31, 2004 and December 31, 2003.



AUDITOR INDEPENDENCE



Our Board of Directors considers that the work done for us in the year ended December 31, 2004 by Hall & Company is compatible with maintaining Hall & Companys independence.



AUDITORS TIME ON TASK



All of the work expended by Hall & Company on our December 31, 2004 audit was attributed to work performed by Hall & Companys full-time, permanent employees.





26







SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 15, 2005.



Electric Aquagenics Unlimited, Inc.:



By: /s/ Gaylord M. Karren

____________________________________

Gaylord M. Karren

President, chief executive officer, principal financial officer, principal accounting officer, chairman of the board of directors



In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date stated.



/s/ Gaylord M. Karren

__________________________________

Gaylord M. Karren

President, chief executive officer, principal financial officer, principal accounting officer, chairman of the board of directors

Date: April 15, 2005



/s/ John M. Hopkins



____________________________________

John M. Hopkins

Director

Date: April 15, 2005



/s/ James K. Stone

____________________________________

James K. Stone

Director

Date: April 15, 2005



/s/ William J. Warwick

____________________________________

William J. Warwick

Director

Date: April 15, 2004





F-0







ELECTRIC AQUAGENICS UNLIMITED, INC.





REPORT AND CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004



F-1





ELECTRIC AQUAGENICS UNLIMITED, INC.



CONTENTS









|                                                          | Page
|--------------------------------------------------------- | ----
|                                                          |     
|Report of Independent Registered Public Accounting Firm   | F-3 
|                                                          |     
|Consolidated Financial Statements                         |     
|                                                          |     
|Consolidated Balance Sheet                                | F-4 
|                                                          |     
|Consolidated Statement of Operation                       | F-5 
|                                                          |     
|Consolidated Statement of Changes in Stockholders Equity | F-6 
|                                                          |     
|Consolidated Statement of Cash Flows                      | F-7 
|                                                          |     
|Notes to Consolidated Financial Statements                | F-8 
|                                                          |     



F-2















Report of Independent Registered Public Accounting Firm



April 13, 2005



To the Stockholders of

Electric Aquagenics, Inc.

Lindon, Utah



We have audited the accompanying consolidated balance sheet of  as of , and the related consolidated statements of operations, stockholders equity, and cash flows for the year then ended.  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 audit.  The consolidated financial statements of  as of December 31, 2003 were audited by other auditors whose report dated March 30, 2004, expressed an unqualified opinion.



We conducted our audit 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.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion.  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 audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of  as of December 31, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the financial statements, the Company has significant losses from operations which raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are described in Note 12.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Hall & Company

HALL & COMPANY





See accompanying notes to consolidated financial statements.



F-3





ELECTRIC AQUAGENICS UNLIMITED, INC.



CONSOLIDATED BALANCE SHEET



DECEMBER 31, 2004







ASSETS

|CURRENT ASSETS                                |  |            
|--------------------------------------------- |  | -----------
|Cash and cash equivalents                     |  | $
382,889  
|Accounts receivable, net                      |  | 184,011    
|Receivables from affiliate                    |  | 319,340    
|Inventory                                     |  | 503,316    
|                                              |  |            
|Total current assets                          |  | 1,389,556  
|                                              |  |            
|PROPERTY AND EQUIPMENT, net of                |  |            
|accumulated depreciation of $                 |  | 537,863    
|                                              |  |            
|OTHER ASSETS                                  |  |            
|Patents, trademarks and intellectual property |  | 1,009,155  
|Investments                                   |  | 804,368    
|Goodwill                                      |  | 160,259    
|Deposits                                      |  | 5,758      
|                                              |  |            
|Total assets                                  |  | $
3,906,959



LIABILITIES AND STOCKHOLDERS EQUITY

|CURRENT LIABILITIES                                                                            |  |            
|---------------------------------------------------------------------------------------------- |  | -----------
|Accounts payable                                                                               |  | $
288,820  
|Accrued expenses                                                                               |  | 23,412     
|Notes payable                                                                                  |  | 14,900     
|Current portion of long-term debt                                                              |  | 43,660     
|                                                                                               |  |            
|Total current liabilities                                                                      |  | 370,792    
|                                                                                               |  |            
|LONG TERM DEBT, net of current portion                                                         |  | 233,337    
|                                                                                               |  |            
|STOCKHOLDERS EQUITY                                                                           |  |            
|Common stock, $.0001 par value; 50,000,000 shares authorized;
6,304,761 issued and outstanding |  | 630        
|Additional paid in capital                                                                     |  | 8,340,144  
|Stock issuance obligation                                                                      |  | 1,125,000  
|Accumulated deficit                                                                            |  | (6,162,944)
|                                                                                               |  |            
|Total stockholders equity                                                                     |  | 3,302,830  
|                                                                                               |  |            
|Total liabilities and stockholders equity                                                     |  | $
3,906,959



See accompanying notes to consolidated financial statements.



F-4





ELECTRIC AQUAGENICS UNLIMITED, INC.



CONSOLIDATED STATEMENT OF OPERATIONS



YEAR ENDED DECEMBER 31, 2004





|NET SALES, to affiliate                |  | $
325,000       
|-------------------------------------- |  | ----------------
|                                       |  |                 
|COST OF GOODS SOLD                     |  | 78,600          
|                                       |  |                 
|GROSS PROFIT                           |  | 246,400         
|                                       |  |                 
|OPERATING EXPENSES                     |  |                 
|Marketing and promotion                |  | 553,220         
|Research and development               |  | 405,397         
|General and administrative             |  | 3,108,684       
|                                       |  |                 
|Total operating expenses               |  | 4,067,301       
|                                       |  |                 
|LOSS FROM OPERATIONS                   |  | (3,820,901)     
|                                       |  |                 
|OTHER INCOME (EXPENSE)                 |  |                 
|Loss from equity method investee       |  | (107,800)       
|Interest expense                       |  | (87,993)        
|Interest income                        |  | 13,105          
|Other income (expense)                 |  | 42,394          
|                                       |  |                 
|Total other income (expense)           |  | (140,294)       
|                                       |  |                 
|LOSS BEFORE PROVISION FOR INCOME TAXES |  | (3,961,195)     
|                                       |  |                 
|PROVISION FOR INCOME TAXES             |  | ---             
|                                       |  |                 
|NET LOSS                               |  | $
(3,961,195)   
|                                       |  |                 
|                                       |  |                 
|NET LOSS PER SHARE                     |  | $         (0.71)
|                                       |  |                 
|WEIGHTED AVERAGE OF SHARES OUTSTANDING |  | 5,605,500       







See accompanying notes to consolidated financial statements.



