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, 2006




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


For
      the
      transition period from _________________ to _________________




Commission
      File Number: 000-51807


**EAU
      TECHNOLOGIES, INC.**


(name
      of
      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 registeredNone
            NoneSecurities
                registered under Section 12(g) of the Act:Common
              Stock, $0.0001 par value(Title
              of class)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. x Yes o NO




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o




Issuer’s
      revenues for its most recent fiscal year: $1,949,709




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





As
      of
      March 30, 2007 the registrant had 13,467,187
      shares of common stock, par value $0.0001, outstanding.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates as of March 30, 2007, was $10,056,275 (based upon the closing
      price of $1.04 per share of common stock as reported on the OTC Bulletin
      Board).




Documents
      incorporated by reference: None




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







TABLE
      OF
      CONTENTS





PagePART
                  IITEM
                  1.
              DESCRIPTION
                  OF BUSINESS.
              2ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY.
              21ITEM
                  3.
              LEGAL
                  PROCEEDINGS.
              21ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS.
              21PART
                  II
 ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
              22ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
              24ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              33ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE.
              33ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES.
              33ITEM
                  8B
              OTHER
                  INFORMATION
              34PART
                  III
 ITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                  SECTION
                  16(a) OF THE EXCHANGE ACT.
              35ITEM
                  10.
              EXECUTIVE
                  COMPENSATION.
              40ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
              45ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS.
              47ITEM
                  13.
              EXHIBITS
              49ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES.
              51SIGNATURES.
              53









**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.




1





**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**





EAU
      TECHNOLOGIES, INC., previously known as Electric Aquagenics Unlimited, Inc.
      (referred to herein sometimes as “EAU,” “we,” “us,” or the “Company”), is in the
      business of developing, manufacturing and marketing equipment that uses water
      electrolysis to create fluids. These fluids have various commercial applications
      and may be used in commercial food processing organic or non-organic
      agricultural products that clean, disinfect, remediate, hydrate and moisturize.
      The processes for which these fluids may be used are referred to in this Report
      (this “Report”) as the “EOW Technology.” For example, we believe that our food
      and agricultural treatment products potentially may be used to systemically
      treat all facets and phases of the food chain, from soil to animal feed to
      meat
      processing, by eliminating dangerous and unhealthy pathogens from the food
      chain
      with organically based and highly effective solutions. We make the claim that
      our products are “non-toxic”. We can do this because at the levels we employ our
      technology, our studies both internal as well as through third parties show
      no
      toxicity. Further studies are in progress to make more specific claims. We
      also
      develop, manufacture and market consumer products that support a healthy
      lifestyle, such as our Perfect Empowered Drinking WaterTM and Perfect Oxygenated
      EssentialsTM products. At the levels employed, the fluids and products are
      environmentally safe and non-toxic and do not contain or leave harmful residues
      associated with chemical-based supplements, disinfecting and cleaning agents.
      The electrolyzed fluids created by the EOW Technology (referred to herein
      sometimes as the “EO Fluids” or “Empowered Water TM ”)
      generated by our patented and patent pending specialized equipment currently
      replace many of the traditional products used in commercial, industrial and
      residential disinfecting and cleaning.





We
      have
      identified the following industries for early stage sales and marketing focus:
      1) meat and poultry processing, 2) agricultural grow-out and processing and
      3)
      bottled drinking water and consumer products the ( **“Primary
      Markets”** ).
      As of
      the date of this Report, the Company was focused on these markets because it
      believes that it has a competitive advantage, a leading strategic industry
      partner, and/or can provide an attractive value-added proposition. To penetrate
      these markets, EAU is conducting trials that will lead to partnerships with
      industry leaders who can assist in rolling the technology out on a large
      scale.




2




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





**Products
      and Related Markets**




**EOW
      Technology**





We
      intend
      to sell electrolyzed fluid that is produced by our generators, which are placed
      on-site at commercial processing facilities (“CIP Systems”), particularly in the
      food products sectors that require high volumes of non-toxic sanitizing fluids.
      This market niche should allow us to exploit the fact that our non-toxic
      products are more effective than most toxic chemical treatments at typically
      used concentration levels. The quantity of electrolyzed sanitizing fluids can
      be
      metered, and the user of the generator will either pay a set price per unit
      of
      fluid drawn from the generator, or will pay a fee based on the number of units,
      such as animal carcasses, that are treated with our electrolyzed water products.
      As of the date of this Report, generators have been sold on a commercial basis
      as well as continuing trials in multiple new commercial applications.





In
      2005,
      we entered into an agreement with Tyson Foods, Inc., to test our EOW Technology
      and EO Fluids (the **“EOW
      System”** )
      in its
      Shelbyville, Tennessee, poultry processing plant. In March, 2006, our EOW System
      trial was completed. The
      trial yielded significant results in killing salmonella on the
      processed poultry. Independent testing analysis conducted by ABC Research,
      Inc., in Gainesville, Florida, revealed pre-chill microbial reduction was
      significantly below the Food Safety Inspection Service (the enforcement arm
      of
      the USDA; “FSIS”) allowable limit. From these results we have
      successfully completed phase I of our USDA Online Reprocessing (OLR)
      Certification. The EAU Technologies OLR intervention also tested well showing
      a
      statistically significant difference between control and test groups. EAU is
      immediately moving forward into the second phase of USDA testing with two
      unidentified processors. According to the USDA rules EAU can charge for the next two facilities which
      would double as further test sites for On-line Reprocessing approval. Once
      EAU
      receives similar results in these two subsequent trial sites EAU may commence
      a
      full sales effort in this channel. Tyson Foods chose not to go with the
      Empowered WaterTM system due to budgetary constraints based on the pricing model
      presented by EAU.




3





The
      Company has experienced some sales resistance from the multiple industries
      including the poultry industry as the status quo for the industry is to use
      the
      currently available toxic solutions that keep processing plants within
      regulatory limits of the allowable levels of pathogens. Throughout our learning
      process, we found that if a plant is in compliance with the USDA there would
      be
      no reason for that plant to take steps to better its processes if there wasn’t
      some financial benefit of doing so. Due to the state of the industry it would
      take a change in government regulation or policy to make a dramatic change.
      We
      believe on December 22, 2006, that event occurred. The FSIS, a division of
      the
      USDA, sets the public heath performance standards for all raw and processed
      meat, poultry and egg processing standard for the United States. They have
      been
      looking at a process called the “Risk Based Index” platform to regulate these
      industries based on the relative risk a processing facility has. The new system
      allows the FSIS to allocate its inspector’s time at processing plants based on
      the risk each plant presents. For processors with strong processes and
      intervention systems, there would be far less FSIS inspectors on site, thus
      reducing the cost incurred by the plant. We believe that with the success that
      we have achieved in field trials, there is now more than just efficacy and
      positive environmental aspects to our technology that will make our technology
      appealing to the industry.




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





Our
      current product line consists of several different commercial generators varying in volume capacity and active ingredient
      concentrations. The volume and concentration levels vary widely by industry
      and
      application. Commercial generators have an expected lifespan of approximately
      three years. This may lead to recurring sales, creating additional and ongoing
      revenues. We have developed models which would have prices of up to $1,600,000
      although we currently do not have sufficient working capital to produce and
      sell
      each model.





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





The
      versatility of our EOW Technology is unique in the marketplace. Beyond our
      initial focus in our three Primary Markets, our EO Fluids have potential uses
      in
      the following areas: dairy, oyster, and fish processing; and mold remediation.
      The Company produces its electrolyzed fluids through an advanced continuous-flow
      electrolysis process using the basic raw materials of water, electricity, and
      sodium chloride (salt). EAU’s generators produce the following EOW
      Fluids:




4





·
            **Primacide
                A**is
                a disinfecting and sanitizing fluid that kills bacteria; yeast; molds;
                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 millivolt (one thousandth of a volt) ORP (oxidative
                reduction potential) and hypochlorous acid concentration 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
                Department indicated that Primacide A can be used to sanitize and
                wash
                meat carcasses, strawberries, lettuce, cabbage, carrots and other
                vegetables. Surfaces such as floors in hospital operating rooms,
                bench
                tops, treatment tables, cutting boards and other surfaces can be
                effectively sanitized by cleaning with Primacide A. Further tests
                performed at the University of Georgia Poultry Science Department
                have
                established successful and dramatic log reductions of organisms in
                chicken
                chillers and also in in-line spraying. We have filed and received
                patent
                protection for the washing and sanitizing of eggs and expect to receive
                additional patent protection for other uses of Primacide A.





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





***·***
            **Primacide
                C**is
                a product that was developed by the University of Georgia by Dr.
                Yen Con
                Hung and company executives to stabilize acid water (Primacide A).
                This
                process has been submitted for patent protection and is currently
                pending.
                The Company has recently filed an enhancement patent application
                to
                further secure the stabilized acid water technology under its own
                name. We
                hold an exclusive, worldwide license for this patent pending technology
                from the University of Georgia for the life of the patent. This product
                is
                useful in applications ranging from spraying on produce in grocery
                stores
                to consumer products requiring a longer shelf
                life.




5




·
            **Drinking
                Water********-
                Empowered drinking water that is purified either through reverse
                osmosis
                or water softeners, ionized for optimal biological alkalinity (pH
                9.0),
                molecularly-bound stabilized oxygen, enhanced with essential minerals
                and
                electrolytes, and micro-structured for enhanced cellular absorption.
                Empowered Drinking WaterTM can be used either for human or animal
                consumption. We are marketing a bottled Empowered Water as Perfect
                Empowered Drinking WaterTM for human consumption. Trials are currently
                being conducted for using a version of Empowered WaterTM for the health
                benefits in dairy cows.





Zerorez
      Franchising Systems ( **“Zerorez”** )
      is a
      national carpet and surface cleaning company and previously a related party
      to
      the Company. In March 2001, we entered into an exclusive agreement with Zerorez
      and renewed the exclusive nature of the arrangement with Zerorez in December
      2006, which provides that Zerorez franchisees will purchase our EOW Technology
      generators to produce Primacide B for use in their carpet and surface cleaning
      businesses. Zerorez has thirty-one national franchisees.





**Agriculture**





In
      2006
      we made initial sales under the “Exclusive License and Distribution Agreement”
with Water
      Science, LLC, a Florida limited liability company **(“Water
      Science”** )
      principally owned by Esmeralda’s CEO and Chairman of the board of directors, for
      the
      Latin American markets. Water Science is a major shareholder of the Company.
      We
      shipped four P-1200s to Ecuador, Mexico, Columbia and Costa Rica for trials
      and
      Water Science internal use. Water Science is utilizing the technology for its
      own flower and agricultural endeavors. As of December 31, 2006, EAU had five
      completed P-1200 Systems in inventory ready to ship upon receiving destination
      orders from Water Science. EAU received deposits on these systems in 2006.
      While
      waiting for those destination orders, EAU has continuously upgraded the
      technology to accommodate varying local water qualities. Further studies are
      being done as each country that has the Empowered WaterTM technology ramps up for
      their own outside sales efforts.





**Consumer
      Products**




Our
      consumer products currently consist of the following: Perfect Empowered Drinking
      WaterTM, a drinking water that we bottle at our bottling facility located at our
      corporate offices; Perfect Oxygenated Therapy supplement and wellness products,
      formerly marketed under the brand name Aquagen® (as discussed below), and sold
      primarily through the health food and nutraceutical markets. We have continued
      to develop new products utilizing the benefits of Empowered WaterTM.




We
      utilize our in-house sales department to sell the Perfect products to the
      grocery, convenience and, health and natural food products industries. In 2005
      we contracted with MarkEd Solutions, a private company that consults with
      companies to increase sales in the health and natural food stores, to set up
      our
      in-house sales department. We hired two employees to operate the sales
      department. Our in-house sales department is fully operational.




6




In
      2005,
      we changed our brand of Aquagen ® products
      to a new brand name designated “Perfect Oxygenated EssentialsTM.” Thus, our
      Aquagen ® oxygen
      supplement products are marketed as “Perfect Oxygenated Essential, Oxygen
      Supplements.” Because Aquagen ® is a
      proprietary name with a twelve-year history we retained the name
      Aquagen ® on our
      labels, but describe it as the “science” behind the Perfect brand of oxygenated
      products. Our other current Aquagen ® products
      bear similar “Perfect” brand names. We believe that it is more cost-effective to
      brand all of our consumer products under the same name. This will assist our
      marketing efforts in creating a consistent and recognized line of products.
      As
      our Perfect Empowered Drinking Water’s distribution expands, we will be able to
      add our other oxygen-based products to the distribution channels. All of the
      Aquagen ® product
      labels have been changed to leverage the Perfect Empowered Drinking WaterTM label
      acceptance.




Our
      current Perfect Products are as follows:




·
            ***Perfect
                Oxygenated Essentials***TM***Product***s***.***These include Perfect Oxygen EssentialsTM, the regular-strength stabilized
                oxygen supplement, Perfect Oxygen MaximumTM, the maximum-strength
                stabilized oxygen supplement; Perfect Sports DrinkTM, a unique pre-sport
                drink; and the Perfect Colon CleanseTM, a tablet that helps colon wellness
                and detoxifies the intestinal tract. Although these products are
                now sold
                primarily in the heath food markets, we intend to move these products
                into
                mainstream retail and grocery store locations for sale. Also, our
                private
                label business continues to grow and has become an important part
                of our
                overall Aquagen®based product sales.




·
            ***Perfect
                Empowered Drinking Water***TM***.***In
                April 2005, we launched our new bottled drinking water product known
                as
                “Perfect Empowered Drinking WaterTM”
                As of March 30, 2007, our Perfect Water product has been sold in
                approximately 1,200 grocery stores, including stores owned or operated
                by
                large grocery operators such as Associated Foods and several divisions
                of
                the Kroger Company. Kroger has expanded their distribution of the
                product
                to their stores throughout the country. Additionally, our Perfect
                Empowered Drinking WaterTMis
                sold in other outlets such as Wild Oats and independent grocery and
                nutrition store locations across the country. Perfect Empowered Drinking
                WaterTMis
                available for retail sale in approximately 2,000 retail outlets.
                The
                Company has signed agreements to distribute the product in multiple
                IGA
                and Associated regional warehouses.




**Additional
      Agricultural Markets**





We
      are
      investigating the potential to enter these additional agricultural markets:
      soybeans, bananas and tomatoes.





***Soybeans***  -A
      major
      problem affecting the domestic soybean crop is the soybean aphid, an Asian
      soybean pest that invaded the United States in 2000 and transfers soybean rust,
      which can be deadly to the soybean crop. Some pesticides have proven effective
      against soybean rust; however, soybean losses with pesticides in the soybean
      market in 2004 were over $120 million. Although pesticides are often effective
      against agricultural pests, they have deleterious effects to soils, other plant
      life, animal life and the environment.




7





Testing
      has demonstrated that our EOW Technology is an efficacious killer of soybean
      rust. Our Agricultural Products can restore and revitalize soil damaged by
      pesticides used against the soybean aphid.




***Bananas*** - Banana
      “bunchy top virus” is one of the main problems affecting the banana industry. It
      is transmitted by banana aphids, and there is currently no cure for it. The
      only
      solution is to uproot the entire plant and those around it. Plants infected
      at a
      young stage simply do not produce fruit and their leaves shrivel. Plants that
      do
      produce fruit rot and then shrivel. Another significant disease that plagues
      the
      banana plant is Black Sigatoka. The Black Sigatoka is treated by spraying
      dangerous pesticides that damage fish and plants indigenous to the banana
      plantations and the ecosystem. There have been reported instances of severe
      birth defects manifested in habitats in and around the banana fields as well
      as
      sterility, impotence, depression and stomach cancer. The Black Sigatoka also
      kills approximately 25% of the worldwide banana crop annually. Aerial spraying
      and pesticide runoff contaminate water used by workers, their families and
      nearby communities.





In
      testing in Latin America, our EOW Technology has proven effective in killing Black
      Sigatoka as
      well
      as other fungi and bacteria that infest and damage banana crops. Because our
      technology and products are non toxic, there is no negative impact to the
      environment and to communities situated in and around banana plantations.