F-5





ELECTRIC AQUAGENICS UNLIMITED, INC.



CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY



YEAR ENDED DECEMBER 31, 2004







|                                                               | COMMON STOCK | ADDITIONAL | STOCK       |             |              
|-------------------------------------------------------------- | ------------ | ---------- | ----------- | ----------- | -------------
|                                                               |              |            | PAID IN     | ISSUANCE    | ACCUMULATED  
|                                                               | SHARES       | AMOUNT     | CAPITAL     | OBLIGATION  | DEFICIT      
|Balance, December 31, 2003                                     | $
3,810,535  | $
381      | $
2,688,299 | $
---       | $
(2,201,749)
|                                                               |              |            |             |             |              
|Issuance of 1,000,000 shares, net of offering costs            | 1,000,000    | 100        | 1,699,900   | ---         | ---          
|                                                               |              |            |             |             |              
|Issuance of 128,630 shares for conversion of note payable      | 128,630      | 13         | 132,698     | ---         | ---          
|                                                               |              |            |             |             |              
|Issuance of 28,214 shares for conversion of related party note | 28,214       | 3          | 49,371      | ---         | ---          
|                                                               |              |            |             |             |              
|Issuance of 244,250 shares for services                        | 244,250      | 24         | 255,851     | ---         | ---          
|                                                               |              |            |             |             |              
|Issuance of 841,026 shares for related party services          | 841,026      | 84         | 1,261,456   | ---         | ---          
|                                                               |              |            |             |             |              
|Issuance of 252,106 shares, net of offering costs              | 252,106      | 25         | 799,975     | ---         | ---          
|                                                               |              |            |             |             |              
|Common stock subscribed                                        | ---          | ---        | 1,452,594   | ---         | ---          
|                                                               |              |            |             |             |              
|Obligation to issue 321,749 shares for purchase of Aquagen     | ---          | ---        | ---         | 1,125,000   | ---          
|                                                               |              |            |             |             |              
|Net loss/
comprehensive loss                                   | ---          | ---        | ---         | ---         | (3,961,195)  
|                                                               |              |            |             |             |              
|Balance, December 31, 2004                                     | $
6,304,761  | $
630      | $
8,340,144 | $
1,125,000 | $
(6,162,944)







See accompanying notes to consolidated financial statements.



F-6





ELECTRIC AQUAGENICS UNLIMITED, INC.



CONSOLIDATED STATEMENT OF CASH FLOWS



YEAR ENDED DECEMBER 31, 2004







|CASH FLOWS FROM OPERATING ACTIVITIES                                        |  |              
|--------------------------------------------------------------------------- |  | -------------
|Net loss                                                                    |  | $
(3,961,195)
|Adjustments to reconcile net loss to net cash
used in operating activities: |  |              
|Depreciation                                                                |  | 51,231       
|Common stock issued for services                                            |  | 1,517,415    
|Common stock issued for interest                                            |  | 75,985       
|Loss from equity method investee                                            |  | 107,800      
|Changes in operating assets and liabilities:                                |  |              
|Increase in accounts receivable                                             |  | (84,011)     
|Increase in receivables from affiliates                                     |  | (82,828)     
|Increase in inventory                                                       |  | (454,516)    
|Increase in deposits                                                        |  | (5,758)      
|Increase in accounts payable                                                |  | 165,215      
|Decrease in accrued expenses                                                |  | (9,623)      
|                                                                            |  |              
|Net cash used in operating activities                                       |  | (2,680,465)  
|                                                                            |  |              
|CASH FLOWS FROM INVESTING ACTIVITIES                                        |  |              
|Acquisition of property and equipment                                       |  | (216,831)    
|Investments                                                                 |  | (912,168)    
|Goodwill acquired                                                           |  | (160,259)    
|                                                                            |  |              
|Net cash used in investing activities                                       |  | (1,289,258)  
|                                                                            |  |              
|CASH FLOWS FROM FINANCING ACTIVITIES                                        |  |              
|Payments on notes payable                                                   |  | (78,207)     
|Payments on long term debt                                                  |  | (115,130)    
|Proceeds from issuance of common stock                                      |  | 2,500,000    
|Proceeds from common stock subscribed                                       |  | 1,452,594    
|                                                                            |  |              
|Net cash provided by financing activities                                   |  | 3,759,257    
|                                                                            |  |              
|NET DECREASE IN CASH                                                        |  | (210,286)    
|                                                                            |  |              
|CASH and cash equivalents, beginning of year                                |  | 593,175      
|                                                                            |  |              
|CASH and cash equivalents, end of year                                      |  | $
382,889    
|                                                                            |  |              
|                                                                            |  |              



See accompanying notes to consolidated financial statements.



F-7





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004



NOTE 1  BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES



Business Description  Electric Aquagenics Unlimited, Inc. (the Company) was incorporated on March 6, 2000 under the laws of the state of Delaware and commenced operations in September, 2000.  On May 10, 2001, the Company changed its name from Primacide, Inc. to Electric Aquagenics Unlimited, Inc.  The Company markets and manufactures purification equipment using technologies that sanitize and clean surfaces using water electrolysis.  These products are for commercial and residential use, which the Company intends to market nationally.  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.



Principles of Consolidation  The accompanying consolidated financial statements include the accounts of Electric Aquagenics Unlimited, Inc. and its wholly owned subsidiaries Equilease, Inc. and Aquagen International, Inc. (collectively, the Company).  All significant intercompany accounts and transactions have been eliminated, if any.



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.



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.  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 year ended December 31, 2004 was $51,231.



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 value of cash on hand, receivables, payables and accrued expenses approximate their fair value due to the short period to maturity of these instruments.





See accompanying notes to consolidated financial statements.



F-8





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004





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



Recognition of Sales and Costs of Goods Sold  The Company records sales of its products upon shipment; title passes to its customers; and, 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.





Advertising Costs  The Company expenses advertising costs as incurred.





Income Taxes  The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.





Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the proprietor 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.





Goodwill - Goodwill represents the excess of cost over fair value of net assets acquired through acquisitions. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, acquired goodwill and other intangible assets that are determined to have an indefinite life are no longer amortized.  Instead, the carrying value of these assets is reviewed for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.



Patents, Trademarks and Intellectual Property  Patents, trademarks and intellectual property, consisting of trade secrets and formulas, are recorded in accordance with Statement of Financial Accounting Standards (SFAS) No. 142.  As such, patents and trademarks are initially measured based on their fair values.  Patents and trademarks are being amortized on a straight-line basis over a period of 10 to 17 years.  Intellectual property with indefinite lives is not amortized, but rather the carrying amounts of these assets are reviewed for impairment at least annually.





See accompanying notes to consolidated financial statements.



F-9





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004



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



Investments The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance-sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.  Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available-for-sale.  Held-to-maturity securities are recorded as either short-term or long-term on the balance sheet based on contractual maturity date and are stated at amortized cost.  Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings.  Debt and marketable equity securities not classified as held-to-maturity or as trading, are classified as available-for-sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income and reported in stockholders equity.



The fair value of substantially all securities is determined by quoted market prices. The estimated fair value of securities for which there are no quoted market prices is based on similar types of securities that are traded in the market.



The equity method of accounting is used when the Company has a 20% to 50% interest in other entities. Under the equity method, original investments are recorded at cost and adjusted by the Companys share of undistributed earnings or losses of these entities.  Nonmarketable investments in which the Company has less than a 20% interest and in which it does not have the ability to exercise significant influence over the investee are initially recorded at cost, and periodically reviewed for impairment.



Comprehensive Loss The Company adopted Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income (SFAS No. 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, 2004, 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 Statement of Financial Accounting Standard No. 128, Earnings per Share (SFAS No. 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 since warrants granted would have been anti-dilutive due to the Companys net reported loss.  During the current year, the Company converted its debt agreements through the issuance of 156,844 shares.







See accompanying notes to consolidated financial statements.



F-10





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004





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



Stock Based Compensation The Company will account for employee stock option plans under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation (SFAS 148).  The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services.



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 customer in the normal course of business.  Periodically, the Company performs credit evaluations of its customers financial condition for determination of doubtful accounts.



For the year ended December 31, 2004, sales to one (1) customer, an affiliate, represented approximately 100% of the Companys total net sales.  Approximately 85% of the Companys outstanding receivables were attributable to three (3) customers as of December 31, 2004.





NOTE 3  PROPERTY AND EQUIPMENT



Property and equipment at December 31, 2004 consisted of the following:



|Machinery and equipment         | $
236,506
|------------------------------- | ---------
|Vehicles                        | 181,049  
|Furniture and fixtures          | 73,411   
|Leasehold improvements          | 159,958  
|                                |          
|Total property and equipment    | 650,924  
|                                |          
|Less:  accumulated depreciation | (113,061)
|                                |          
|Property and equipment, net     | $
537,863









See accompanying notes to consolidated financial statements.



F-11





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004







NOTE 4  PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY



Patents, trademarks and intellectual property at December 31, 2004 consisted of the following:



|Patents               | $
23,400   
|--------------------- | -----------
|Trademarks            | 8,255      
|Intellectual property | 977,500    
|                      |            
|Net                   | $
1,009,155



In December , the Company completed the purchase of Aquagen International, Inc.  The assets acquired included $985,755 of intangible assets, other than goodwill. Of the $985,755 of acquired intangible assets, $8,255 was assigned to registered trademarks and $977,500 was assigned to intellectual property consisting of trade secrets and formulas that are not subject to amortization.





NOTE 5  INVESTMENTS



In April 2004, The Company signed an agreement to purchase up to a 40% interest in ByoCoat Strategies Corporation, Inc. (ByoCoat), a research and development entity, for $400,000.  As of December 31, 2004, the Company paid $333,000, representing a 33.3% interest.  The Company accounts for this investment under the equity method of accounting and accordingly, includes its allocable portion of ByoCoats income or loss.  For the year ended December 31, 2004, the Company recorded a loss on its investment in the amount of $107,800 as reported on its statement of operations.  The Company has also reduced its investment in ByoCoat to $225,200 at December 31, 2004.



During 2004, the Company purchased 30,278 shares of common stock of Zerorez Franchising Systems, Inc., an affiliated entity, (Zerorez) for $60,555 in cash.  The common stock was purchased pursuant to Zerorez private placement offering at $2.00 per share.  In addition, the Company received 109,307 shares of Zerorez common stock in lieu of all outstanding receivable balances due to the Company in the amount of $218,613.  The Company also valued these shares at $2.00 per share, which was considered fair value by the Company and Zerorez.



The Company purchased a 2% interest in KesAir Technologies, LLC for $300,000.  KesAir Technologies, LLC is a manufacturing, research and development entity that will assist the Company in its distribution efforts to the poultry industry.









See accompanying notes to consolidated financial statements.



F-12





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004







NOTE 6  ACQUISITION OF BUSINESS



In December 2004, the Company acquired 100% of Aquagen International, Inc. (Aquagen), in exchange for $75,000 forgiveness of note receivable, note payable of $125,000 and 321,429 shares of the Companys common stock valued at $3.50 per share.  Aquagen is a provider of proprietary water based oxygen supplement products.  The following table presents the assets acquired and liabilities assumed, based on their fair values:





|Cash and cash equivalents      | $       11,555
|------------------------------ | --------------
|Accounts receivable            | 6,111         
|Inventories                    | 34,329        
|Property, plant, and equipment | 89,453        
|Intangible assets              | 985,755       
|Total assets acquired          | 1,127,203     
|                               |               
|Accounts payable               | 72,562        
|Other current liabilities      | 14,900        
|Total liabilities assumed      | 87,462        
|                               |               
|Net assets acquired            | $  1,039,741  





NOTE 7  RELATED PARTY TRANSACTIONS



Sales to Affiliate During 2004, the Company sold 13 of its water generators to Zerorez, an affiliated entity having similar stockholders, for $325,000.  This accounted for all of the Companys sales for the year ended December 31, 2004.  The Company recorded costs associated with these sales in the amount of $78,600 for the year and has $319,340 in accounts receivable related to these transactions at December 31, 2004.



Management and Consulting Fees The Company pays management and consulting fees to entities owned by officers for services rendered to the Company in lieu of wages.  For the year ended December 31, 2004, the Company paid $342,500 in cash and 841,026 shares of common stock valued at $1,261,540 for these services.



Advances Periodically throughout the year, the Company advances officers and employees cash for certain reimbursable expenses.  As of December 31, 2004, there were no outstanding advances to employees or officers.



Office Facilities and Rents The Company pays rent to an entity controlled by an officer.  For the year ended December 31, 2004, the Company paid $45,000 in rent expense to this entity.



See accompanying notes to consolidated financial statements.