The
      Company believes that its technology is a solution to Black
      Sigatoka and
      other
      bacteria, and that it is more effective than current pesticides, without the
      residual dangerous and unacceptable environmental, social and medical side
      effects.





***Tomatoes*** -- “Late
      blight” is a fungus that infests tomatoes in the United States. It is not
      harmful to humans but can destroy entire tomato fields in one week. The fungus
      rots the tomato first and then the plant dies. Our EO Fluids and EOW Technology
      have been tested to be effective in containing and eliminating this
      fungus.





**Other
      Markets, Products and Industries**





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







***Mold
      Remediation -*** Mold
      remediation is a multi-billion dollar industry that consists of home and
      commercial cleanup and reconstruction, generally following disasters such as
      floods or fires. The Company believes that its technology can be used for mold
      remediation. The Company’s electrolyzed fluids can be employed to “physically”
kill mold spores and break down associated mycotoxins.




8




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




***Fish
      Processing*** -- We
      believe that our EOW Fluids are an excellent sanitizer in seafood processing
      houses. Initial tests were conducted on fish in the Cook Islands and were
      effective. We will proceed into this market when we are solidly placed in the
      poultry and beef processing industries.




***Grocery
      Store Produce and Meat Departments --*** We are
      currently installed in four Whole Foods Market (WFM) stores in the South Region.
      These stores are using the Empowered WaterTM in three areas of the store: floral,
      fresh cut produce and leafy vegetable rinse area. Empowered WaterTM may also be
      used by grocery store meat departments as a cleaning agent and disinfectant
      on
      cutting surfaces where multiple products, such as beef, poultry and seafood
      are
      cut and packaged, and where cross contamination commonly occurs. Using our
      electrolyzed fluids, a store’s processing machinery and floor surfaces can be
      cleaned and sanitized without the use of toxic chemicals. We intend to watch
      this market carefully during this next year and if further entry is fiscally
      sound, we plan to dedicate some resources to further exploration of this
      market.




***Dairy
      -*** The
      Company commenced hydration and production tests on dairy cattle in 2006.
      Initial results indicate a possible increase in milk production and milk fat
      while maintaining the protein content. The Company has expanded its investment
      into the application of its technology in the dairy channel. Multiple trials
      and
      University studies are being either planned or implemented to validate early
      results. EAU plans a full rollout at the end of the trials.





**Markets
      and Distribution**





We
      presently market our existing products in our identified market channels
      (poultry processing, agriculture and consumer products). Future plans include
      enhancing our current products, and introducing new products and features to
      meet changing customer requirements and evolving industry standards, as
      opportunities arise and are fiscally reasonable. Our present products are based
      on the use of EOW Technology, to kill bacteria, viruses and fungus and to clean
      the living environment without the use of harsh chemicals. Our agricultural
      products stimulate plant growth and animal productivity.





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




9





Our
      Agricultural Products also provide an organic alternative at a reasonable price. Our
      solutions provide an ecologically safe alternative to toxic cleaning chemicals
      and pesticides. We have identified a large number of potential markets for
      our
      products within specific industry channels, but will focus initially on
      developing and marketing in the protein processing, agricultural and consumer
      product industries.





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





**Manufacturing
      and Sources of Supply**





We
      manufacture and or assemble contractually manufactured specialized parts in
      our
      Kennesaw facility. We utilize contract labor both internally as well as
      externally for certain aspects of the manufacturing and assembly process until
      demand for our technology increases to a level necessary for further investment.
      Eventually we will outsource to third parties the majority of manufacturing
      and
      assembly of electrolyzed water generator components that comprise our EOW
      Technology. In the future, outsourcing more of the Empowered Generator
      manufacture and assembly will enable us to benefit from the manufacturing
      capabilities of those who can accommodate significant increases in production
      volume as necessary. However, as of the date of this Report, we do not intend
      to
      enter into any single long-term contract related to generator manufacture.





We
      manufacture our Prefect Empowered Drinking Water TM, as well
      as our Perfect Oxygenated Essential TM products
      in our Lindon, Utah plant.




**Distribution**





Currently,
      we coordinate the distribution and shipping of our consumer products from our
      headquarters in Lindon, Utah. In the past, we have taken custody of generators
      after their manufacture by subcontractors and have 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 and third party distributors with established
      distribution channels to assist with the marketing of our products.




10





We
      assemble and distribute our Empowered WaterTM generators from our company
      facility plant in Kennesaw, Georgia.




**Competition**





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




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





**Governmental
      Regulation**





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





The
      active ingredient in our Primacide A and C fluid is electrolytically generated
      hypochlorous acid. This, in addition to the oxidation-reduction potential of
      positive 1,150 millivolts plus, and a low pH makes Primacide A and C effective
      disinfectants. We have established that our particular method of
      creating  hypochlorous
      acid through the electrolysis process is generally recognized as safe for
      indirect food contact and food contact surfaces.




11





We
      have
      submitted a request to the EPA to confirm that our commercial fluid generator
      is
      a pesticide device, and are awaiting their response. The EPA indicated that
      even
      though our generator is exempt from an antimicrobial type registration, we
      are
      required to register it with the EPA annually. We intend to obtain required
      EPA
      and FDA approvals for our consumer products. We utilize our internal regulatory
      specialists as well as outside consultants to ensure this process is completed
      properly and competently.





**Trademarks
      & Proprietary Rights**





The
      name
      Primacide is registered with the U.S. Patent and Trademark Office. The names
      “Empowered Water,” EAU Technologies, Inc., “Electric Aquagenics Unlimited,”
“Aquagen,” “Perfect Empowered Drinking Water,” “Perfect Oxygenated Essentials,”
“Oxytime+”, “Oxyzone”, “Perfect Oxygen Therapy”, and “Perfect Oxygenated
      Supplements” are some of our trademarks.





We
      have
      filed several provisional utility patent applications with the U.S. Patent
      and Trademark Office. Two patents have been issued (for carpet cleaning and
      egg
      sanitization) while others are in pending or application status. We have entered
      into an exclusive license for certain stabilized acid water (Primacide C)
      technology developed by the University of Georgia. Two other patent applications
      that have been filed by us involve stabilizing our Primacide C product and
      a
      process application for poultry processing.





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





**Research
      and Development**




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




·
            generate
                electrolyzed water that has a longer shelf life;


·
            sanitize
                agricultural products;


·
            enhance
                current products for further use in carpet
                cleaning;


·
            sanitize
                and disinfect hard and soft
                surfaces;


·
            provide
                superior personal care products;


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


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





12




Our
      research and development expenditures totaled $348,923 in 2006, $1,172,027
      in
      2005 and $405,397 in 2004.









**RISK
      FACTORS RELATING**


**TO
      OUR BUSINESS**





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





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





We
      have
      received a report from our independent auditors on our financial statements
      for
      fiscal years ended December 31, 2006 and 2005. The footnote to our financial
      statements list factors, including recurring losses since incorporation, which
      raise some doubt about our ability to continue as a going concern.





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





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





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





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





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




13





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





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





Currently
      we do not use independent parties to distribute or place our generators. We
      do
      not expect to use outside distributors to market or sell our products in the
      next 12 months. We may not be able to sell our products effectively if our
      management does not have adequate time and resources to conduct our distribution
      activities. Moreover, as our sales grow, the strain on our management to sell
      and distribute products may increase. In the event that we decide to retain
      distributors, we may not be able to establish relationships with distributors.
      In addition, we may incur additional costs and business delays and interruptions
      in sourcing distributors.





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





Our
      cash
      requirements may vary materially from those now planned because of results
      from
      marketing efforts, relationships with suppliers, changes in the direction of
      our
      business strategy, competitive and technical advances for electrolyzed water
      as
      a sanitizer. We may not be able to continue to improve or develop successful
      electrolyzed water products. In addition, it may be more costly than anticipated
      to develop new products. We may incur costs necessary to comply with
      governmental requirements. For example, we may be required to get approval
      from
      the U.S. Food and Drug Administration for our current or planned products.
      We
      may require substantial additional funding for our operating expenses and for
      marketing and sales programs. Adequate funds for these purposes may not be
      available when needed or on acceptable terms.








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





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





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





14


-
            Our
                ability to attract and retain
                customers;





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





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





-  Delays
      in
      developing and introducing new products;





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





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





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





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





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





Our
      success depends in part upon our ability to protect our intellectual property.
      We rely on a combination of trade secret, trademark, and contractual protection
      to establish and protect our proprietary rights. We are also applying for patent
      protection from the United States governments, but do not own patents on
      products that we intend to launch in the next 12 months. We may enter into
      confidentiality agreements with employees and consultants involved in product
      development or distribution. Despite efforts to protect proprietary rights
      through confidentiality and license agreements, unauthorized parties may attempt
      to copy or otherwise obtain and use our products or technology. Precautions
      may
      not prevent misappropriation or infringement of our intellectual property,
      or
      independent third-party development of competitive products.





**Our
      products are not patented which creates vulnerability to
      competitors.**





We
      have
      been assigned rights to applications submitted to the U.S. Patent and Trademark
      Office for a utility patent relating to the use of our electrolyzed acidic
      fluid
      to sanitize eggs, and a second patent relating to the use of our electrolyzed
      alkaline fluid to clean and sanitize carpets and hard surfaces. The active
      ingredient in the sanitizing fluids that are created by our generator products
      is electrolyzed water that kills bacteria, viruses and molds shortly after
      contact. We did not create the concept of electrolyzed water as a sanitizer
      and
      cleaner and other companies may purchase machines to create electrolyzed water
      or develop machines to create electrolyzed water and compete with us. Such
      competition could have a harmful effect on our business.




15





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





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





**We
      have material weaknesses in our internal control over financial reporting which
      could have a material adverse effect on our business and a negative impact
      on
      our stock price.**





In
      our
      preparation of the consolidated financial statements for the year ended December
      31, 2005, management identified material weaknesses in our internal control
      over
      financial reporting that existed as of December 31, 2005, which resulted in
      errors in our 2005 financial statements and required a restatement of our
      consolidated financial statements for year ended December 31, 2004, which
      restatement appeared in the Company's annual report on Form 10-KSB for the
      period ended December 31, 2005. Additional errors were discovered subsequent
      to
      the filing of our Annual Report on Form 10-KSB. A material weakness is a control
      deficiency, or combination of control deficiencies, which results in more than
      a
      remote likelihood that a material misstatement of the annual or interim
      financial statements will not be prevented or detected. See Item 8A of this
      Form
      10-KSB for a description of these material weaknesses.




Although
      we are currently in the process of implementing remediation measures to correct
      these material weaknesses, we can provide no assurance that we will be
      successful in these efforts or that the remediation measures will result in
      our
      having adequate internal control over financial reporting in the future. In
      addition, we cannot assure you that we will not in the future identify further
      deficiencies or weaknesses in our internal control over financial reporting.
      If
      we are unable to adequately remediate our material weaknesses and maintain
      an
      effective system of internal control, our ability to timely and accurately
      report financial results may continue to be adversely affected, which could
      have
      a material adverse effect on our ability to operate our business. Any failure
      to
      file periodic reports on a timely basis could have many consequences, including:
      actions by the SEC against us for failure to comply with applicable Federal
      securities laws; our inability to use certain short form registration
      statements; and our potential inability to comply with contractual obligations
      relating to the registration of securities. In addition, we may incur
      substantial costs in connection with these remediation measures and the
      implementation of such measures may distract management from its ordinary
      business functions.




16




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





The
      Sarbanes-Oxley Act of 2002 (the Act) introduced new requirements regarding
      corporate governance and financial reporting. Among the many requirements is
      the
      requirement under Section 404 of the Act for management to annually assess
      and report on the effectiveness of our internal control over financial reporting
      and for our registered public accountant to attest to this report. The SEC
      has
      modified the effective date and adoption requirements of Section 404
      implementation for non-accelerated filers, such as us, such that we are first
      required to issue our management report on internal control over financial
      reporting in our annual report on Form 10-KSB for the fiscal year ending
      December 31, 2007. We will be required to dedicate significant time and
      resources during fiscal 2007 to ensure compliance. The costs to comply with
      these requirements will likely be significant and adversely affect our operating
      results. In addition, there can be no assurance that we will be successful
      in
      our efforts to comply with Section 404. Failure to do so could result in
      penalties and additional expenditures to meet the requirements, which could
      affect the ability of our auditors to issue an unqualified report (currently
      required by December 31, 2008) which, in turn, may further adversely
      affect our business and operating results.





**Convertible
      promissory notes and stock purchase warrants that we issued may subject us
      to
      liability under Sections 5 and 12 of the Securities Act of 1933 if they are
      deemed unregistered securities sold without an exemption.**





Convertible
      promissory notes totaling approximately $82,214 along with warrants issued
      to
      Castle Arch Bridge Fund, L.L.C. and Charles and Donna Bergh, in 2002 may not
      be
      deemed exempt transactions under Section 4(2) of the Securities Act of 1933
      and,
      therefore, would expose us to potential liability under Sections 5 and 12 of
      the
      Securities Act of 1933 and state blue sky laws. Actions disputing the legality
      of the issuance could be brought in state or federal courts by the SEC, state
      agencies or the security holders. Damages in the event the sale of the
      convertible promissory notes are held not to be exempt transactions could
      include court ordered disgorgement of the $82,214 note proceeds, payment of
      interest to the holders of the securities for the period we held the $82,214,
      and court fees and costs awarded to the holders of those
      securities.




**We
        may incur additional costs to address federal and state tax compliance
        issues.**
 
 Management
        has determined that the Company owes taxes with respect to certain stock
        options
        and warrants granted for services provided to the Company. This tax liability
        is
        due to the Company’s failure to satisfy withholding tax obligations when options
        were exercised and to timely amend certain options to comply with the applicable
        requirements of Section 409A of the Code. Management is reviewing all options
        and warrants with professional tax advisors to determine the proper treatment.
        However, based on the present estimate of this tax liability, the Company
        has
        accrued a liability in its financial statements of $82,000 for these taxes.
        The
        Company’s estimate assumes that a significant discount may be utilized in
        determining the fair market value of the Company’s stock for purposes of
        calculating the applicable employment taxes owed by the Company based on
        factors
        such as lack of marketability or restrictions on trading. If this position
        were
        challenged successfully by the Internal Revenue Service, the Company’s actual
        tax liability may be greater. The Company has estimated its maximum potential
        tax liability attributable to the options to be up to $168,000.




17





The
        Company has also determined that it may owe additional taxes with respect
        to
        compensation paid to certain former officers in 2005 and 2006. The Company
        classified these former officers as independent contractors for federal and
        state tax purposes. If the Company’s classification of these former officers as
        independent contractors were challenged successfully, the Company would be
        liable for underpayment of federal and state employment taxes. Based on the
        present estimate of this tax liability, the Company has accrued a liability
        in
        its financial statements of $118,000. This estimate assumes that the Company
        may
        reduce its tax liability for the income and self-employment taxes paid by
        these
        former officers on the compensation received from the Company. If the Company
        is
        unable to reduce its tax liability for taxes paid by these former officers,
        the
        Company’s actual tax liability attributable to this issue may be greater. The
        Company has estimated its maximum potential tax liability attributable to
        this
        issue to be up to $356,000.
 
 Management
        has determined that certain stock options and warrants granted for services
        may
        not have been properly treated for income tax withholding purposes. Management
        is reviewing all granted options and warrants with professional tax accountants
        to determine the proper treatment. In addition, in the past the Company has
        classified several consultants and officers as independent contractors for
        federal and state tax purposes. This classification could be challenged by
        the
        applicable taxing authorities for some or all of these individuals. The Company
        may incur additional costs associated with addressing these issues, and may
        ultimately have additional tax liability.




**GENERAL
      RISKS RELATING TO THE SANITATION AND CLEANING INDUSTRIES.**





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





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





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





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





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





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





18
 **Our
          success will depend on growth in consumer acceptance of environmentally
          friendly
          sanitizing products as an alternative to chemically based
          products.**


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




**Inability
      to manage growth could hinder our success.**





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





ADDITIONAL
      RISKS RELATED TO OUR COMMON STOCK





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





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





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





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





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




19





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





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





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





**There
      may be additional unknown risks, which could have a negative effect on our
      business.**





The
      risks
      and uncertainties described in this section are not the only ones facing us.
      Additional risks and uncertainties not presently known to us or that we
      currently deem immaterial may also impair our business operations. If any of
      the
      foregoing risks actually occur, our business, financial condition, or results
      of
      operations could be materially adversely affected.