F-13





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004







NOTE 8  LONG TERM DEBT



Long-term debt as of December 31, 2004 consisted of the following:



|Unsecured note payable to unrelated third party, payable in monthly installments of $1,500, including interest of approximately 22%, due October 2012 | $
62,763 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                                                                                                                      |          
|Unsecured note payable to unrelated third party, payable in monthly installments of $1,500, including interest of approximately 22%, due October 2012 | 62,763   
|                                                                                                                                                      |          
|Notes payable to bank, secured by vehicles, payable in monthly installments of approximately $2,899, including interest of 7%, due March 2009         | 151,471  
|                                                                                                                                                      |          
|Total long term debt                                                                                                                                  | 276,997  
|                                                                                                                                                      |          
|Less:  current portion                                                                                                                                | (43,660) 
|                                                                                                                                                      |          
|Long term debt                                                                                                                                        | $
233,337



Maturities of the notes payable are as follows:



|Year Ending December 31, | Amount   
|------------------------ | ---------
|2005                     | $
43,660 
|2006                     | 45,560   
|2007                     | 48,704   
|2008                     | 51,950   
|Thereafter               | 87,123   
|                         |          
|                         | $
276,997





NOTE 9  COMMON STOCK



During the year, the Company completed a private placement offering pursuant to Rule 506 of the Securities and Exchange Commission regulations for up to 200,000 investment units consisting of 10 shares of common stock and one warrant for $20 per unit.  As a result of this offering, the Company received $1,700,000, net of offering costs of approximately $300,000 and placement agent warrants of 90,000 shares.





See accompanying notes to consolidated financial statements.



F-14





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004



NOTE 9  COMMON STOCK (continued)



In addition, the Company commenced a private placement offering in July 2004 pursuant to Rule 506 for up to $5,000,000 consisting of 1,250,000 shares of common stock at $4.00 per share.  As of December 31, 2004, the Company had received proceeds of approximately $2,500,000, net of offering costs of approximately $350,000 and placement agent warrants representing approximately 66,000 shares.



In March 2004, the Company converted notes payable in the amount of $106,100 plus accrued interest into approximately 157,000 shares to related and unrelated parties.



In March 2004, the Company issued 1,085,276 shares of its common stock to related and unrelated parties for services rendered for the Company.





NOTE 10  INCOME TAXES



At December 31, 2004, the Company has available for federal income tax purposes a net operating loss carryforward of approximately $5,990,000 expiring at various times through 2024 that may be used to offset future taxable income.  Therefore, there is no provision for income tax.



In addition, we have deferred tax assets of approximately $2,275,000 at December 31, 2004.  We have not recorded a benefit from our net operating loss carryforward because realization of the benefit is uncertain and, therefore, a valuation allowance of ($2,275,000) has been provided for the deferred tax assets.  The following table sets forth our carryforwards and the related deferred tax assets by year through December 31, 2004:



|Year                      | NOL carryforward | Deferred tax asset
|------------------------- | ---------------- | ------------------
|2003                      | $  2,029,000     | $    770,000      
|2004                      | 3,961,000        | 1,505,000         
|Less: valuation allowance | ---              | (2,275,000)       
|                          |                  |                   
|Totals:                   | $5,990,000       | $---              



NOTE 11  COMMITMENTS AND CONTINGENCIES





Facilities Lease The Company leases its facilities from an entity controlled by an officer on a month-to-month basis.  Rents paid under the lease amounted to $45,000 for the year ended December 31, 2004.



Product Supplier Agreement The Company maintains a 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.



See accompanying notes to consolidated financial statements.



F-15





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004





NOTE 11  COMMITMENTS AND CONTINGENCIES (continued)



Royalty Agreement With its acquisition of Aquagen, the Company was assigned a royalty agreement with an unrelated third party requiring the Company to pay a royalty in the amount of 3% of the wholesale price of products sold produced by Aquagens intellectual property for oxygen supplements.  Under the agreement, the royalty amount is payable quarterly.  No amounts were paid for the year ended December 31, 2004, or were any amounts due as of December 31, 2004.



License Agreements The Company maintains a licensing agreement with Covenant Water Systems LLC (Covenant), that provides Covenant the right and license to market, promote, install, service and maintain water generator systems for use in washing, cleaning and sanitizing poultry products in the United States of America.  Under the agreement, the Company is entitled to 75% of installation fees, a 10% licensing fee of Covenants gross revenue from units sold, and 35% of net revenues of Covenant after consideration of Covenants operating expenses.



The Company also maintains a license agreement with Innovative Oyster Processing Systems, LLC (OPC) for worldwide rights and license to market the Companys products for oyster purification.  Under this agreement, the Company is entitled to a 10% license fee of total gross revenues of OPC with minimum license fees $820,000 over its five (5) year term.



NOTE 12  GOING CONCERN



During the current period, the Company incurred significant losses and a negative cash flow from operations.  As a result, at December 31, 2004, the Company 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.  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 increase sales and profit margins and control operating expenses.  Management plans to mitigate its losses in the near term through the further development and marketing of its trademarks, brand and product offerings.



NOTE 13  SUBSEQUENT EVENTS



In February 2005, the Company successfully completed additional private placement offering of $2,975,000 for 850,000 shares of its common stock at $3.50 per share.  Under this offering, the Company received proceeds of $2,630,600, net of offering costs of approximately $344,000 plus placement agent warrants of 73,800 shares.



Subsequent to year-end the Company is in talks to renegotiate its license agreement with Covenant Water Systems LLC.



See accompanying notes to consolidated financial statements.



F-16





ELECTRIC AQUAGENICS UNLIMITED, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004







NOTE 13  SUBSEQUENT EVENTS (continued)



In March 2005, the Company entered into a manufacturing agreement with Power & Electric Company (PECO) whereby PECO will assume certain manufacturing responsibilities for the Companys expanding line of equipment, including large poultry processors.





NOTE 14  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION



For the year ended December 31, 2004, the Company paid cash for the following:



Interest

$42,622

Income taxes

$---





In addition, for the year ended December 31, 2004, the Company non-cash investing and financing activities related to the following:



Purchase of property and equipment

$168,529

Common stock issued on conversion of notes payable

$106,100



Acquisition of business in exchange for stock issuance obligation

$1,125,000

















F-18

























ELECTRIC AQUAGENICS UNLIMITED, INC.

Audited Financial Statements



December 31, 2003 and 2002



See accompanying notes to consolidated financial statements.



F-19





Electric Aquagenics Unlimited, Inc.



Financial Statements





December 31, 2003





Contents



Accountants  Report

F-20



Financial Statements



Balance Sheet

F-21

Statements of Operations

F-22

Statements of Changes in Stockholders Equity (Deficit)

F-23

Statements of Cash Flows

F-24

Notes to Financial Statements

F-25



See accompanying notes to consolidated financial statements.



F-19







Independent Accountants Report







Board of Directors and Stockholders

Electric Aquagenics Unlimited, Inc.





We have audited the balance sheet of Electric Aquagenics Unlimited, Inc. as of December 31, 2003, and the related statements of operations, changes in stockholders equity (deficit) and cash flows for the years ended December 31, 2003 and 2002.  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 auditing standards generally accepted in the United States of America.  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 Electric Aquagenics Unlimited, Inc. as of December 31, 2003, and the results of its operations and its cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.



/s/ Child, Sullivan & Company



Child, Sullivan & Company

Kaysville, Utah

March 26, 2004



F-20







Electric Aquagenics Unlimited, Inc.

Balance Sheet

December 31, 2003





ASSETS



Current assets:

Cash

$

593,175



Accounts receivable

100,000

Accounts receivable-related parties - (note 3)

236,512

Inventories, less allowance for obsolete inventory of $21,000

48,800

Total current assets

978,487



Fixed assets:

Computers

18,944



Furniture & fixtures

1,390



Machinery & equipment

47,633

Total fixed assets

67,967

Less accumulated depreciation

(26,551)

Net fixed assets

41,416



Total assets

$

1,019,903





LIABILITIES AND STOCKHOLDERS EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

140,186



Accounts payable-related parties - (note 3)

6,831



Accrued interest - related party loans - (note 3)

9,623



Short-term notes - (note 4)

33,700



Short-term notes-related parties - (notes 3 & 4)

59,407

Convertible bridge loan-related parties - (notes 3 & 4)

93,423

Convertible bridge loan-other - (note 4)

50,000

Current portion of long-term debt - related parties - (note 4)

5,846

Total current liabilities

399,016



Long-term debt:

Notes payable-less current portion - related parties - (note 4)

133,956



Stockholders equity - (note 5):



Common stock, par value $ .0001 per share;

50,000,000 authorized shares;

3,810,535

shares issued and outstanding

381

Additional paid in capital

2,688,299

Accumulated deficit

(2,201,749)

Total stockholders equity

486,931

Total liabilities and stockholders equity

$

1,019,903





F-21







Electric Aquagenics Unlimited, Inc.

Statements of Operations













Years ended December 31,

2003



2002



Revenues

Regular sales, net of returns of $50,000 in 2003

$

200,000

$

72,000

Sales to affiliates and shareholders, net of returns and

discounts of $0 in 2003 and $9,939 in 2002 - note 3

25,000

40,061

Total sales

225,000

112,061

Cost of goods sold

(114,783)

(51,446)

Gross Profit

110,217

60,615



Other Expenses

Other general and administrative

419,372

189,382

Advertising

-

600

Management, legal and consulting fees paid

to affiliates or shareholders - note 3

247,057

118,713

Research and development

206,500

162,251

Depreciation

11,071

6,618

Rent-related party

43,569

27,500

Total other expenses

927,569





505,064





Net operating loss

(817,352)

(444,449)



Other income (expense)

Interest - related party - note 3

(129,891)

(162,533)

Interest- other  notes 4 and 5

(12,928)

(66,943)

Gain on extinguishment of debt to related parties

89,077

-

Net loss before income taxes

(871,094)

(673,925)

Income tax (expense) benefit

-



-

$

(871,094)

$

(673,925)



Net loss per share

$

(.28)

$

(.24)



Weighted average shares outstanding

3,142,618

2,772,618



F-22







Electric Aquagenics Unlimited, Inc.

Statements of Changes in Stockholders Equity (Deficit)

Years Ended December 31, 2003 and 2002





Additional

Common Stock

Paid in

Accumulated

Shares

Amount

Capital

deficit

Total





Balance at January 1, 2002

2,599,535

$

260

$

935,740

$

(656,730)

$

279,270



Exercise of Common Stock

warrants

211,000

21

190

-

211



Detachable warrants issued

for bridge loan-related party

-

-

14,000

-

14,000



Detachable warrants issued

with convertible debt

-

-

28,000

-

28,000



Issuance of debt with beneficial

conversion feature-related party

-

-

14,000

-

14,000



Issuance of debt with beneficial

conversion feature

-

-

28,000

-

28,000



Net loss-2002

-

-

-

(673,925)

(673,925)











Balance at December 31, 2002

2,810,535

281

1,019,930

(1,330,655)

(310,444)



Common stock issued for cash

1,000,000

100

1,739,900

-

1,740,000



Detachable warrants issued for

bridge loans-related party

-

-

66,562

-

66,562



Detachable warrants issued for

bridge loans-other

-

-

5,984

-

5,984



Detachable warrants issued for

costs of raising capital

-

-

-

-

-



Return of capital to shareholder-

Note 2

-

-

(55,000)

-

(55,000)



Extinguishment of debt with

beneficial conversion feature-

Note 5

-

-

(89,077)

-

(89,077)



Net loss-2003

-

-

-

(871,094)

(871,094)











Balance at December 31, 2003

3,810,535

$

381

$

2,688,299

$

(2,201,749)

$

486,931



F-23







Electric Aquagenics Unlimited, Inc.

Statements of Cash Flows







Years ended December 31,

2003





2002



Operating activities

Net loss

$

(871,094)

$

(673,925)

Adjustments to reconcile net loss to net cash

provided by operating activities:

Depreciation

11,071

6,618

Amortization of debt discount (interest)

72,546

184,436

Gain on extinguishment of debt

(89,077)

-

Changes in operating assets and liabilities:



Accounts receivable

(75,000)

(25,000)

Accounts receivable - related parties

(115,877)

(51,961)

Inventories

109,783

51,446

Prepaid rent

-

19,000

Accounts payable and accrued expenses

(19,741)

81,225

Accounts payable - related parties

(3,813)

7,126

Accrued interest - related party loans

(24,474)

34,097

Net cash used in operating activities

(1,005,676)

(366,938)

Investing activities

Decrease (increase) in deposits

2,052

(500)

Purchase of property, plant and equipment

(46,261)

(375)

Net cash used in investing activities

(44,209)

(875)

Financing activities

Payments on short-term notes and convertible loans

(12,000)

95,700

Payments on convertible bridge loans and short-term

notes-related parties

(109,370)

51,200

Proceeds from issuance of common stock

1,740,000

211

Proceeds from long-term debt

-

145,493

Principle payments on long-term debt

(5,002)

(689)

Net cash provided by financing activities

1,613,628

291,915

Net increase (decrease) in cash

563,743

(75,898)

Cash at beginning of period

29,432

105,330

Cash at end of period

$

593,175

$

29,432





F-24







Supplemental disclosure of non-cash investing and financing activities



Detachable warrants issued with convertible loans

$          -

$

42,000

Commitment for return of capital

$

55,000

$           -

Issuance of debt with beneficial conversion feature

$          -

$

42,000

Interest paid in cash

$

13,913

$           5,311



F-25









F-26







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements

December 31, 2003 and 2002



1.

Significant Accounting Policies



This summary of significant accounting policies of the Company is presented to assist in understanding the Companys financial statements.  The financial statements and notes are representations of the Companys management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.