**Employees**




As
      of
      December 31, 2006 we had 25 full-time employees, 2 part-time employees and
      2
      consultants. As our business grows, we anticipate that we will need to employ
      additional project managers, field technicians, salaried clerical staff and
      sales personnel. We believe that our relationships with our employees are good.




**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**





Our
      corporate headquarters are located in leased office space at 1464 W. 40 S.
      Suite
      #200 Lindon, Utah 84042. We also lease office and a manufacturing and assembly
      facility at 1890 Cobb International Blvd, Suite A, B & C, Kennesaw, GA
      30152. We believe that our current offices and other properties 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
      were a
      party to one lawsuit, ***Kirby
      D. Cochran vs. Electric Aquagenics Unlimited, Inc*** .,
      in the
      Third Judicial District Court, Salt Lake County, as action number 050920678.
      This matter related to an alleged breach of contract by the Company. By this
      action, the plaintiff, Kirby Cochran, seeks to enforce a “Settlement Agreement”
(the **“Settlement
      Agreement”** )
      that he
      entered into with the Company, whereby the Company agreed to pay him 24 monthly
      payments of $4,175, for a total payment of $100,200 in settlement for loans
      tendered to the Company and other matters. Mr. Cochran alleges that the Company
      breached the Settlement Agreement in that it did not make timely payments under
      the Settlement Agreement. We have entered into a “Stipulation for Entry of
      Judgment,” (the **“Stipulation”** )
      whereby
      we agreed to pay to Mr. Cochran $83,500 as follows: $25,000 upon the execution
      of the Stipulation (which has been paid), $58,500 on or before September 16,
      2006. All payments required under the Stipulation were paid in full and on
      time.




20




In
      March
      2007, we were served a summons notifying us of a lawsuit that has been started
      against us and Zerorez, a related party, in the King County District Court,
      in
      the State of Washington. This matter involves a product sold and applied by
      a
      franchisee of a related party. The complaint alleges unspecified amounts of
      damages, and treble damages under the Washington Consumer Protection Act. The
      complaint erroneously alleges that Zerorez is owned by the Company. We are
      in
      the early stages of investigating this complaint. The Company intends to
      vigorously defend this matter.




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




There
      were no matters submitted to a vote of stockholders during the fourth quarter
      of
      2006.





**PART
      II**




**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**




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




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





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





On
      May 1,
      2006, the Company sold and issued to Water Science, LLC, a Florida limited
      liability company (“Water Science”), a related party, a total of 1,600,000
      shares of the Company’s $0.0001 par value common stock for a total of $4 million
      cash, or $2.50 per share. The sale of the securities was exempt from
      registration with the Securities and Exchange Commission under Section 4(2)
      of
      the Securities Act of 1933 (the “Act”) and Rule 506 of Regulation D promulgated
      thereunder, in that Water Science is an accredited investor and the placement
      occurred without general solicitation.


21


On
      May 1,
      2006, the Company also issued to Water Science a warrant to purchase up to
      6,400,000 shares of the Company’s $0.0001 par value common stock in exchange for
      the payment of $2.76 per share. The warrant is exercisable for a period of
      three
      years. The holder of the warrant may exercise the warrant as to an aggregate
      of
      up to 500,000 shares by converting a portion of the warrant into that number
      of
      shares determined by dividing (a) the aggregate fair market value of the shares
      issuable upon exercise of the conversion right minus the aggregate purchase
      price of such Shares by (b) $2.76. The warrant can only be exercised as to
      the
      remaining shares by payment of the purchase price in cash. The issuance of
      the
      warrant was exempt from registration with the Securities and Exchange Commission
      under Section 4(2) of the Act and Rule 506 of Regulation D promulgated
      thereunder, in that Water Science is an accredited investor and the issuance
      occurred without general solicitation.





A
      placement fee of $240,000 was paid to SunTrust Robinson Humphrey Capital Markets
      Division (“SunTrust”) in connection with the placement of the 1,600,000 shares
      of common stock. The placement fee was paid to SunTrust pursuant to the terms
      of
      an Engagement Letter dated October 31, 2005 (the “Engagement Letter”) whereby
      SunTrust was appointed as the Company’s exclusive placement agent in connection
      with the sale of securities by the Company. Pursuant to the terms of the
      Engagement Letter, which may be terminated by either party at any time, SunTrust
      is entitled to a placement fee of 6.0% of the gross proceeds received by the
      Company from any sale by the Company of its securities. On December 18, 2006,
      EAU chose to terminate the exclusive client relationship and will seek to engage
      Sun Trust on a case by case basis.





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





On
      October 27, 2006, Electric Aquagenics Unlimited, Inc. (the “Company”) entered
      into an agreement with Peter F. Ullrich, a shareholder of the Company, whereby
      Mr. Ullrich agreed to purchase a total of 2,307,692 newly issued shares of
      $0.0001 par value common stock of the Company for a purchase price of $1.30
      per
      share in a private transaction, for total consideration of $2,999,999.60. Under
      the terms of the agreement, Mr. Ullrich purchased 1,153,846 shares on October
      27, 2006 and purchased the remaining 1,153,846 shares in January, 2007. In
      connection with this sale, the Company paid $30,000 in stock offering
      costs.




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




22





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





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


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


***EAU
                  Technologies*****,
                  Inc. Common Stock****High**
              
              
              **Low****Year
                Ended December 31, 2005**Quarter
                  Ended March 31, 2005
              
              $
              5.75
              
              $
              3.65Quarter
                  Ended June 30, 2005
              
              
              4.70
              
              
              3.25Quarter
                  Ended September 30, 2005
              
              
              4.45
              
              
              2.95Quarter
                  Ended December 31, 2005
              
              
              3.38
              
              
              2.52




23





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





As
      of
      December 31, 2006, the Company had approximately 438 record holders of common
      stock and as of March 30, 2007, the Company had approximately 400 record holders
      of common stock.




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





We
      develop and market equipment and technology that changes the molecular
      composition of tap water to produce non-toxic electrolyzed oxidative fluids
      (marketed under the name “Empowered WaterTM”) used to clean, disinfect,
      remediate, hydrate and moisturize. The processes for which these fluids may
      be
      used are referred to in this report as the “ **EOW
      Technology** .”
Our
      fluids have demonstrated sharp pathogen reduction and cleaning effectiveness
      and
      are intended to be a “green” replacement for many of the traditional methods
      used in commercial, industrial, and household disinfecting and cleaning today.
      This newly commercialized EOW Technology provides a wide range of non-toxic
      solutions for safe living, food safety and will soon offer medical
      alternatives.





Our
      water-based and non-toxic products and services represent an alternative to
      many
      of the traditional methods and products now being used to clean, disinfect,
      remediate, hydrate and moisturize. We have solutions for the existing bacteria,
      virus and mold proliferation threat facing our nation, using what is known
      as
“Green Chemistry.” Green chemistry is an environmental science that aims to
      reduce the amount of hazardous substances used to produce chemical materials
      and
      to reduce the chemical materials proliferated in our environment. The notion
      is
      to create materials to replace toxic chemicals with equal or better efficacy.
      We
      have years of documented test results in the food processing, mold remediation
      and carpet cleaning industries demonstrating cleaning and pathogen killing
      effectiveness. We have identified the following industries for early stage
      sales
      and marketing focus: 1) meat and poultry processing, 2) agricultural grow-out
      and processing and 3) bottled drinking water and consumer products the
      ( **“Primary
      Markets”** ).
      As of
      the date of this Report, the Company was focused on these markets because it
      believes that it has a competitive advantage, a leading strategic industry
      partner, and/or can provide an attractive value-added proposition. To penetrate
      these markets, EAU is leveraging its contacts within each Primary Market. In
      some cases those contacts are from EAU and others come from current partners.
      It
      is unlikely that EAU will need to build a large manufacturing sales and service
      organization. It is the current management’s goal to build traction in its
      Primary Markets and then find industry leaders to partner with to achieve the
      growth goals of the business.





In
      May of
      2006, Gaylord Karren our co-founder and then CEO took ill and stepped down
      from
      all duties with EAU. Jay Potter, a board member since 2005, stepped into the
      role as chairman of the board and interim CEO. Mr. Potter immediately commenced
      finding a search firm to assist in finding a replacement for the CEO position.
      In July of 2006, John Hopkins our co-founder and then President stepped down
      as
      President. Mr. Hopkins continued to assist the Company until January 2007 in
      a
      very limited capacity for clarification and continuity during the transitional
      period. Mr. Hopkins left the board in January 2007. In November, 2006 EAU hired
      Wade Bradley as its CEO. Mr. Bradley brings a wealth of private and public
      company experience to EAU. His focus and direction is already being felt in
      bringing EAU to a point where it can springboard from the “entrepreneurial
      spirit” of its founders to a fast growing operational Company.




24





In
      2006,
      EAU made significant strides in the Empowered WaterTM technology. Working with
      large trial facilities allowed us to see aspects of the technology that we
      believe put us ahead of any competition. With all the scientific documentation,
      we have moved beyond proving the efficacy of the fluids to fine tuning the
      application in the real world. There are a number of competitors that can make
      similar fluids using different types of machines. None of those that we know
      of
      come close to the ability to handle the volumes that are required to make EOW
      Technology a viable business. With the new direction of the Company, our focus
      is on higher volume systems that will require a smaller support staff, while
      generating larger revenue streams. EAU will continue to support our existing
      small machine applications with a very high level of service, but will not
      be
      attempting to proactively grow those channels.




In
      September 2004, we entered into a joint venture agreement with Aquagen
      International, Inc., (“Aquagen”), a Nevada Corporation to develop and market a
      bottled drinking water that included Aquagen’s unique proprietary stabilized
      oxygen product as a principle ingredient; to develop other consumer products
      jointly; and to cross market each companies products. Aquagen’s primary markets
      for its products at that time were health food and neutracuetical stores. On
      December 31, 2004, we purchased the rights to the Aquagen technology and
      substantially all of the assets of Aquagen for a combination of stock,
      forgiveness of debt, and a promissory note, with an aggregate fair market value
      of $1,412,464. This acquisition launched the Company into consumer products. Prior
      to
      2006, the majority of our sales have been to franchisees
      of Zerorez, a carpet cleaning franchisor. In 2006, sales of our consumer
      products both in the domestic and international markets were $789,702 or 41%
      of
      our total sales. This showed an increase of $366,519 or an increase of 87%
      of
      our sales in this channel from 2005. In 2005, sales of our consumer products
      both in the domestic and international markets were
      $423,183 or 63% of our total sales compared to no sales in 2004.





In
      2005,
      we launched our new bottled drinking water product known as “Perfect Empowered
      Drinking Water TM .”
As
      of
      December 31, 2006, our Perfect Water product has been sold in approximately
      1,200 grocery stores, including stores owned or operated by large grocery
      operators. Our Perfect Empowered Drinking Water TM is
      also
      sold in various other outlets. ******




We
      plan
      to continue to develop into other critical areas, particularly in the poultry
      processing and we intend to expand our agricultural markets due to significant
      success in testing our non-toxic products to solve issues in the agriculture
      industry. We have also had very promising results in the dairy industry and
      intend to pursue opportunities in that area.




25





**Critical
      Accounting Estimates**




The
      preparation of financial statements and related disclosures in conformity with
      U.S. generally accepted accounting principles and our discussion and analysis
      of
      our financial condition and results of operations require us to make judgments,
      assumptions and estimates that affect the amounts reported in our consolidated
      financial statements and accompanying notes.  Note 1 of the notes to
      consolidated financial statements in Part II, Item 7 of this
      Form 10-KSB, describes the significant accounting policies and methods used
      in preparation of our consolidated financial statements.  We base our
      estimates on historical experience, current trends, future projections, and
      on
      various other assumptions we believe to be reasonable under the circumstances,
      the results of which form the basis for making judgments about the carrying
      values of assets and liabilities.  Actual results may differ from these
      estimates.  We believe the following to be our critical accounting
      estimates because they are both important to the portrayal of our financial
      condition and results and they require us to make judgments and estimates about
      matters that are inherently uncertain.




Our
      critical accounting policies and estimates include the following:




·
            Revenue
                recognition;





·
            Impairment
                of long-lived assets; and





·
            Allowances
                for doubtful accounts.





*Revenue
      Recognition.* We
      recognize revenue according to the terms of the contract and when title passes
      to the customer or when services are performed in accordance with contract
      terms. The Company provides an allowance for sales returns based on current
      and
      historical experience.





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





*Allowance
      for doubtful accounts.* The
      Company sells its products to large grocery and commercial customers. It
      regularly reviews its aging and reserves for amounts that may be at risk in
      collection. The Company has historically had very few uncollectible
      amounts.





**Commitments
      and Contingencies**




26





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




On
      June
      15, 2006, we entered into a Termination Agreement with Coating Systems
      Laboratories (“CSL”), whereby both parties agreed to terminate the License and
      Distribution Agreement, entered into during February 2005 and the Joint Venture
      Agreement, entered into during August 2005. Included in the termination
      agreement the companies agreed to enter into a future agreement subject to
      further testing of the CSL products, whereby the Company will have exclusive
      rights to purchase and market certain CSL products within a certain territory
      mutually agreed upon by both parties. The parties continue to negotiate towards
      agreed to a new License and Distribution Agreement, whereby the Company will
      have the exclusive right to distribute and sell certain products in North and
      South America.




On
      July
      31, 2006, we entered into a Termination Agreement with KES Science and
      Technology, Inc. (“KES”), whereby both parties agreed to terminate the Exclusive
      Distributor Agreement, entered into during May 2004. Included in the termination
      agreement KES agreed to pay to the Company all amounts currently owed.
      Additionally, the companies agreed that the Company would sell one more EO
      Water
      machine to KES. No additional future sales are anticipated.




In
      November 2005, we entered into a joint venture agreement with Dr. William
      Jackson to market certain of the products he owns and controls that are used
      in
      the agriculture industry (the “Dr. Jackson JV Agreement”). By the terms of the
      Dr. Jackson JV Agreement, we agreed to market and sell certain of his currently
      marketed products, and he agreed to market and sell our EOW Technology and
      EOW
      Systems into the agriculture industry. In August of 2006, the Company and Dr.
      Jackson mutually agreed to cancel the nature of the relationship.




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




27





Management
        has determined that certain stock options and warrants granted for services
        may
        not have been properly treated for income tax withholding purposes. Management
        is reviewing all granted options and warrants with professional tax accountants
        to determine the proper treatment. In addition, in the past the Company has
        classified several consultants and officers as independent contractors for
        federal and state tax purposes. This classification could be challenged by
        the
        applicable taxing authorities for some or all of these individuals. Management
        believes that it is reasonably estimatable and probable that the amount of
        liability to the Company will be $200,000. The Company has estimated the
        potential tax liability as a range between $129,000 and $524,000.




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





Financial
      Position and Results of Operations





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





***Financial
      Position***





The
      Company had $206,094 in cash as of December 31, 2006, compared to $681,348
      at
      December 31, 2005. Our working capital as of December 31, 2006 was $961,230
      compared to $1,089,192 at December 31, 2005. The primary reason for the change
      in our working capital for the year ended December 31, 2006, was a decrease
      in
      cash of $475,254, or 70%, which was offset by an increase in accounts receivable
      of $243,069, or 196%, and from an increase in inventory of $498,361, or 25%.
      The
      Company has received and recorded $697,500 in advance deposits from Water
      Science on machine orders at December 31, 2006. This will be reduced as the
      Company delivers machines on order to Water Science, a related party. Water
      Science, who has exclusive rights to sell our products in South America and
      Mexico is also an affiliate of the Company, by agreement may purchase machinery
      from us at cost plus 25 percent. These deliveries are targeted to occur during
      the second and third quarter of 2007. Long term debt increased 205%, from
      $448,668 at December 31, 2005 to $1,371,091 at December 31, 2006, or $922,423.
      The primary increase is a result of the discount of the Senior Note Payable,
      which was $1,000,000 for the year ended December 31, 2006. At December 31,
      2006,
      our stockholders’ deficit was $3,868,466.