Business

Electric Aquagenics Unlimited, Inc., (the Company) was incorporated on March 6, 2000 under the laws of the state of Delaware and commenced operations in September, 2000.  On May 10, 2001, the Company changed its name from Primacide, Inc. to Electric Aquagenics Unlimited, Inc.  The Company markets and manufactures purification equipment using technologies that sanitize and clean surfaces using water electrolysis.  These products are for commercial and residential use, which the Company intends to market nationally.  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.



Accounting Method

The Companys financial statements are prepared using the accrual method of accounting.



Inventories

Inventories consist primarily of finished goods.  Cost is determined principally on the lower of first-in, first-out (FIFO) cost or market.



Property and Equipment

Property, plant and equipment is stated at cost.  Depreciation is computed primarily using the straight-line method based on estimated useful lives, which range from 5 to 7 years.



Revenue Recognition

The Company recognizes revenue from product sales upon receipt and acceptance by the customer, including sales to affiliates.  The Company does not have any significant remaining obligations after the customer has acknowledged receipt and acceptance.  In 2003, the company, though it had no previous commitment to do so, agreed to allow two former Zerorez franchisees (see note 3) to return products and receive their original sales price as reimbursement due to concerns regarding the franchisees ability to emulate the Companys technology after having their franchise agreement with Zerorez terminated.  The machines were brought back into inventory at cost which was lower than estimated realizable value.



Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.





F-27







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



1.  Significant Accounting Policies (continued)

Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities, as well as footnote disclosures included in the financial statements and accompanying notes.  Actual results may differ from those estimates and such differences may be material to the financial statements.  Estimates that may change significantly in the near term include debt discount estimates and related fair value measures of warrants and underlying restricted shares, fair values of financial instruments, and contingencies.



Credit Risk and Concentrations

The Companys customers may be affected by changing economic conditions. Management believes that its credit review procedures, and loss reserves (if any) have adequately provided for usual and customary credit-related losses.  The carrying amount of trade receivables and other receivables approximates fair value.  The Companys policy for charging off trade receivables is to consider write-down of receivables extending beyond 120 days after significant collection efforts have been made or when the financial condition of debtors warrant charge-off.  Trade receivables are determined to be past due after 90 days regardless of whether partial payments have been received.  To date, all of the Companys product inventory for sale is produced by one manufacturer and sales have all been to Zerorez franchisees (see note 3) scattered throughout the country.

Research and Development

The Company expenses the cost of research and development as incurred.  Research and development costs charged to operations were $206,500 and $162,251 in 2003 and 2002, respectively.

Advertising Costs

The Company generally expenses advertising costs as incurred.  Advertising expenses included in selling expenses were $600 for the period ending December 31, 2002.



Earnings Per Share

The Company adopted Statement of Financial Accounting Standard No. 128, Earnings per Share (SFAS No. 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 since warrants granted would have been anti-dilutive due to the Companys net reported loss (see note 4).  Such warrants, totaling 295,500 shares and 150,000 shares at December 31, 2003 and 2002, respectively, if exercised, could potentially dilute basic EPS in the future.  In addition, the Company has entered into convertible debt agreements (see note 3) representing other potentially dilutive securities totaling 103,046 shares, if converted, at December 31, 2003.







F-28







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



1.

Significant Accounting Policies (continued)



Earnings Per Share (continued)

December 31,

December 31,



2003

2002



Weighted average number of common

shares used

3,142,618

2,772,618



Stock-Based Compensation

The Company will account for employee stock option plans under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).  The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services.



Income Taxes

The Company uses the liability approach to financial accounting and reporting for income taxes.  The differences between the financial statement and tax bases of assets and liabilities is determined annually.  Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the period in which they are expected to affect taxable income.  Valuation allowances are established, if necessary, to reduce deferred tax asset accounts to the amounts that will more likely than not be realized.  Income tax expense is the current tax payable or refundable for the period, plus or minus the net change in the deferred tax asset and liability accounts.



Recent Accounting Pronouncements

In April, 2002, the FASB issued SFAS No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.  SFAS No. 145 rescinds the requirement under SFAS No. 4 to classify gains from the extinguishment of debt as an extraordinary item in most cases.  The Company has adopted the requirements of SFAS No. 145 in its 2003 financial statements.



In December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-and amendment of SFAS No. 123.SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this statement amends the disclosure requirements of SFAS No. 123 to require disclosures in both compensation and the effect of the method used on the reported results.  SFAS No. 148 was effective for the Companys year ended December 31, 2003 and 2002.  The adoption of this pronouncement did not have a material impact on the Companys financial condition or results of operations.







F-29







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



1.

Significant Accounting Policies (continued)



Recent Accounting Pronouncements (continued)



In April, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  The adoption of this pronouncement did not have a present impact on the Companys financial condition or results of operations.



In May, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.SFAS No. 150 establishes standards for how an issuer measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument within its scope as a liability  (or asset in some circumstances).  SFAS No. 150 was effective for financial statements entered into or modified after May 31, 2003 and otherwise was effective and adopted by the Company in 2003.  As the Company has no such instruments, the adoption of this statement did not have a present impact on the Companys financial condition or results of operations.



2. Commitments and Contingencies



The Company has rented its facilities from an affiliate on a month-to-month basis for $2,500 per month increasing to $5,000 per month for additional office space beginning May, 2003.  Rent expense charged to operations was $43,569 and $27,500 for the years ended December 2003 and 2002, respectively.



The Company is a defendant in a lawsuit made by a shareholder demanding return of a $50,000 investment for which he received shares.  The shareholder contended his investment was intended to be a debt instrument and is entitled to repayment plus interest, costs and fees.  Subsequent to year-end, the shareholder prevailed in his claim against the Company and was awarded the $50,000 return of investment plus $5,000 in costs and fees.  The Company paid the claim subsequent to year-end.  Included in accrued liabilities is $55,000 for the commitment which was offset against additional paid-in-capital as the payment was made from proceeds received from the sale of shares.  The shares were returned to the Company in 2004.  Accordingly, the receipt of shares was transferred to treasury stock in 2004, from paid-in-capital, since the Company plans to cancel the shares at some future date.



F-30







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



2. Commitments and Contingencies (continued)



The Company has entered into a licensing and royalty agreement with a university which conducts a substantial part of the research and development for the Company.  The agreement calls for a one-time license fee payment of $10,000 upon signing (June 18, 2002) and an additional $20,000 upon the Companys successful completion of a registered offering.  Under the agreement, the Company is also required to pay the greater of 5% of all licensed products sales or certain minimum royalty payments beginning in year two of the contract up to $10,000 per year once the Companys shares are trading publicly on a national exchange.  During 2003, the remaining $20,000 due for the original licensing was paid.  No royalties have been paid under the agreement as of December 31, 2003.