Summary
      of select balance sheet information follows:


December
                  31,
                2006
              
              December
                  31,
                2005Balance
                  Sheet Data:Cash
                  and Cash Equivalents
              
              $
              206,094
              
              $
              681,348Total
                  Current Assets
              
              
              3,077,702
              
              
              2,891,739Total
                  Assets
              
              
              4,929,761
              
              
              5,809,927Total
                  Current Liabilities
              
              
              2,116,472
              
              
              1,802,547Long
                  Term Debt
              
              
              1,371,091
              
              
              448,668Total
                  liabilities and stockholders’ equity
              
              $
              4,929,761
              
              $
              5,809,927




***Results
      Of Operations For The Year Ended December 31, 2006 As Compared To The Year
      Ended
      December 31, 2005***




28




Revenues
      and Net Income - Net revenues for the year ended December 31, 2006, increased
      by
      $1,273,207, or 188%, to $1,949,709, of which $1,124,560 are related party sales,
      compared to revenues of $676,502 for the year ended December 31, 2005. The
      major
      increase in revenues was due to the sales of our EO water machines to Water
      Science, a related party with an exclusive license for Central and South
      America, and the additional increase of our consumer products. Sales to Water
      Science totaled $899,560 or 46% of total revenues. We also recognized $200,000
      in licensing revenues related to the exclusive license granted to Water Science.
      Our other related party sales consist of one small EO water machine to Zerorez
      for $25,000. Consumer product sales were 41% of total sales or $789,702 for
      2006
      compared to $423,183 in sales in 2005.





Our
      cost
      of sales increased by $607,702, to $1,259,514, for the year ended December
      31,
      2006. This is a 93% increase over the $651,812 cost of sales during the year
      ended December 31, 2005. As a percentage of revenues, the cost of sales
      decreased from 96% of revenues during the year 2005 to 65% of revenues during
      the year 2006. This decrease is attributable to the increase in sales of our
      EO
      water machines, which typically has a higher margin than our consumer products.
      We have also been able to develop better cost-effective manufacturing processes
      and procedures.




Our
        net
        loss for the year ended December 31, 2006, was $8,515,357, which is $4,732,893
        less than the $13,248,250 net loss for the fiscal year ended December 31,
        2005.
        This decrease of 36% in the net loss is primarily attributable to the Company’s
        continued efforts to eliminate unnecessary expenses and increase revenues
        (see
        above). The Company was able to decrease general and administrative costs
        significantly (see below). Another significant factor is the non-cash loss
        on
        derivative liability charge of $2,353,716 relating to the Water Sciences
        Note in
        2005 and a gain on the adjustment to fair value of the derivative liability
        of
        $714,404 in 2006.


***General
        and Administrative Expense -*** The
        Company incurred total general and administrative expenses of $7,879,783
        in
        2006, an 18% decrease over the $9,600,091 incurred in 2005. General and
        administrative expenses for 2006 consist primarily of payroll expense
        ($2,838,687), compensation expense, which includes expenses related to stock
        options and warrants ($1,775,583), professional fees ($1,580,618), travel
        related expenses ($358,382), marketing expenses ($169,303), rent ($166,730)
        and
        Insurance expense ($120,333).
 Payroll
          expense for the year ended December 31, 2006, was $2,838,687 as compared
          to
          $1,911,795 in 2005. The increase in payroll expense is due to the accrual
          of a
          potential tax liability, the Company hiring employees who were previously
          engaged as consultants and the hiring of additional workers in anticipation
          of
          increased sales.





During
      the year ended December 31, 2006, we expended $1,580,618 in professional fees,
      which include legal and consulting fees. This was a decrease of $1,933,277
      or
      55%, from the $3,513,895 spent in 2005. This decrease is primarily due to a
      decrease in consulting fees. During 2005, the Company expensed $2,569,479 in
      consulting fees, of which the majority of the fees were to consultants who
      helped the Company raise equity and promote new opportunities. During 2006,
      the
      Company decreased consultant fees by $1,621,114, to $948,365, as the Company
      did
      not require outside consultants to help raise equity.




29





Our
      interest expense increased from $385,057 in 2005 to $1,173,335 in 2006, the
      majority of which related to a $3,000,000 loan to us from Water Sciences. This
      loan has a full discount of $3,000,000 which is being amortized to interest
      expense over the life of the loan. See Note 10 to our audited financial
      statements. This required accounting treatment resulted in our recognizing
      a
      $1,000,000 in interest expense for the year ended December 31, 2006 as compared
      to $291,667 for 2005.




***Research
      and Development -*** Our
      research and development expenses for the year ended December 31, 2006, were
      $348,923, a decrease of $823,104, or a 70%, as compared to $1,172,027 for the
      year ended December 31, 2005. During 2005, we purchased parts for a lower cost
      in volume purchasing, anticipating orders from customers. While we have
      increased sales of our EO machines, we are continually striving to improve
      the
      quality of our machines. Certain key components were upgraded. This has resulted
      in having to strip and recoat the surfaces and change the design in these
      larger, high-volume machines which the Company is pioneering. This stripping
      and
      recoating required expensing these costs to research and development which
      makes
      up approximately 93% of the decrease between the years 2005 and
      2006.




Summary
      of select income statement information follows:


2006
              
              2005
              
              Better
                  (Worse)
              
              Percent
                  ChangeRevenue,
                  net
              
              $
              1,949,709
              
              $
              676,502
              
              $
              1,273,207
              
              
              188
              %Gross
                  profit
              
              
              690,195
              
              
              24,690
              
              
              665,505
              
              
              2,695
              %Operating
                  loss
              
              
              7,762,710
              
              
              10,929,340
              
              
              3,166,630
              
              
              29
              %Net
                  loss
              
              
              8,515,357
              
              
              13,248,250
              
              
              4,732,893
              
              
              36
              %Loss
                  per share
              
              
              0.81
              
              
              1.54
              
              
              0.73
              
              
              47
              %












30


**Liquidity
        And Capital Resources**




At
        December 31, 2006, we had cash and cash equivalents of $206,094, compared
        to
        $681,348 at December 31, 2005. We
        have
        had continuing net losses of $8,515,357 for the year ended December 31, 2006
        compared with net losses of $13,248,250 for the year ended December 31, 2005.
        The net loss per share for the year ended 2006 was $0.81 compared to a loss
        of
        $1.54 per share for the same period in 2005. The decrease is attributable
        to
        increased gross profits, reduced operating expenses and a higher
        weighted-average of shares outstanding during 2006. Our working capital as
        of
        December 31, 2006 was $961,230 for reasons discussed above under financial
        position.


At
      December 31, 2006, the Company’s inventory was $2,502,263, representing an
      increase of 25% from the $2,003,902 on hand at December 31, 2005. T he
      Company is in the process of building machines for Water Science, LLC, a related
      party, and other customers for expected deliveries in the second and third
      quarters in 2007 and has increased its inventory over the December 31, 2005
      inventory levels due to ordering components for these machines.





The
      operating outflow of cash was reduced by the Company issuing warrants and stock
      options in lieu of cash during the quarter of $1,621,991. The Company adopted
      SFAS 123(R), effective January 1, 2006, and now expenses stock options given
      to
      employees. The Company recognized a non-cash increase from the discounting
      of
      the Company’s note payable to Water Science, LLC of $1,000,000. (See Note 10 to
      the Company’s financial statements.) Further, the Company recognized a non-cash
      decrease in the derivative liability of $714,404, due to changes in the
      Black-Scholes value of the liability.





Cash
      flows from investing activities provided the Company $429,862 during the period
      ended December 31, 2006 as compared $8,166 provided for in the same period
      in
      2005. During 2006, the cash flows consisted of net cash receipts of $452,559
      from the sale of our investment in Equilease (See Note 15 to the Company’s
      financial statements), investments in intellectual property and patents of
      $9,870 and purchase of equipment of $54,552. This compares to $433,998 used
      to
      purchase equipment, $135,890 net cash used to purchase notes receivables,
      proceeds of $601,067 related to asset sales and $23,013 used to invest in
      intellectual property and patents for the comparable period in 2005.





Cash
      flows from financing activities provided the Company $5,199,472 and $8,454,686
      for the years ended December 31, 2006 and 2005, respectively. This is primarily
      a result of the Company’s continued sales of its common stock to fund
      operations. The Company raised $5,230,747 and $5,544,282 from the sale of stock
      and $0 and $3,000,000 from the issuance of a note payable for the years ended
      December 31, 2006 and 2005, respectively. This amount was offset by payments
      made on notes payable in the amount of $31,275 and $91,721 in 2006 and 2005,
      respectively.




31





In
      March
      2007, the Company signed a non-binding Letter of Intent with an unrelated third
      party to explore the possible sale of the Company’s Consumer Products division.





Our
      working capital requirements for the foreseeable future will vary based upon
      a
      number of factors, including, our timing in the implementation of our business
      plan, our growth rate and the level of our revenues. We have no commitments
      to
      fund any future capital expenditures. Our current assets, along with cash
      generated from anticipated revenues, will not provide us with sufficient funding
      for the next twelve months. On October 27, 2006, the Company entered into a
      stock purchase agreement with Peter F. Ullrich, a shareholder of the Company,
      whereby Mr. Ullrich agreed to purchase a total of 2,307,692 newly issued shares
      of $0.0001 par value common stock of the Company for a purchase price of $1.30
      per share in a private transaction, for total consideration of $2,999,999.60.
      Under the terms of the agreement, Mr. Ullrich purchased 1,153,846 shares on
      October 25, 2006 and the remaining 1,153,846 shares were purchased on January
      10, 2007. We anticipate that we may need an additional $4,000,000 or more in
      future funding to execute our business plan over the next twelve months.
      Moreover, if we able to expand our sale of EO machines as anticipated, we will
      need significant additional working capital to fund that expansion. We do not
      have arrangements in place to provide us with this funding or any additional
      funding. In light of these circumstances, the ability of the Company to continue
      as a going concern is in substantial doubt.





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




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





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




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





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





The
      Company has evaluated, with the participation of the Company’s principal
      executive and principal financial officers, the effectiveness of the issuer’s
      disclosure controls and procedures (as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2006,
      pursuant to Exchange Act Rule 15d-15. Based upon that evaluation, the principal
      executive and financial officers concluded that the Company’s disclosure
      controls and procedures were not effective at the reasonable assurance
      level.




32





As
      part
      of its regular evaluation of procedures, management, with the assistance of
      the
      Company’s SEC legal counsel, determined that certain disclosure filings,
      including current reports on Form 8-K, were not made in a timely manner.
      Management is working with its legal counsel to ensure that all filings are
      current and properly filed.





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





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





·
            Engaged
                a new independent public accounting firm on March 9,
                2006;


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


·
            Engaged
                a new law firm to advise on S.E.C. issues and
                filings;


·
            Engaged
                an accounting firm (separate from it's auditor) to assist it with
                complex
                accounting issues;


·
            Our
                Chief Financial Officer conducts a quarterly meeting with all senior
                executives to discuss our Internal Controls over Financial Reporting
                and
                Disclosure and review all pertinent matters with such senior executives;


·
            Management
                has reviewed its current systems and decided to purchase and implement
                a
                new general ledger system during 2007 allowing for better internal
                accounting controls.





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





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




**ITEM
      8B.**  **OTHER
      INFORMATION**





**Termination
      of Contract**





33




On
      October 31, 2005 the Company signed an Engagement Letter (the “Engagement
      Letter”) with SunTrust Robinson Humphrey Capital Markets Division (“SunTrust”)
      whereby SunTrust was appointed as the Company’s exclusive placement agent in
      connection with the sale of securities by the Company. Pursuant to the terms
      of
      the Engagement Letter, which may be terminated by either party at any time,
      SunTrust is entitled to a placement fee of 6.0% of the gross proceeds received
      by the Company from any sale by the Company of its securities. On December
      18,
      2006, EAU chose to terminate the exclusive client relationship and will seek
      to
      engage Sun Trust on a case by case basis.





**Unregistered
      Sales of Equity Securities and Use of Proceeds**





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





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





**Termination
      of President**





On
      May
      26, 2006, John Hopkins submitted his resignation as President of the Company
      and
      a member of the board, and the Company and Mr. Hopkins signed a Separation
      Agreement. Under the terms of the Separation Agreement, the effective date
      of
      his resignation as an officer and director was a date determined by the Company
      within 90 days after the date of the Separation Agreement; that date was
      determined as July 26, 2006. However, Mr. Hopkins continued to act as a director
      until January 10, 2007. Mr. Hopkins confirmed his resignation as a director
      to
      the Board of Directors on January 12, 2007. Under the Separation Agreement,
      the
      Company agreed to pay Mr. Hopkins a total of $138,000 in severance pay. The
      Company also granted a stock option to purchase 25,000 shares at a price of
      $1.75 per share.





**PART
      III**





**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a)
      OF THE EXCHANGE ACT**




**Directors
      and Executive Officers**




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





**Name
                and Address**
            **Age**
            **Position
                and Office Held**Wade
                R. Bradley
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            46
            Chief
                Executive Officer; Director




34




Brian
                D. Heinhold
              1464
                W. 40 S., Ste 100
              Lindon,
                UT 84042
            34
            Chief
                Financial OfficerDoug
                Kindred
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            52
            Senior
                Vice President of Manufacturing and Engineering
                ServicesLarry
                Earle
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            38
            Senior
                Vice President of Live ProcessingJoseph
                A. Stapley
              1890
                Cobb International Blvd.
              Kennesaw,
                GA 30152
            38
            Senior
                Vice President of Investor Relations and Business
                DevelopmentJay
                S. Potter
              10509
                Vista Sorrento Pkwy. #300
              San
                Diego, CA 92121
            42
            Interim
                Chairman of the Board; DirectorWilliam
                J. Warwick
              1063
                Ocean Ridge Drive
              Wilmington,
                North Carolina 28405
            71
            DirectorRandy
                K. Johnson
              60
                E. South Temple, Suite 1800
              Salt
                Lake City, Utah 84111
            52
            Secretary





Wade
      Bradley became CEO in November 2006. Brian Heinhold took over as CFO when Warren
      Jaynes resigned in September, 2006. Prior to Mr. Heinhold taking on these
      duties, he was the Company’s controller. Other officers and directors were
      elected and appointed at the annual shareholders meeting and board of directors
      meeting held in September, 2005. The term of office of each officer and director
      is one year or until his successor is elected and qualified.





William
      J. Warwick, an independent board member who is also a member of the Company’s
      audit committee, is an audit committee financial expert as defined in Item
      401(e)(2) of Regulation S-B promulgated by the U.S. Securities and Exchange
      Commission.





Jay
      Potter is currently the sitting Chairman of the Board since Gaylord Karren
      stepped down in May, 2006. Upon Mr. Karen’s resignation, Mr. Potter sat as
      Interim CEO and Chairman of the Board from May, 2006 until November, 2006 when
      Mr. Bradley was hired. Mr. Potter is also a member of the Company’s audit
      committee, is an audit committee financial expert as defined in Item 401(e)(2)
      of Regulation S-B promulgated by the U.S. Securities and Exchange
      Commission.




35




**Biographical
      Information**





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





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





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





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




36





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





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





William
      J. 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 Chairman, Executive
      Advisory Board, Cameron School of Business and a member of the Board of
      Directors of the UNC-W Corporation at the University of North Carolina at
      Wilmington, North Carolina. Mr. Warwick obtained his BSBA from the University
      of
      North Carolina, Chapel Hill, and his MBA from Northwestern University,
      Chicago.





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




37





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.





**Committees**





We
      have
      two (2) committees; a Compensation Committee and Audit Committee. The
      Compensation Committee is comprised of William Warwick and Jay Potter. The
      Audit
      Committee is comprised Jay Potter and Bill Warwick. Bill Warwick is our
      designated financial expert. The Audit Committee held four meetings during
      2006.
      All of the committee members attended and participated in each of the
      meetings.