3. Related Party Transactions



The Company pays management fees to entities owned by shareholders for services rendered to the Company in lieu of wages.  During 2003 and 2002, these payments totaled $235,074 and $104,063, respectively, of which none was still outstanding at December 31, 2003.



The Company sold products to affiliates or shareholders. Total sales to these entities and cost of sales for the periods ended December 31, 2003 and 2002 are as follows:





2003



2002

Sales

$

25,000

$

50,000

Cost of sales

8,400

19,862

Gross profit

16,600

30,138

Less discounts

-

9,939

$

16,600

$

20,199



Accounts receivable from related parties for product sales were $25,000 and $50,000 at December 31, 2003 and 2002, respectively.



Accounts receivable from related parties for operating expenses of those entities and expenses relating to research and development were $5,453 and $17,310, respectively, for 2003.



The Company also paid legal fees to a shareholder for legal services rendered totaling $12,407 and $14,650 in 2003 and 2002, respectively, of which $6,831 was outstanding at December 31, 2003.



The Company paid $43,569 in rent to an affiliate in 2003 (see note 2), none of which was outstanding at December 31, 2003.



The Company funded some of the operating expenses of Zerorez, Inc. (formerly H2OAqua-Care Franchising Systems), an affiliated entity whose future franchisees will be required to purchase products from the Company for use by its carpet cleaning businesses.  As of December 31, 2003, the Company had financed a total of $188,749 all of which was outstanding at December 31, 2003.  The advances bear no interest and are unsecured.



F-31







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



3. Related Party Transactions (continued)



On December 4, 2001, the Company obtained bridge loan funding from an affiliate of a shareholder totaling $211,000, bearing interest at 12.00% per annum, and due on June 3, 2002.  Additional debt discount related to the note for detachable stock warrants and beneficial conversion features issued under the bridge loan agreement was recorded (see note 4).  In June 2002, the affiliate provided an additional $25,000 bridge loan funding which was also convertible to common stock (see note 4).  During 2003, the Company repaid certain of these loans resulting in Gain on Extinguishment of Debt due to the application of portions of the payments to the beneficial conversion feature (see note 5).



Total amortization of debt discount charged to related party interest arising from the issuance of warrants and convertible debt with beneficial conversion features (see note 5) was $66,562 and $128,436 for the year ended December 31, 2003 and 2002.  Interest accrued on loans from affiliates totaled $9,623 and $34,097 at December 31, 2003 and 2002.



During 2003, the Company obtained short-term bridge loan funding from related parties totaling $100,457, bearing interest at 10% to 12% and original due dates ranging from April 2, 2003 to June 30, 2003, with no monthly payments required.  The total amount of these loans paid during 2003 was $67,250 (see note 4).



4.

Debt Financing



Short term notes and convertible bridge loans consists of the following at December 31, 2003:



Short-term promissory noted to an unrelated party of $33,700, bearing interest at 10% and due on September 3, 2002, with no monthly payments required.  The loan is in default and are due on demand.$33,700



Short-term promissory notes to related parties, bearing interest at 10% to 12% and original due September 30, 2002 to June 30,2003, with no monthly payments required.  The loans are in default and are due on demand.$59,407



Convertible bridge loan payable to an unrelated individual bearing interest at 12% and maturing on December 17, 2002 (see note 5).  The note is now due on demand.  Substantial debt discount related to the issuance of warrants with the loan has been recorded and amortized in full as of December 31, 2003 (see note 5).$50,000



Convertible bridge loan payable to a related party, bearing interest at 12% per annum and due originally on June 3, 2002.  The loan requires an additional interest charge of 5% if the loan goes into default.  Substantial discounts of debt related to the grant of warrants for the issuance and extension of the loan had been recorded and amortized in full as of December 31, 2003 (see note 5).$93,423



F-32







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



4.

Debt Financing (continued)



Long-term debt consists of two unsecured loans from unrelated entities bearing interest at 21.927% per annum, requiring payments of $1,500 per month (each) due October 2012.$139,802

Less current portion

(5,846)

$133,956



Future maturities of long-term debt for the five years succeeding December 31, 2003 are as follows:



2004

$

5,846



2005

7,264

2006

9,028

2007

11,218

2008

13,940

Thereafter

92,506

$

139,802



Management estimates the fair values of debt financing instruments are equal to or less than carrying amounts due to the terms of their repayment, and considering that related debt discounts have been recorded and fully amortized.



5. Stockholders Equity



Effective April, 2003, the Company commenced a registered offering of 1,000,000 shares at $2.00 per share.  The total offering of $2,000,000 was completed in November, 2003.  Offering costs made up of commissions to placement agents totaling $260,000 were netted against the proceeds resulting in net proceeds of $1,740,000.  Subsequent to completion of the offering, the Company granted 20,000 warrants to the placement agents.  The value of the warrants, estimated at $29,800 was netted against the related paid-in-capital resulting as offering costs in a net adjustment to shareholders equity of $0.



In December 2001, as consideration for making a $211,000 bridge loan, the Company issued 211,000 warrants to an affiliate of a stockholder for the purchase of common stock at $ .001 per share, exercisable through December 3, 2006. Because the warrants are detachable, the Company has recorded the fair value of the warrants as bridge loan debt discount under Accounting Principles Board (APB) #14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.  The discount was amortized over the original life of the loan (six months) resulting in interest expense totaling $100,436 in 2002.  The loan payment terms were extended as described in note 4.  The affiliate exercised the warrant in 2002 resulting in the issuance of 211,000 shares for $211.  During 2003, the Company extinguished (repaid) $117,577 of the principle balance leaving a balance at year-end of $93,423 (see note 4).



F-33









Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



5. Stockholders Equity (continued)



In June 2002, the Company issued a convertible bridge loan with a face amount of $25,000 and a principal amount of $29,214 (including prepaid interest and fees) to an affiliate.  The original terms of the note permitted the lender to convert the note into that number of shares of common stock determined by dividing the outstanding principal and interest on the note by $1.00.  In 2003, the note was repaid in full.  In correlation with the convertible promissory note, the Company issued detachable stock purchase warrants allowing the lender to purchase 50,000 restricted shares of common stock at an exercise price of $.50 per share.



In June 2002, the Company issued a convertible bridge loan with a face value of $50,000 and a principal amount of $53,000 (including prepaid interest and fees) to an individual (see note 4).  The note bears interest at 12% per annum and originally matured on December 17, 2002.  The loan is now in default and is due on demand.  At any time, the lender may elect to convert the note into the number of restricted shares of common stock determined by dividing the outstanding principal and interest on the note by $1.00.  In correlation with the convertible promissory note, the Company issued stock purchase warrants allowing the lender to purchase 100,000 restricted shares of common stock at an exercise price of $0.50 per share.