**Meetings**





The
      Company’s board of directors held ten meetings during the year ended December
      31, 2006. All of the directors attended and participated in each of the
      meetings.





**Compensation
      of Directors**





Directors
      of the Company are not paid a salary. They are reimbursed for their costs
      incurred in attending board meetings. In addition, non-employee members of
      the
      board receive a grant of 10,000 shares of the Company’s common stock for each
      year of service on the board, which shares are restricted for a period of three
      years form the date of grant. For the year ended 2006, two directors earned
      10,000 shares each, they are Jay Potter and William Warwick. The shares have
      not
      been issued as of the date of this report.




38





**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, except as set forth
      above, we believe that during the fiscal year ended December 31, 2006 all
      Section 16(a) filing requirements applicable to our directors, officers, and
      greater than 10% beneficial owners were completed, except the following: (1)
      each of the following officers and directors failed to file a Form 3 -Larry
      Earle, Brian Heinhold, Doug Kindred, Jay Potter, and Joseph Stapley; (2) each
      of
      the following officers and directors failed to file a Form 4 during 2005 to
      report a grant of stock options - Joseph Stapley, Doug Kindred, and Larry Earle;
      (3) William Warwick failed to file a Form 4 to report a restricted stock grant
      in 2006; (4) each of the following former officers and directors failed to
      file
      any Forms 4 or Forms 5: Gaylord Karren and John Hopkins. All officers and
      directors listed in item 1, 2 and 3 above filed the correct forms as of April
      2,
      2007.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





**Compensation
      of Executive Officers**




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




Name
                and Principal Position
            
            Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Stock
                Awards
              ($)
            
            Option
                Awards
              ($)
            
            Non-Equity
                Incentive Plan Compensation
            
            Change
                in Pension Value and Nonquali-fied Deferred Compensation
                Earnings
              ($)
            
            All
                Other Compensation ($)
            
            Total
                ($)Wade
                R. Bradley (1)
              Chief
                Executive Officer
            
            
            2006
            
            
            40,000
            
            
            0.00
            
            
            0.00
            
            
            63,216
            
            
            0.00
            
            
            0.00
            
            
            1,000
                (4
            )
            
            104,216Jay
                S. Potter (1)
              Chairman
                of the Board, Former Interim Chief Executive Office
            
            
            2006
            
            
            50,000
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            50,000Gaylord
                Karren (1)
              Former
                Chief Executive Officer and Former Chairman of the Board
            
            
            2006
            
            
            53,250
            
            
            0.00
            
            
            0.00
            
            
            30,640
            
            
            0.00
            
            
            0.00
            
            
            146,550
                (2
            )
            
            224,890


39


John
                Hopkins Former President
            
            
            2006
            
            
            72,250
            
            
            0.00
            
            
            0.00
            
            
            20,707
            
            
            0.00
            
            
            0.00
            
            
            71,710
                (3
            )
            
            153,457Doug
                Kindred
              Senior
                Vice President, Manufacturing
            
            
            2006
            
            
            120,000
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            8,884
                (4
            )
            
            128,884Larry
                Earle
              Senior
                Vice President, Live Processing
            
            
            2006
            
            
            120,000
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            5,351
                (4
            )
            
            125,351James
                Thatcher
              Senior
                Vice President, Consumer Products
            
            
            2006
            
            
            120,000
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            5,000
                (4
            )
            
            125,000Joe
                Stapley
              Senior
                Vice President, Investor Relations
            
            
            2006
            
            
            120,000
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            0.00
            
            
            3,920
                (4
            )
            
            123,920




(1)
              In
                  May 2006, Mr. Karren resigned from all of his positions with the
                  Company.
                  Mr. Potter, a member of the Board of Directors agreed to act as
                  interim
                  Chief Executive Officer until a permanent CEO was retained. In
                  October
                  2006, the Company hired Mr. Bradley to serve as Chief Executive
                  Officer.





(2)
            Pursuant
                to Mr. Karren’s resignation the Company agreed to pay a severance of
                $138,000 that was paid over six months. The last payment to Mr. Karren
                was
                in December 2006 Amounts also include a $3,000 entertainment allowance
                and
                car allowances of $5,500.





(3)
            Pursuant
                to Mr. Hopkins’ resignation the Company agreed to pay a severance of
                $138,000 that was paid over six months. The Company still owed $80,500
                to
                Mr. Hopkins at December 31, 2006. Amounts also include a $3,000
                entertainment allowance and car allowances of
                $11,210.





(4)
            Other
                Compensation includes amounts paid for a car
                allowance.




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





The
      following table sets forth information regarding stock options and restricted
      stock held by the Company's Named Executive Officers at December 31,
      2006.





Option
                AwardsName
            
            Number
              of
                Securities Underlying Unexercised Options
              (#)
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options (#)
              Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration DateWade
                R. Bradley (1)
            
            -
            
            500,000
            
            -
            
            1.30
            
            11/6/2016Jay
                S. Potter (2)
              Interim
                Chairman of the Board
            
            
            30,000
              30,000
              20,000
              20,000
              20,000
              10,000
              10,000
              10,000
              10,000
              10,000
              5,000
              5,000
            
            
            -
            
            
            -
            
            
            3.00
              2.50
              0.01
              0.01
              0.50
              1.00
              1.50
              2.00
              2.50
              3.00
              4.00
              5.00
            
            
            7/16/2007
              11/15/2007
              1/15/2010
              2/1/2010
              2/15/2010
              3/1/2010
              3/15/2010
              4/1/2010
              4/15/2010
              5/1/2010
              5/15/2010
              6/1/2010Gaylord
                Karren (2)
              Former
                CEO and Founder
            
            
            25,000
            
            
            -
            
            
            -
            
            
            2.10
            
            
            5/25/2010Doug
                Kindred (2)
              Senior
                Vice President, Manufacturing
            
            
            150,000
              150,000
            
            
            -
            
            
            25,000
            
            
            0.01
              1.50
              3.50
            
            
            1/2/2008
              1/2/2008
              5/27/2015Joseph
                Stapley (2)
              Senior
                Vice President, Investor Relations
            
            
            
            
            
            -
            
            
            25,000
            
            
            3.50
            
            
            5/27/2015Larry
                Earle (2)
              Senior
                Vice President, Live Processing
            
            
            75,000
            
            
            -
            
            
            25,000
            
            
            0.01
              3.50
            
            
            6/1/2015
              5/27/2015John
                Hopkins (2)
              Former
                President & Founder
            
            
            25,000
            
            
            -
            
            
            -
            
            
            1.80
            
            
            7/25/2010




40




(1)
            Mr.
                Bradley’s options vest over a term of three years. See below under
                Employment Agreements.





(2)
            All
                outstanding options are fully
                vested.




**Employment
      Agreements**




As
      of
      December 31, 2006, 4 executives had current employment agreements (the **“Agreements** ”).
      The
      agreements, with the exception of Wade Bradley (entered into in November 2006);
      all were entered into during the second quarter of 2005. The Agreements are
      each
      for a two (2)-year term and allow for the employees to share in bonus and profit
      sharing plans if any are established in the future. The Agreements provide
      for a
      base salary of $120,000 per year. The Agreements also provide for severance
      payments upon termination for any reason other than “cause,” as defined in the
      Agreements. The amount of severance is equal to the aggregate base salary
      payments for a period of the longer of the remainder of the term of the
      Agreement or 24 months from the date of termination. The employees that have
      this employment contract are identified as follows:





Douglas
      Kindred


Larry
      Earle


Joseph
      Stapley




41





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





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





The
      material terms of the agreement include the following:





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





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





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





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




·
            100,000
                shares shall vest on February 6,
                2007




·
            100,000
                shares shall vest on November 6,
                2007




·
            100,000
                shares shall vest on November 6,
                2008




·
            100,000
                shares shall vest on November 6,
                2009




·
            100,000
                shares shall vest on November 6,
                2010




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




42





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




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





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





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





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




·
            Salary.
                Any unpaid base salary through the date of
                termination.





·
            Vacation.
                Any earned but unused vacation
                time.





·
            Severance
                Payment.He
                will be entitled to an amount equal to twelve months of base salary
                payable over the 12-month period immediately following
                termination.





·
            To
                secure the Company’s obligation to make the Severance Payment, within
                seven days after the Effective Date, the Company shall deposit, at
                its
                election, either (1) cash in the amount of Two Hundred Forty Thousand
                Dollars ($240,000) or (2) an irrevocable letter of credit with a
                face
                amount of Two Hundred Forty Thousand Dollars ($240,000), with an
                agreed
                upon escrow agent who shall hold such funds (or letter of credit)
                in
                escrow pursuant to the terms and conditions contained in the escrow
                agreement substantially in the form of Exhibit 10.3 in an 8-K the
                Company
                filed with the SEC dated October 30, 2006. The escrow agreement provides
                different scenarios upon which either the Company or Mr. Bradley
                shall be
                entitled to interest on the escrowed funds.




43




·
            Options.
                All unvested options shall immediately vest and, together with the
                previously vested options, must be exercised during the 60 days
                immediately following the date of termination (and if not so exercised,
                all such options shall automatically and irrevocably
                terminate).




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




**Code
      of Ethics**




The
      Company adopted a Code of Ethics on April 6, 2004, that applies to its principal
      executive officer, principal financial officer, principal accounting officer
      and
      controller or persons performing similar functions. A copy of our Code of Ethics
      was filed
      as
      an exhibit to our Annual Report for the year ended December 31, 2004. The
      Company undertakes to provide to any person, without charge, upon written or
      verbal request directed to 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
      30,
      2007 by:




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




·
            each
                of our directors;




·
            each
                of our named executive officers; and




·
            all
                directors and executive officers as a group.




Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission and generally includes voting or investment power with
      respect to securities, subject to community property laws, where applicable.
      The
      percentage of beneficial ownership is based on 13,467,187 shares
      of
      common stock outstanding as of March
      30,
      2007.




44




**Name
                  and Address of Beneficial Owner**
              
              **Number
                  of Shares**
                **Beneficially
                  Owned**
              
              **Percentage
                  of Shares**
                **Outstanding**Peter
                  Ullrich (1)
                1800
                  NW 89th Place
                Miami,
                  FL 33172
              
              
              14,462,692
              
              
              59.11
              %Water
                  Science, LLC. (1)
                1800
                  NW 89th Place
                Miami,
                  FL 33172
              
              
              14,462,692
              
              
              59.11
              %Wade
                  R. Bradley (2)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              100,000
              
              
              0.74
              %Joseph
                  A. Stapley (3)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              125,000
              
              
              0.93
              %Doug
                  Kindred (4)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              325,000
              
              
              2.36
              %Larry
                  Earle (5)
                1890
                  Cobb International Blvd., Ste 100
                Kennesaw,
                  GA 30152
              
              
              100,000
              
              
              0.74
              %William
                  J. Warwick
                1063
                  Ocean Ridge Drive
                Wilmington,
                  North Carolina 28405
              
              
              160,000
              
              
              1.19
              %Jay
                  S. Potter (6)
                10509
                  Vista Sorrento Pkwy. #300
                San
                  Diego, CA 92121
              
              
              459,905
              
              
              3.32
              %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 (4 persons)
              
              
              15,732,597
              
              
              61.90
              %
 
 (1)
              Mr.
                  Ullrich is the managing director of Water Science, LLC. Mr. Ullrich
                  beneficially owns 3,462,692 shares and indirectly holds warrants
                  to
                  purchase 10,000,000 shares at an exercise price of $2.76 per share
                  and has
                  a convertible note which could be converted into 1,000,000 shares.
                  The
                  warrants and convertible note are held by Water Science,
                  LLC.
  45
  (2)
              Mr.
                  Bradley holds options to purchase a total of 100,000 shares at
                  an exercise
                  price of $1.30 per share.
 
 (3)
              Mr.
                  Stapley beneficially owns 100,000 shares and holds options to purchase
                  a
                  total of 25,000 shares at an exercise price of $3.50 per
                  share.
 
 (4)
              Mr.
                  Kindred holds options to purchase a total of 325,000 shares at
                  exercise
                  prices between $0.01 and $3.50 per
                  share.
 
 (5)
              Mr.
                  Earle holds options to purchase a total of 100,000 shares at an
                  exercise
                  price of $0.01 (75,000 shares) and $3.50 (25,000 shares) per
                  share.
 
 (6)
              Mr.
                  Potter beneficially owns 61,739 shares and holds warrants to purchase
                  a
                  total of 398,166 shares at exercise prices ranging from $0.01 to
                  $5.00 per share.




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





EQUITY
                COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2006Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights (a)
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
                (b)
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column (a))
                (c)Equity
                compensation plans approved by security holders
            
            
            282,500
            
            $
            3.50
            
            
            717,500Equity
                compensation plans not approved by security holders*
            
            
            2,026,666
            
            $
            1.60
            
            
            N/ATotal
            
            
            2,309,166
            
            $
            1.83
            
            
            N/A





(1)
      Equity compensation plans not approved by security holders consist of
      individually negotiated grants of options or warrants to consultants, directors,
      suppliers, vendors and others who provide goods or services to the Company,
      and
      grants of warrants to investors in connection with limited offerings of the
      Company’s common stock.




46




**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




The
      following are certain transactions during the year ended December 31, 2006, 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**




Water
      Science, who has exclusive rights to sell our products in South America and
      Mexico, is a major shareholder of the Company. Water Science by agreement may
      purchase machinery from the Company at cost plus 25 percent. During
      the year ended December 31, 2006, the Company sold four large water generators,
      one small water generator and related parts to Water Science for $660,141. Further,
      the Company has received and recorded $697,500 in advance deposits from Water
      Science on machine orders at December 31, 2006. The Company also sold
      approximately $239,419 in products to an entity related to Water Science. In
      connection with the sales of the machines and products, the Company has recorded
      approximately $219,479 in accounts receivable at December 31, 2006. The Company
      sold two small water generators to Water Science for $34,164 during the year
      ended December 31, 2005.




During
      the year ended December 31, 2006, we sold our products to Zerorez Franchising
      Systems, Inc., a Nevada Corporation in which Gaylord Karren and John Hopkins,
      former officers of the Company, are beneficial owners. 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 approximately
      1% and 15% of
      our
      revenue during the fiscal years ended December 31, 2006 and 2005,
      respectively.





In
      December 2006, the Company entered into an amended exclusive licensing and
      product supplier agreement with Zerorez, an affiliated entity, to provide
      Zerorez with its Primacide water solutions and water generator for its carpet
      cleaning franchisees. The Company is committed to sell to Zerorez the Primacide
      B water generator over the next 5 years under the agreement, ending on December
      31, 2011. The agreement allows for the automatic renewal of the agreement for
      three (3) terms of five year terms, unless both parties agree to the
      cancellation of the agreement. The Company received $25,000 from sales of
      machines to Zerorez in 2006.




The
      Company provided financing for equipment to Zerorez franchisees, which are
      related party entities. These transactions were recorded through Equilease,
      Inc., a wholly owned subsidiary of the Company. During September 2006, Equilease
      was sold to EOWORP, L.L.C. (“EOWORP”), a related party, for the cash value of
      the notes receivable (See Note 15). EOWORP is a shareholder of the Company
      and
      its partners were involved in the management of the Company.




47





In
      September 2005, the Company entered into a Senior Convertible Note with Water
      Science in exchange for $3,000,000. Due to the discount of this note and the
      beneficial conversion feature, the Company has recognized $1,000,000 in interest
      expense and has recorded a gain of approximately $714,404 in the change of
      the
      derivative liability to fair market value for the year ended December 31, 2006.
      The Company recorded a loss of approximately $2,353,716 in the change of the
      derivative liability to fair market value for the year ended December 31,
      2005.





In
      2004,
      the Company engaged Integra Management (“Integra”) to assist the Company in its
      investor relations and other public market related activities. The Company
      paid
      $15,000 and $61,876 to Integra in consulting fees for the years ended December
      31, 2006 and 2005, respectively. The Company also issued Integra warrants to
      purchase 120,000 shares of common stock at exercise prices ranging from $0.01
      per share to $5.00 per share during 2005. The Company also engaged Nexcore
      Capital (“Nexcore”) as its placement agent for two private placement offerings
      in 2005. The Company paid $0 and $724,513 to Nexcore in placement fees for
      the
      years ended December 31, 2006 and 2005, respectively. The Company issued
      warrants to purchase 73,800 and 78,885 shares to Nexcore in connection with
      the
      private placement offerings. The warrants have an exercise price of $5.00 and
      $5.50 per share respectively. Both companies, Integra and Nexcore, are
      controlled by Jay Potter, who serves as the Interim Chairman of the Board of
      EAU.





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




(a)(1)
      Financial Statements





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




Independent
      Auditors’ Report


Balance
      Sheet, December 31, 2006 and 2005


Statements
      of Operations for years ended December 31, 2006 and 2005


Statements
      of Changes of Stockholder Equity for years ended December, 2006 and
      2005


Statements
      of Cash Flow for year ended December, 2006 and 2005


Notes
      to
      Financial Statements





(a)(2)
      Exhibits




**Exhibit
                No.**
            **Identification
                of Exhibit**3(i).1
            Articles
                of Incorporation (incorporated by reference from registration statement
                on
                Form SB-2 filed with the SEC on July 29, 2002)3(i).2
            Certificate
                of Amendment of Certificate of Incorporation (incorporated by reference
                from registration statement on Form SB-2 filed with the Securities
                and
                Exchange Commission on July 29, 2002)3(ii).1
            Bylaws
                (incorporated by reference from registration statement on Form SB-2
                filed
                with the Securities and Exchange Commission on April 24,
                2002).




48




10.1
            Subscription
                Agreement, by and between the Company and Water Science, LLC, dated
                May 1,
                2006 (Incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K,
                dated May 4, 2006)10.2
            Warrant
                Agreement, by and between the Company and Water Science, LLC, dated
                May 1,
                2006 (Incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K,
                dated May 4, 2006)10.3
            Registration
                Rights Agreement by and between the Company and Water Science, LLC,
                dated
                May 1, 2006 (Incorporated by reference to Exhibit 10.3 of the Company’s
                Form 8-K, dated May 4, 2006)10.4
            Amended
                and Restated Exclusive License and Distribution Agreement, by and
                between
                the Company and Water Science, LLC, dated May 1, 2006 (Incorporated
                by
                reference to Exhibit 10.4 of the Company’s Form 8-K, dated May 4,
                2006)10.5
            Engagement
                Letter by and between the Company and SunTrust Robinson Humphrey
                Capital
                Markets Division, dated May 1, 2006 (Incorporated by reference to
                Exhibit
                10.12 of the Company’s Form 10-QSB for the quarter ended March 31,
                2006)10.6
            Consulting
                Agreement by and between the Company and JL Montgomery Consulting,
                LLC,
                dated May 1, 2006 (Incorporated by reference to Exhibit 10.13 of
                the
                Company’s Form 10-QSB for the quarter ended March 31,
                2006)10.7
            Consulting
                Agreement by and between the Company and Brand Velocity, Inc, dated
                March
                28, 2006 (Incorporated by reference to Exhibit 10.14 of the Company’s Form
                10-QSB for the quarter ended March 31, 2006)10.8
            Separation
                Agreement by and between the Company and Gaylord Karren, dated May 26,
                2006 (Incorporated by reference to Exhibit 10.1 of the Company's
                Form 8-K,
                dated June 2, 2006)10.9
            Termination
                Agreement by and between the Company and Coating Systems Laboratories,
                dated June 15, 2006. (Incorporated by reference to Exhibit 10.8 of
                the
                Company's Form 10-QSB for the quarter ended June 30,
                2006).10.10
            Agreement
                by and between the Company and Coating Systems Laboratories, dated
                June
                20, 2006. (Incorporated by reference to Exhibit 10.9 of the Company's
                Form
                10-QSB for the quarter ended June 30, 2006).10.11
            Termination
                Agreement by and between the Company and KES Science and Technology,
                Inc.,
                dated July 31, 2006. (Incorporated by reference to Exhibit 10.10
                of the
                Company's Form 10-QSB for the quarter ended June 30,
                2006).10.12
            Form
                of Employment Agreement dated as of October 24, 2006 with Wade R.
                Bradley.
                (Incorporated by reference to Exhibit 10.1 of the Company's Form
                8-K dated
                October 30, 2006.)10.13
            Form
                of Option Agreement dated as of October 24, 2006 with Wade R. Bradley.
                (Incorporated by reference to Exhibit 10.2 of the Company's Form
                8-K dated
                October 30, 2006.)




49




10.14
            Form
                of Escrow Agreement dated as of October 24, 2006 with Wade R. Bradley.
                (Incorporated by reference to Exhibit 10.3 of the Company's Form
                8-K dated
                October 30, 2006.)10.15
            Equilease
                Stock Purchase Agreement by and between the Company and EOWORP, L.L.C.
                dated September 13, 2006. (Incorporated by reference to Exhibit 10.2
                of
                the Company's Form 10-QSB for the quarter ended September 30,
                2006.)10.16
            Amended
                and Restated License Agreement dated as of January 10, 2007 by and
                between
                Electric Aquagenics Unlimited, Inc. and Zerorez Franchising Systems,
                Inc.
                (Incorporated by reference to Exhibit 10.1 of the Company's Form
                8-K dated
                November 16, 2006.)10.17
            Stock
                Purchase Agreement dated as of January 10, 2007 by and between Electric
                Aquagenics Unlimited, Inc. and Peter Ullrich. (Incorporated by reference
                to Exhibit 10.2 of the Company's Form 8-K dated November 16,
                2006.)10.18
            Separation
                Agreement by and between the Company and John Hopkins, dated May
                26, 200614
            Code
                of Ethics (incorporated by reference from our Annual Report for the
                year
                ende3d December 31, 2004, filed with the Securities and Exchange
                Commission on April 15, 2005).31.1
            Certification
                by Wade R. Bradley under section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                by Brian D. Heinhold under section 302 of the Sarbanes-Oxley Act
                of
                2002.32.1
            Certification
                of Wade R. Bradley pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant
                to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
            Certification
                of Brian D. Heinhold pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.




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




**AUDIT
      FEES**





The
      following table shows the audit fees schedule for the fiscal years ending
      December 31, 2006 and 2005, for professional services rendered for both audit
      firms engaged to audit our annual financial statements and their reviews of
      the
      financial statements included in our Form 10-KSB.





**HJ
                & Associates**2006
            
            2005Audit
                Fees
            
            $
            44,233.00
            
            $
            25,000.00




50




**AUDIT-RELATED
      FEES**





HJ
      did
      not bill us for any audit-related fees in connection with its audit of our
      financial statements for the fiscal years ended December 31, 2006.





**FINANCIAL
      INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES**





For
      the
      fiscal years ended December 31, 2006 and December 31, 2005, HJ & Associates
      did not bill us for, nor performed, any financial information systems design
      or
      implementation. For the fiscal years ended December 31, 2006 and December 31,
      2005, we were not billed for professional services from any other accounting
      firm for information systems design or implementation.





**TAX
      FEES**





HJ
&
      Associates did not bill us for any professional services rendered for tax
      related services for the fiscal years ended December 31, 2006 or 2005.





**ALL
      OTHER FEES**





We
      were
      not billed for any other professional services by HJ & Associates for the
      fiscal years ended December 31, 2006 and December 31, 2005.





**AUDITOR
      INDEPENDENCE**





Our
      Board
      of Directors considers that the work done for us in the year ended December
      31,
      2006 by HJ Associates, LLC is compatible with maintaining HJ Associates, LLC
      independence.





**AUDITOR’S
      TIME ON TASK**





All
      of
      the work expended by HJ & Associates on our December 31, 2006 audit was
      attributed to work performed by HJ & Associates’ full-time, permanent
      employees.




51


**SIGNATURES**





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


EAU
              Technologies,
              Inc.:Dated:
              April 2, 2007
            By:
            /s/
                Wade R. BradleyWade
                R. BradleyChief
                Executive Officer
              (Principal
                Executive Officer) By:
            /s/ Brian D. HeinholdBrian
              D. HeinholdChief
                Financial Officer
              (Principal
                Financial Officer)




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.





By:
            /s/ Wade R. BradleyWade
              R. BradleyChief
                executive officer and member of the board of
                directors.
              Date:
                April 2, 2007 By:
            /s/ Jay S. PotterJay
              S. PotterInterim
                chairman of the board of directors.
              Date:
                April 2, 2007 By:
            /s/ William J. WarwickWilliam
              J. WarwickDirector
              Date:
                April 2, 2007




52







**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**








**REPORT
      AND CONSOLIDATED FINANCIAL STATEMENTS**






DECEMBER
      31, 2006 AND 2005










**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**







**REPORT
      AND CONSOLIDATED FINANCIAL STATEMENTS**







DECEMBER
      31, 2006 AND 2005




***CONTENTS***







PageReport
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Financial StatementsConsolidated
                Balance Sheets
            F-3
                - F-4Consolidated
                Statements of Operation
            F-5
                - F-6Consolidated
                Statements of Changes in Stockholders’ Equity (Deficit)
            F-7
                - F-8Consolidated
                Statements of Cash Flows
            F-9
                - F-10Notes
                to Consolidated Financial Statements
            F-11
                - F-26









REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Board
      of
      Directors


EAU
      Technologies, Inc.


(formerly
      Electric Aquagenics Unlimited, Inc)


Lindon,
      Utah





We
      have
      audited the accompanying consolidated balance sheets of EAU Technologies, Inc.
      (formerly Electric Aquagenics Unlimited, Inc.) as of December 31, 2006 and
      2005,
      and the related statements of operations, stockholders' equity (deficit), and
      cash flows for the years then ended. These consolidated financial statements
      are
      the responsibility of the Company's management. Our responsibility is to express
      an opinion on these consolidated financial statements based on our
      audit.





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
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated 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 financial position of EAU Technologies, Inc. (formerly
      Electric Aquagenics Unlimited, Inc.) as of December 31, 2006 and 2005 and the
      results of their operations and their cash flows for the years then ended,
      in
      conformity with U.S. generally accepted accounting principles.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 16 to the
      consolidated financial statements, the Company’s recurring losses and cash used
      by operations raise substantial doubt about its ability to continue as a going
      concern. Management’s plans concerning these matters are also described in Note
      16. The consolidated financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.







HJ
&
      Associates, LLC


Salt
      Lake
      City, Utah


March
      16,
      2007




F
          - 2


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      BALANCE SHEETS***




***ASSETS***





December
                31,2006
            
            2005CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            206,094
            
            $
            681,348Accounts
                receivable, net
            
            
            134,225
            
            
            122,771Accounts
                receivable - related party, net
            
            
            219,479
            
            
            1,061Pre-paid
                expense
            
            
            15,641
            
            
            -Current
                portion of notes receivable
            
            
            -
            
            
            18,834Current
                portion of notes receivable - related party
            
            
            -
            
            
            63,823Inventory,
                net
            
            
            2,502,263
            
            
            2,003,902Total
                current assets
            
            
            3,077,702
            
            
            2,891,739PROPERTY
                AND EQUIPMENT, net ofaccumulated
                depreciation of $406,919 and $245,211
            
            
            633,477
            
            
            946,702OTHER
                ASSETSNote
                receivable
            
            
            -
            
            
            72,555Note
                receivable - related party
            
            
            -
            
            
            306,829Investments
            
            
            -
            
            
            374,075Intellectual
                property
            
            
            1,191,238
            
            
            1,207,459Deposits
            
            
            27,344
            
            
            10,568Total
                other assets
            
            
            1,218,582
            
            
            1,971,486Total
                assets
            
            
            $4,929,761
            
            
            $5,809,927


The
        accompanying notes are an integral part of these consolidated financial
        statements.




F
          - 3




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      BALANCE SHEETS (CONTINUED)***




***LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)***




December
                  31,2006
              
              2005CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              738,666
              
              $
              1,320,313Accrued
                  expenses
              
              
              560,166
              
              
              346,759Warranty
                  reserve
              
              
              102,362
              
              
              96,800Advance
                  deposits on machine orders - related party
              
              
              697,500
              
              
              -Current
                  portion of long-term debt
              
              
              17,778
              
              
              38,675Total
                  current liabilities
              
              
              2,116,472
              
              
              1,802,547LONG
                  TERM LIABILITIESLong
                  Term Debt,net
                  of current portion
              
              
              79,424
              
              
              157,001Senior
                  Convertible Note Payable - related party, net of discounts
                of
                  $1,708,333 and $2,708,333 respectively
              
              
              1,291,667
              
              
              291,667Derivative
                  liability - related party
              
              
              4,639,312
              
              
              5,353,716Deferred
                  licensing revenue - related party
              
              
              741,667
              
              
              941,667Total
                  Long Term Liabilities
              
              
              6,752,070
              
              
              6,744,051Total
                  Liabilities
              
              
              8,868,542
              
              
              8,546,598STOCKHOLDERS’
                  EQUITY (DEFICIT)Common
                  stock, $.0001 par value; 50,000,000 shares authorized;
                12,313,341and9,322,825issued
                  and outstanding, respectively
              
              
              1,232
              
              
              933Additional
                  paid in capital
              
              
              27,151,279
              
              
              19,838,331Accumulated
                  deficit
              
              
              (31,091,292
              )
              
              (22,575,935
              )Total
                  stockholders’ equity (deficit)
              
              
              (3,938,781
              )
              
              (2,736,671
              )Total
                  liabilities and stockholders’ equity (deficit)
              
              $
              4,929,761
              
              $
              5,809,927






The
        accompanying notes are an integral part of these consolidated financial
        statements.


F
          - 4




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      STATEMENTS OF OPERATIONS***


**For
                  the Year Ended****December
                  31,****2006**
              
              **2005**NET
                  SALES - RELATED PARTY
              
              $
              1,124,560
              
              $
              121,964NET
                  SALES
              
              
              825,149
              
              
              554,538TOTAL
                  SALES
              
              
              1,949,709
              
              
              676,502COST
                  OF GOODS SOLD
              
              
              1,259,514
              
              
              651,812GROSS
                  PROFIT
              
              
              690,195
              
              
              24,690OPERATING
                  EXPENSESDepreciation
                  and amortization
              
              
              224,199
              
              
              181,912Research
                  and development
              
              
              348,923
              
              
              1,172,027General
                  and administrative
              
              
              7,879,783
              
              
              9,600,091Total
                  operating expenses
              
              
              8,452,905
              
              
              10,954,030LOSS
                  FROM OPERATIONS
              
              
              (7,762,710
              )
              
              (10,929,340
              )OTHER
                  INCOME (EXPENSE)Interest
                  expense
              
              
              (1,173,335
              )
              
              (385,057
              )Interest
                  income
              
              
              22,833
              
              
              10,511Gain
                  (loss) on derivative liability
              
              
              714,404
              
              
              (2,353,716
              )Gain
                  on sale of assets
              
              
              72,736
              
              
              2,530(Loss)
                  on investments
              
              
              (374,075
              )
              
              -Other
                  income (expense)
              
              
              (43,408
              )
              
              362,975Total
                  other income (expense)
              
              
              (780,845
              )
              
              (2,362,757
              )LOSS
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              (8,543,555
              )
              
              (13,292,097
              )PROVISION
                  FOR INCOME TAXES
              
              
              -
              
              
              -LOSS
                  FROM CONTINUING OPERATIONS
              
              
              (8,543,555
              )
              
              (13,292,097
              )DISCONTINUED
                  OPERATIONS:Income
                  from operations of discontinued operations (Net of $0 in income
                  taxes)
              
              
              28,248
              
              
              43,847(Loss)
                  on disposal of discontinued operations (Net of $0 in income
                  taxes)
              
              
              (50
              )
              
              -GAIN
                  FROM DISCONTINUED OPERATIONS
              
              
              28,198
              
              
              43,847NET
                  LOSS
              
              $
              (8,515,357
              )
              $
              (13,248,250
              )








The
        accompanying notes are an integral part of these consolidated financial
        statements.