The warrants issued in connection with these loans are also detachable, and accordingly, the Company had recorded debt discount in 2002 equal to the value of the warrants granted of $42,000.  The discount was amortized over the original life of the loans resulting in total interest charge to operations of $42,000 for the year ended December 31, 2002.  The convertible loans are collateralized with shares of Company stock.



During December, 2003, the Company also granted warrants to related and non-related entities.  The warrants, exercisable for 5 years at $.01 per share and totaling 62,750 and 10,000, respectively, were granted as consideration for extending short-term loans issued in previous years, resulting in additional debt discount(s) totaling $66,562 to related parties and $5,984,to non-related parties respectively.  The discounts were amortized immediately to interest expense in 2003 since the loans were due on demand or already paid in full as of the date of grant.



The Company calculated the fair value of the warrants on the date of issuance using the Black-Scholes option pricing model and the following assumptions: weighted average expected option term of 5 years; risk free interest rate of 4.5% and 4.39% at December 31, 2003 and 2002, expected dividend yield of zero percent, and an expected volatility of ranging from 160 % to 170% at December 31, 2003 and 2002.



The weighted average fair value of warrants granted was $1.49 per share and $.63 per share for the periods ended December 31, 2003 and December 31, 2002, respectively.  The fair value of warrants results primarily from an extremely low exercise price and from estimated share prices resulting from recent equity placements of the Companys common stock at $1.50 per share, in 2003 (based on an estimated discounted value of 25% from the issuance price per share of the Companys free-trading shares of 2.00) and $1.00 per share, in 2002.



F-34









Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



5. Stockholders Equity (continued)



The Black-Scholes model used by the Company to calculate option and warrant values, as well as other currently accepted option valuation models, were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which is significantly different from the Companys stock warrants. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values.  Accordingly, management believes that this model does not necessarily provide a reliable single measure of the fair value of the Companys stock warrants.



As mentioned above, the convertible debt instruments issued in 2002 are convertible to common stock at the rate of $1.00 per share, using the pre-discounted face value of the debt instruments plus accrued interest as the basis for computing the number of shares to be obtained upon conversion.  The discounted face value of the convertible debt instruments was substantially less than the original face value resulting in beneficial conversion rates ranging from $0.50 per share to $0.56 per share.  Accordingly, the Company has recorded additional interest of $42,000 during the year ending December 31, 2002 in accordance with EITF 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.  Substantial interest related to the beneficial conversion features of debt instruments issued in prior years has also been recorded.



As noted above, the Company paid down certain of its convertible related-party loans for which beneficial conversion features were recorded in 2002.  In accordance with EITF 98-5, the principle payments were applied first to the intrinsic value of the beneficial conversion feature with the excess allocated to the principle reduction of the debt.  Previously recorded debt discounts have been fully amortized as of the dates of the extinguishment resulting in a Gain on the Extinguishment of Debt totaling $89,077.  The gain has been recorded separate from operating income or loss in accordance with FAS #145.



6. Income Taxes



Deferred tax assets and liabilities arise from differences in tax and financial statement accounting methods for depreciation and issuance of stock warrants.  Significant deferred tax assets also arise from net operating loss carryforwards.  Net operating loss carryforwards for federal income tax      purposes total $2,029,000 at December 31, 2003 and expire 2020 through 2023.  The amount of, and ultimate realization of the benefits from the Companys operating loss carryforwards for income tax purposes is dependent, in part, upon the tax laws in effect, the future earnings of the Company, and other future events, the effects of which cannot be determined.  Because of the uncertainty surrounding the realization of the loss carryforwards, the Company has established a valuation allowance equal to tax effect of the loss carryforwards and, therefore, no deferred tax asset has been recognized for the loss carryforwards.







F-35







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



6. Income Taxes (continued)



The significant components of the deferred tax liability (asset) consists of the following:

2003

2002



Depreciation

$

(1,676)

$

(246)

Allowance for obsolete inventory

(8,400)

-

Debt discount amortization

(45,818)

(16,800)



Net operating loss carryforward-tax

(811,746)

(456,416)

Valuation allowance

867,640

473,462

$  -

$  -



A reconciliation of income tax expense (benefit) to expected income taxes using statutory federal income tax rates:

2003

2002



Income tax expense (benefit) at statutory

rate of 35%

$

(304,883)

(35%)

$ (235,874)

(35%)

Interest applicable to beneficial conversion



feature

(35,631)

(4%)

16,800

2%

State taxes, net of federal benefit

(43,555)

(5%)

(33,696)

(5%)

Amortization of offering costs

(10,400)

(1%)

-

(0%)

Redetermination of prior year tax liability

(429)

(0%)

-

(0%)

Other

720

0%

-

(0%)

Change in valuation allowance

394,178

45%

252,770

38%



$       -

0%

$  -

0%





All significant components of net deferred tax liabilities and assets have been classified as long-term based on the anticipated realization of the underlying assets and settlement of underlying liabilities in accordance with Financial Accounting Standard 109 Accounting for Income Taxes.



















F-36







Electric Aquagenics Unlimited, Inc.

Notes to Financial Statements (continued)

December 31, 2003 and 2002



7. Going Concern Considerations



The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern.  However, the Company has incurred losses since its inception and has not yet been successful in establishing profitable operations. The Company, until the year ended December 31, 2003, has experienced cumulative deficits in retained earnings and equity.  These factors raised substantial doubt about the ability of the Company to continue as a going concern.  However, in 2003 the Company was successful in obtaining substantial equity financing, which, together with expected revenue generation and its existing working capital, the potential for reducing overhead and payments to affiliates for consulting, and restructuring terms of payables (particularly those to affiliates) is anticipated to be sufficient to meet the Companys projected working capital and cash requirements beyond December 31, 2004.  Unanticipated costs and expenses or lower than anticipated revenues could require additional financing, in 2004, which the Company is continuing to obtain through its placement of shares and other means.  Accordingly, management has reevaluated the Companys ability to continue as a going concern and believes substantial doubt as to its ability to do so has been alleviated.  The Company will continue to evaluate its projected expenditures relative to its available cash and to evaluate additional means of financing in order to satisfy its working capital and other cash requirements.



8. Subsequent Events



In 2004, the Company commenced a private placement of common stock under Rule 506 for a total of 200,000 investment units consisting of 10 shares of common stock and one common stock warrant each, at $20.00 per unit.



In addition, a significant number of common shares and warrants for the purchase of common stock were issued to related and non-related parties alike.





F-37