F
          - 5




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      STATEMENTS OF OPERATIONS***


***(Continued)***


**For
                  the Year Ended****December
                  31,****2006**
              
              
              **2005**NET
                  LOSS
              
              $
              (8,515,357
              )
              $
              (13,248,250
              )NET
                  LOSS PER SHARE CONTINUING OPERATIONS
              
              $
              (0.81
              )
              $
              (1.54
              )NET
                  INCOME PER SHARE DISCONTINUED OPERATIONS
              
              $
              0.00
              
              $
              0.00WEIGHTED
                  AVERAGE OF SHARES OUTSTANDING
              
              
              10,541,203
              
              
              8,602,812




The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F
            - 6


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY(DEFICIT)***




**COMMON
                STOCK**
            
            
            **ADDITIONAL**
            
            
            **STOCK****PAID
                IN**
            
            
            **SUBSCRIPTION**
            
            
            **ACCUMULATED****SHARES**
            
            
            **AMOUNT**
            
            
            **CAPITAL**
            
            
            **RECEIVABLE**
            
            
            **DEFICIT**
            
            
            **TOTAL**Balance,
                December 31, 2004
            
            
            7,446,197
            
            $
            745
            
            $
            12,173,124
            
            $
            (2,125
            )
            $
            (9,327,685
            )
            $
            2,844,059Issuance
                of 17,141 shares for cash
            
            
            17,141
            
            
            2
            
            
            59,992
            
            
            ---
            
            
            ---
            
            
            59,994Issuance
                of 10,000 shares for services
            
            
            10,000
            
            
            1
            
            
            47,499
            
            
            ---
            
            
            ---
            
            
            47,500Issuance
                of 5,000 shares for termination of investment
            
            
            5,000
            
            
            1
            
            
            24,999
            
            
            ---
            
            
            ---
            
            
            25,000Issuance
                of 850,000 shares for cash, net of offering costs of
                $355,793
            
            
            850,000
            
            
            85
            
            
            2,721,307
            
            
            ---
            
            
            ---
            
            
            2,721,392Issuance
                of 17,986 shares for conversion of warrants
            
            
            17,986
            
            
            2
            
            
            33,272
            
            
            ---
            
            
            ---
            
            
            33,274Issuance
                of 50,000 shares for services
            
            
            50,000
            
            
            5
            
            
            144,995
            
            
            ---
            
            
            ---
            
            
            145,000Receipt
                of subscription receivable
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            2,125
            
            
            ---
            
            
            2,125Issuance
                of 50,000 shares for conversion of warrants
            
            
            50,000
            
            
            5
            
            
            24,995
            
            
            ---
            
            
            ---
            
            
            25,000Issuance
                of 876,500 shares for cash, net of offering costs of
                $366,885
            
            
            876,501
            
            
            87
            
            
            2,704,535
            
            
            ---
            
            
            ---
            
            
            2,704,622Warrants
                issued for services
            
            
            ---
            
            
            ---
            
            
            1,903,613
            
            
            ---
            
            
            ---
            
            
            1,903,613Net
                loss for the year ended Dec. 31, 2005
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            (13,248,250
            )
            
            (13,248,250
            )Balance,
                December 31, 2005
            
            
            9,322,825
            
            $
            933
            
            $
            19,838,331
            
            $
            ---
            
            $
            (22,575,935
            )
            $
            (2,736,671
            )




The
      accompanying notes are an integral part of these
      consolidated financial statements.


F
          - 7




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY(DEFICIT)***




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




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F
          - 8




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      STATEMENTS OF CASH FLOWS***




Year
                ended December 31,2006
            
            2005**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                loss
            
            $
            (8,515,357
            )
            $
            (13,248,250
            )Adjustments
                to reconcile net loss to net cashused
                in operating activities:Depreciation
            
            
            224,200
            
            
            181,912Bad
                debt expense
            
            
            13,197
            
            
            30,000Common
                stock issued for services
            
            
            255,309
            
            
            217,500Warrants
                issued in lieu of cash
            
            
            1,621,991
            
            
            1,903,613Discount
                of note payable
            
            
            1,000,000
            
            
            291,667Gain
                (loss) on sale of assets
            
            
            72,736
            
            
            (2,530
            )Disposal
                of assets
            
            
            26,091
            
            
            -Loss
                on disposal of discontinued operations
            
            
            50
            
            
            -(Gain)
                loss on investments
            
            
            374,075
            
            
            (362,974
            )(Gain)
                on settlement of debt
            
            
            (14,597
            )
            
            -Changes
                in operating assets and liabilities:Increase
                in accounts receivable
            
            
            (24,651
            )
            
            (101,633
            )(Increase)
                decrease in accounts receivable - related party
            
            
            (218,418
            )
            
            100,000Increase
                in pre-paid expense
            
            
            (15,641
            )Increase
                in inventory
            
            
            (498,361
            )
            
            (1,509,655
            )Increase
                in deposits
            
            
            (16,776
            )
            
            (4,810
            )Increase
                (decrease) in accounts payable
            
            
            (595,701
            )
            
            841,864Increase
                in warranty reserve
            
            
            5,562
            
            
            1,640Increase
                in advance on deposits on machine orders - relatedparty
            
            
            697,500
            
            
            -Increase
                (decrease) in deferred revenue
            
            
            (200,000
            )
            
            941,667Increase
                (decrease) in derivative liability
            
            
            (714,404
            )
            
            2,353,716Increase
                in accrued expenses
            
            
            418,607
            
            
            195,547Net
                cash used in operating activities
            
            
            (6,104,588
            )
            
            (8,170,726
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of property and equipment
            
            
            (54,552
            )
            
            (433,998
            )Proceeds
                from sale of assets
            
            
            456,201
            
            
            601,067Payments
                received from notes receivable
            
            
            13,877
            
            
            20,140Payments
                from (advances to) notes receivable - related party
            
            
            24,206
            
            
            (156,030
            )Intellectual
                property disbursements
            
            
            (9,870
            )
            
            (23,013
            )Net
                cash provided by investing activities
            
            
            429,862
            
            
            8,166CASH
                FLOWS FROM FINANCING ACTIVITIESPayments
                on notes payable
            
            
            (31,275
            )
            
            (91,721
            )Proceeds
                from notes payable
            
            
            -
            
            
            3,000,000Proceeds
                from issuance of common stock, net
            
            
            5,230,747
            
            
            5,544,282Proceeds
                from common stock subscribed
            
            
            -
            
            
            2,125Net
                cash provided by financing activities
            
            
            5,199,472
            
            
            8,454,686NET
                INCREASE (DECREASE) IN CASH
            
            
            (475,254
            )
            
            292,126CASH
                BEGINNING OF YEAR
            
            
            681,348
            
            
            389,222CASH
                END OF YEAR
            
            $
            206,094
            
            $
            681,348




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F
          - 9




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***CONSOLIDATED
      STATEMENTS OF CASH FLOWS*** ***(Continued)***




Year
                ended December 31,2006
            
            2005**Supplemental
                Disclosures of Cash Flow Information**Cash
                paid during the period for:Interest
            
            $
            57,463
            
            $
            62,405Income
                Taxes
            
            $
            -
            
            $
            -**Supplemental
                Disclosures of Non-cash Investing and Financing
                Activities**Common
                stock issued on conversion of liabilities
            
            $
            205,200
            
            $
            -Common
                stock issued for services
            
            $
            255,309
            
            $
            217,500Warrants
                issued for services
            
            $
            1,621,991
            
            $
            1,903,613




The
      accompanying notes are an integral part of these consolidated financial
      statements.




F
          - 10




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





**DECEMBER
      31, 200** **6
      AND 2005**





**NOTE** **1** **- BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES**





***Business
      Description*** - EAU
      Technologies, Inc. (the “Company” or “EAU”), was incorporated on March 6, 2000,
      under the laws of the state of Delaware and commenced operations in September,
      2000 as Primacide, Inc,. On May 10, 2001, the Company changed its name from
      Primacide, Inc., to Electric Aquagenics Unlimited, Inc. On January 17, 2007
      the
      Company changed its name from Electric Aquagenics Unlimited, Inc. to EAU
      Technologies, Inc. The Company is in the business of developing, manufacturing
      and marketing equipment that uses water electrolysis to create fluids. These
      fluids have various commercial applications and may be used in commercial food
      processing organic or non-organic agricultural and consumer products that clean,
      disinfect, remediate, hydrate and moisturize. These products, which the Company
      intends to market nationally and internationally, are for commercial and
      residential use. The Company is a successor enterprise to another company,
      Primacide, LLC, which was founded by certain of the Company’s founders in 1998.
      The Company was organized with an insignificant carrying amount of the assets
      of
      Primacide, LLC. The Company’s financial statements are presented in accordance
      with accounting principles generally accepted in the United States of America.





***Principles
      of Consolidation*** - The
      accompanying financial statements for 2006 were not consolidated. The financial
      statements for 2005, were consolidated and include the accounts of its wholly
      owned subsidiary Equilease, Inc. (“Equilease”), which was sold during 2006 (See
      Note 15). 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. The Company estimates allowances for doubtful accounts
      based on the aged receivable balances and historical losses. The Company charges
      off uncollectible accounts receivable when management estimates no possibility
      of collecting the related receivable.





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





***Property
      and Equipment, and Depreciation*** -
      Property and equipment are recorded at historical cost. Expenditures for
      additions and major improvements that extend the life of the asset are
      capitalized, whereas the cost of maintenance and repairs are expensed as
      incurred. Depreciation is computed on the straight-line method over the
      estimated useful lives of the assets ranging from three to five years.
      Depreciation expense for the years ended December 31, 2006 and 2005 was $224,199
      and $181,912, respectively. In September 2005, the Company pledged all the
      assets of the Company as collateral for the Senior Convertible Note, payable
      to
      Water Science, a related party.





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




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




F
          - 11


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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





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





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





***Advertising
      Costs*** - The
      Company expenses advertising costs as incurred. The Company expensed $169,303
      and $665,091, during the years ended December 31, 2006 and 2005,
      respectively.





***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 Company to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





***Research
      and Development -*** Research
      and development costs are expensed as incurred. Research
      and development expenses for the years ended December 31, 2006 and 2005 were
      $348,923 and $1,172,027, respectively.





***Patents,
      Trademarks and Intellectual Property*** -
      Patents, trademarks and intellectual property, consisting of trade secrets
      and
      formulas, are recorded in accordance with SFAS No. 142. As such, patents and
      trademarks are initially measured based on their fair values. Patents and
      trademarks will be amortized on a straight-line basis over its estimated life.
      Currently, we do not have any patents in force to begin amortizing. Intellectual
      property with indefinite lives is not amortized, but the carrying amounts of
      these assets are reviewed for impairment at least annually. The Company reviewed
      these assets for impairment at December 31, 2006 and determined the no
      impairment was indicated.





***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 being sold 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 which are 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.




F
          - 12


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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





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 SFAS No. 130, *“Reporting
      Comprehensive Income”* (“SFAS
      130"). SFAS 130 establishes standards for the reporting and display of
      comprehensive income or loss, requiring its components to be reported in the
      financial statements. For the year ended December 31, 2006 and 2005, the Company
      had no other component of comprehensive income or loss other than the net loss
      as reported in the statement of operations.





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




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





***Recently
      Enacted Accounting Standards:***  In
      May
      2005, the FASB issued Statement of Financial Accounting Standards No. 154 *“Accounting
      Changes and Error Corrections, an amendment of APB Opinion 20 and FASB Statement
      No. 3,”* which
      changes the requirements for accounting for and reporting on a change in
      accounting principle. This statement is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      We
      believe that the adoption of SFAS No. 154 will not have a material impact on
      our
      results of operations.





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




F
          - 13


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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





In
      June
      2006, the FASB issued Financial Interpretation No. (FIN) 48, “ *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      109* .”
FIN
      48
      prescribes a recognition threshold and a measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This interpretation also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company is currently evaluating
      the
      impact of applying the various provisions of FIN 48.





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





***Reclassification*** **-** The
      financial statements for periods prior to December 31, 2006, have been
      reclassified to conform to the headings and classifications used in the December
      31, 2006, financial statements.





**NOTE
      2 - CONCENTRATIONS OF CREDIT RISK**





The
      Company occasionally maintains cash balances in excess of the $100,000 federally
      insured limit. To date, the Company has not incurred, and the Company’s
      management does not currently expect to incur, any losses associated with its
      cash balances.





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





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





For
      the
      year ended December 31, 2005, sales to three customers, two related parties
      and
      one non-related party, represented approximately 23% of the Company’s total net
      sales. Approximately 83% of the Company’s outstanding receivables were
      attributable to six customers as of December 31, 2005.




F
          - 14




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





**NOTE
      3 - TRADE ACCOUNTS RECEIVABLE**





Trade
      accounts receivable consist of the following at December 31:


2006
            
            
            2005Trade
                Accounts Receivable
            
            $
            159,225
            
            $
            152,771Trade
                Accounts Receivable - Related Party
            
            
            219,479
            
            
            1,061Less
                allowance for doubtful accounts
            
            
            (25,000
            )
            
            (30,000
            )$
            353,704
            
            $
            123,832





Bad
      debt
      expense for the years ended December 31, 2006 and 2005 was $13,197 and $30,000,
      respectively.





**NOTE
      4 - INVENTORIES**





The
      composition of inventories is as follows at December 31:


2006
            
            
            2005Finished
                goods
            
            $
            543,336
            
            $
            531,625Raw
                materials
            
            
            2,375,062
            
            
            1,792,277Allowance
                for obsolete inventory
            
            
            (416,135
            )
            
            (320,000
            )$
            2,502,263
            
            $
            2,003,902





The
      Company has established an allowance for obsolete inventory. Expense for
      obsolete inventory was $121,303 and $299,000, for the years ended December
      31,
      2006 and 2005, respectively, and is included in Cost of Goods Sold.





**NOTE
      5 - PROPERTY AND EQUIPMENT**





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




2006
            
            
            2005Machinery
                and equipment
            
            
            754,921
            
            
            723,870Vehicles
            
            
            4,650
            
            
            127,687Furniture
                and fixtures
            
            
            50,824
            
            
            55,680Leasehold
                improvements
            
            
            230,001
            
            
            284,676Total
                property and equipment
            
            
            1,040,396
            
            
            1,191,913Less:
                accumulated depreciation
            
            
            (406,919
            )
            
            (245,211
            )Property
                and equipment, net
            
            $
            633,477
            
            $
            946,702





F
          - 15


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





**NOTE
      6 - PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY**





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


December
                31,2006
            
            
            2005Patents
                and trademarks
            
            $
            68,380
            
            $
            84,601Intellectual
                property
            
            
            1,122,858
            
            
            1,122,858Net
            
            $
            1,191,238
            
            $
            1,207,459





The
      Company determined that the intangible assets valued at $1,122,858 acquired
      in
      the purchase of Aquagen on December 31, 2004 are not subject to amortization
      based upon the guidance contained in SFAS 142, Paragraph 11, and Appendix A
      related thereto. Specifically, in acquiring the intangible assets, the Company
      reviewed all pertinent factors detailed in SFAS 142 and determined that there
      were no legal, contractual, competitive, economic or other factors that would
      limit the useful life of the intangible assets.





**NOTE
      7 - INVESTMENTS**





During
      2005 and 2004, the Company purchased or acquired 187,038 shares of common stock
      of Zerorez Franchising Systems, Inc. (“Zerorez”), an entity who is controlled by
      former members of EAU management, for $2.00 per share, or total consideration
      of
      $374,075 .
      Because
      Zerorez is a private company and the Company is unable to obtain adequate
      information regarding the value of our shares in Zerorez, the Company has
      determined that the value of each share should be written down to $0 per share
      and a loss of $374,075 was recorded. As of December 31, 2006, the carrying
      value
      of this investment is $0.





In
      April
      2005, the Company sold its investment in Biofilm Strategies Corporation, a
      privately held Delaware corporation (“Biofilm”), consisting of 359,000 shares of
      common stock (the “Shares”), to an unrelated third party for a total
      consideration of $718,000, which was paid in cash at the closing.  The
      Shares represented approximately thirty-six percent (36%) of the total issued
      and outstanding capital stock of Biofilm, and were acquired by the Company
      in
      increments between April 2004 and January 2005 for total cash consideration
      of
      $359,000.  The sale resulted in a gain to the Company of $359,000.
 The reason for the sale was that the Board of Directors of the Company
      determined that the business of Biofilm no longer fit into the Company’s
      strategic plans.





**NOTE
      8 - RELATED PARTY TRANSACTIONS**





***Sales
      to Affiliates -*** Water
      Science, who has exclusive rights to sell our products in South America and
      Mexico, is a major shareholder of the Company. Water Science by agreement may
      purchase machinery from the Company at cost plus 25 percent. During
      the year ended December 31, 2006, the Company sold four large water generators,
      one small water generator and related parts to Water Science for $660,141. Further,
      the Company has received and recorded $697,500 in advance deposits from Water
      Science on machine orders at December 31, 2006. The Company also sold
      approximately $239,419 in products to an entity related to Water Science. In
      connection with the sales of the machines and products, the Company has recorded
      approximately $219,479 in accounts receivable at December 31, 2006. The Company
      sold two small water generators to Water Science for $34,164 during the year
      ended December 31, 2005.





During
      the year ended December 31, 2006, the Company sold one of its small water
      generators to Zerorez for $25,000. Zerorez is an affiliated entity having
      similar shareholders and who was founded by the same individuals who founded
      EAU. Many of the Company’s directors are shareholders of Zerorez. The Company
      had $0 in accounts receivable related to these transactions at December 31,
      2006. The Company also sold approximately $600 in products to Zerorez. The
      Company sold four of its generators to Zerorez for $100,000 and other product
      sales of approximately $22,000 during the year ended December 31, 2005.




F
          - 16




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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





***Notes
      Receivable -*** The
      Company provided financing for equipment to Zerorez franchisees, which are
      related party entities. These transactions were recorded through Equilease,
      Inc., a wholly owned subsidiary of the Company. During September 2006, Equilease
      was sold to EOWORP, L.L.C. (“EOWORP”), a related party, for the cash value of
      the notes receivable (See Note 15). EOWORP is a shareholder of the Company
      and
      its partners were involved in the management of the Company.





***Senior
      Note Payable -*** In
      September 2005, the Company entered into a Senior Convertible Note with Water
      Science in exchange for $3,000,000 (see Note 10). Due to the discount of this
      note and the beneficial conversion feature, the Company has recognized
      $1,000,000 in interest expense and has recorded a gain of approximately $714,404
      in the change of the derivative liability to fair market value for the year
      ended December 31, 2006. The Company recorded a loss of approximately $2,353,716
      in the change of the derivative liability to fair market value for the year
      ended December 31, 2005.





***Licensing
      Fee -*** In
      September 2005, the Company received
      $1,000,000 in exchange for providing Water Science exclusive licensing and
      distribution rights for a five-year term for a specified market area. The
      agreement provides termination rights by Water Sciences and a pro rata refund
      of
      the fee. The Company recognizes the fee on a pro rata basis over the life of
      the
      agreement. The Company recognized $200,000 for the year ended December 31,
      2006.





***Severance*** -
      The
      Company has accrued $80,500 at December 31, 2006, as severance pay to Mr. John
      Hopkins, the Company’s former President.





***Advances*** -
      Periodically throughout the year, the Company advances officers and employees
      cash for certain reimbursable expenses. As of December 31, 2006 and 2005, the
      Company had advances to employees or officers in the amount of $0 and $1,000,
      respectively.





***Employee
      Options*** -
      In
      October 2006, the Company issued 500,000 options to Mr. Wade Bradley, the
      Company’s CEO, pursuant to his employment agreement. The options vest over four
      years and have an exercise price of $1.30 per share. (See Note 12)





***Product
      Supplier Agreement*** ****** -
      The
      Company entered into an amended exclusive licensing and product supplier
      agreement with Zerorez, an affiliated entity, to provide Zerorez with its
      Primacide water solutions and water generator for its carpet cleaning
      franchisees. The Company is committed to sell to Zerorez the Primacide B water
      generator over the next 5 years under the agreement, ending on December 31,
      2011. The agreement allows for the automatic renewal of the agreement for three
      (3) terms of five year terms, unless both parties agree to the cancellation
      of
      the agreement. The Company received $25,000 from sales of machines to Zerorez
      in
      2006.





***Consulting
      and Placement Agent Fees*** - In
      2004, the Company engaged Integra Management (“Integra”) to assist the Company
      in its investor relations and other public market related activities. The
      Company paid $15,000 and $61,876 to Integra in consulting fees for the years
      ended December 31, 2006 and 2005, respectively. The Company also issued Integra
      warrants to purchase 120,000 shares of common stock at exercise prices ranging
      from $0.01 per share to $5.00 per share during 2005. The Company also engaged
      Nexcore Capital (“Nexcore”) as its placement agent for two private placement
      offerings in 2005. The Company paid $0 and $724,513 to Nexcore in placement
      fees
      for the years ended December 31, 2006 and 2005, respectively. The Company issued
      warrants to purchase 73,800 and 78,885 shares to Nexcore in connection with
      the
      private placement offerings. The warrants have an exercise price of $5.00 and
      $5.50 per share respectively. Both companies, Integra and Nexcore, are
      controlled by Jay Potter, who serves as the Interim Chairman of the Board of
      EAU.




F
          - 17




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





**NOTE
      9 - WARRANTY RESERVE**





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


For
                  the Year Ended December 31,2006
              
              
              2005Warranty
                  reserve at beginning of period
              
              $
              96,800
              
              $
              95,160Costs
                  accrued for additional warranties
              
              
              62,000
              
              
              67,000Service
                  obligations honored
              
              
              (56,438
              )
              
              (65,360
              )Warranty
                  reserve at end of period
              
              $
              102,362
              
              $
              96,800





**NOTE
      10 - SENIOR CONVERTIBLE DEBT**





In
      September 2005, the Company entered into a Senior Convertible Note (“the Note”)
      with Water Science, a related party, in exchange for $3,000,000. Pursuant to the
      debt agreement, the Note accrues interest at the rate of 3% per annum and is
      due, principal and interest together, on September 16, 2008. No principal or
      interest payments need to be paid during the loan period. The Note may be
      converted into 1,000,000 shares of the Company’s $0.0001 par value common stock
      prior to the maturity date, and at any time, by the holder at a price per share
      equal to $3.00 per share, subject to certain other conversion adjustments.
      The
      Company granted a security interest in all of the Company’s assets as collateral
      for the loan. In connection with the issuance of the Note, the Company also
      granted a three year warrant to purchase up to two million shares of the
      Company’s $0.0001 par value common stock with an exercise price of $2.76 per
      share. The exercise price of these warrants is to be adjusted if the Company
      should issue stock for less than the original exercise price. Due to this
      feature wherein the conversion price is reset if shares are issued at a price
      less than the fixed conversion price, and pursuant to EITF 00-19, the Company
      has elected to bifurcate the conversion feature from the debt host, and accounts
      for the feature as a derivative liability with changes in fair value being
      recorded in the income statement. As of December 31, 2006, the value of the
      derivative liability was $4,639,312. For the year ended December 31, 2006,
      the
      Company recorded a gain on derivative liability of $714,404.





**NOTE
      11 - LONG TERM DEBT**





Long-term
      debt consisted of the following at:


December
                31,2006
            
            
            2005Unsecured
                note payable to unrelated third party, payable in monthly installments
                of
                $1,500, including interest of approximately 22%, due October
                2012
            
            $
            48,601
            
            $
            57,186Unsecured
                note payable to unrelated third party, payable in monthly installments
                of
                $1,500, including interest of approximately 22%, due October
                2012
            
            
            48,601
            
            
            54,864Notes
                payable to bank, secured by vehicles, payable in monthly installments
                of
                approximately $2,220, including interest of 7%, due March 2009.
            
            
            -
            
            
            83,626Total
                long term debt
            
            
            97,202
            
            
            195,676Less:
                current portion
            
            
            (17,778
            )
            
            (38,675
            )Long
                term debt
            
            $
            79,424
            
            $
            157,001




F
          - 18




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





**NOTE
      11 - LONG TERM DEBT -** **(continued** **)**





Maturities
      of the notes payable are as follows:





**Year
                Ending December 31,**
            
            **Amount**2007
            
            
            17,7782008
            
            
            20,5722009
            
            
            25,5652010
            
            
            33,2872011
            
            
            -Thereafter
            
            
            -$
            97,202




**NOTE** **12** **- COMMON STOCK**





In
      October 2006, the Company issued 500,000 options to Wade
      R.
      Bradley i n
      connection with the appointment of Mr. Bradley as Chief Executive Officer and
      President. The options are for a term of ten (10) years and have an exercise
      price of $1.30 per share. The options vest over a period of four (4) years. The
      warrants were valued using the Black-Scholes model with the following
      assumptions: risk free rate of 4.71%, volatility at 81.29% and the stock price
      at $1.46. The value of each warrant is approximately $1.25 per warrant. The
      Company recognized $63,216 during the year ended December 31, 2006 as consulting
      expense.





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





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





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





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




F
          - 19




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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





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





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





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





In
      December 2005, the Company completed a private placement offering of 1,000,000
      investment units (“the Units”) consisting of two shares of the Company’s
      restricted $0.0001 par value common stock (the “Shares”) plus one (1) warrant to
      purchase an additional Share, exercisable through December 31, 2010, at an
      exercise price of $3.17 per share. Each Unit was priced at $3.50. Under this
      offering, the Company received proceeds of $2,704,000, net of offering cost
      of
      approximately $366,000.





In
      February 2005, the Company successfully completed an additional private
      placement offering of 850,000 shares of its common stock at $3.50 per share.
      Under this offering, the Company received proceeds of approximately $2,721,000,
      net of offering costs of approximately $356,000, including placement agent
      warrants of 73,800 shares.





During
      the year ended December 31, 2005, the Company issued 67,986 shares of common
      stock for conversion of warrants. The Company received a total of $58,274 in
      payment for the shares, or approximately $0.86 per share.




During
      the year ended December 31, 2005, the Company issued 596,665 warrants to
      purchase common stock in the Company for consulting and advisory services valued
      at approximately $3.19 per warrant, or $1,903,613.





During
      the year ended December 31, 2005, the Company issued 60,000 shares of common
      stock for services valued at approximately $3.21 per share, or
      $192,500.





During
      the year ended December 31, 2005, the Company issued 5,000 shares of common
      stock as settlement in a termination of an investment, valued at
      $25,000.





STOCK
      OPTION PLAN - In February 2005, the Company’s board of directors approved and
      adopted its 2005 Omnibus Stock Option Plan (“the Plan”). Under the plan, the
      Company may issue both Incentive Stock Options to employees only and
      Non-Qualified Stock Options to employees and consultants at its discretion. The
      exercise price of the incentive stock options are 100% of the fair market value
      at grant date. The exercise price of the non-qualified options are at not less
      than 85% of the fair market value at grant date.





F
          - 20




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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





A
      summary
      of the status of the options and warrants granted at December 31, 2006 and
      2005,
      and changes during the years then ended is presented below.


For
                    the Years Ended December 31,2006
                
                
                2005Weighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                AverageExercise
                
                
                
                
                
                ExerciseShares
                
                
                Price
                
                
                Shares
                
                
                PriceOutstanding
                    at beginning of period
                
                
                4,678,293
                
                
                2.77
                
                
                1,005,481
                
                
                2.29Granted
                
                
                7,900,000
                
                
                2.58
                    3,672,812
                
                
                2.66Exercised
                
                
                (75,000
                )
                
                0.01
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -
                
                
                -
                
                
                -Expired
                
                
                (577,500
                )
                
                3.00
                
                
                -
                
                
                -Outstanding
                    at end of period
                
                
                11,925,793
                
                $
                2.57
                
                
                4,678,293
                
                $
                2.58Weighted
                    average fair value ofoptions
                    granted during the period
                
                
                7,900,000
                
                $
                2.50
                
                
                3,672,812
                
                $
                2.66
 A
          summary
          of the status of the options and warrants outstanding at December 31, 2006
          is
          presented below:
 Options
                      and Warrants Outstanding
                  
                  
                  Options
                      and Warrants ExercisableRange
                      of
                  
                  
                  
                  
                  
                  Weighted-Average
                  
                  
                  Weighted-Average
                  
                  
                  
                  
                  
                  Weighted-AverageExercise
                  
                  
                  Number
                  
                  
                  Remaining
                  
                  
                  Exercise
                  
                  
                  Number
                  
                  
                  ExercisePrices
                  
                  
                  Outstanding
                  
                  
                  Contractual
                      Life
                  
                  
                  Price
                  
                  
                  Exercisable
                  
                  
                  Price$.01-.50
                  
                  
                  810,000
                  
                  
                  2.9
                      years
                  
                  $
                  0.08
                  
                  
                  810,000
                  
                  $
                  0.081.00
                      -1.99
                  
                  
                  815,000
                  
                  
                  3.7
                      years
                  
                  
                  1.38
                  
                  
                  315,000
                  
                  
                  1.502.00
                      -2.99
                  
                  
                  8,975,000
                  
                  
                  2.3
                      years
                  
                  
                  2.76
                  
                  
                  8,975,000
                  
                  
                  2.763.00
                      -3.99
                  
                  
                  807,417
                  
                  
                  3.2
                      years
                  
                  
                  3.29
                  
                  
                  807,417
                  
                  
                  3.294.00
                      -4.99
                  
                  
                  255,000
                  
                  
                  2.8
                      years
                  
                  
                  4.00
                  
                  
                  255,000
                  
                  
                  4.005.00
                      - 5.50
                  
                  
                  263,376
                  
                  
                  2.9years
                  
                  
                  5.15
                  
                  
                  263,376
                  
                  
                  5.15$.01-5.50
                  
                  
                  11,925,793
                  
                  
                  2.5
                      years
                  
                  $
                  2.57
                  
                  
                  11,425,793
                  
                  $
                  2.65
  The
          fair
          value of each warrant granted is estimated on the date granted using the
          Black-Scholes pricing model, with the following assumptions used for the
          grants
          during 2006: risk-free interest rate of between 4.60% and 5.02%, expected
          dividend yield of zero, expected lives of three to ten years and expected
          volatility of between 59.76% and 91.21%. The following assumptions were
          used for
          options granted during 2005: risk-free interest rate of between 3.53% and
          4.70%,
          expected dividend yield of zero, expected lives of years and expected volatility
          of between 54.50% and 81.58%.





F
          - 21




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





**NOTE
      13 - INCOME TAXES**





The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes.” SFAS No. 109 requires the Company to provide a net deferred
      tax asset or liability equal to the expected future tax benefit or expense
      of
      temporary reporting differences between book and tax accounting and any
      available operating loss or tax credit carryforwards. At December 31, 2006
      and
      2005, the total of all deferred tax assets was approximately $10,361,000 and
      $7,332,000, respectively, and the total of the deferred tax liabilities was
      approximately $0 and $0, respectively. The amount of and ultimate realization
      of
      the benefits from the deferred tax assets for income tax purposes is dependent,
      in part, upon the tax laws in effect, the Company’s future earnings, and other
      future events, the effects of which cannot be determined. Because of the
      uncertainty surrounding the realization of the deferred tax assets, the Company
      established a valuation allowance of approximately $10,361,000 and $7,332,000
      as
      of December 31, 2006 and 2005, respectively, which has been offset against
      the
      deferred tax assets. The net change in the valuation allowance during the year
      ended December 31, 2006, was $3,029,000.





The
      Company has available at December 31, 2006, unused tax operating loss
      carryforwards of approximately $21,700,000, which may be applied against future
      taxable income and expire in various years through 2026.





The
      components of income tax expense from continuing operations for the years ended
      December 31, 2006 and 2005, consist of the following:


Year
                  Ended December 31,2006
              
              2005Current
                  income tax expense:Federal
              
              $
              -
              
              $
              -State
              
              
              -
              
              
              -Net
                  current tax expense
              
              
              -
              
              
              -Deferred
                  tax expense (benefit) arising from:Excess
                  of tax over financial accounting depreciation
              
              $
              32,024
              
              $
              (30,397
              )Accrued
                  compensation and taxes
              
              
              69,826
              
              
              (28,870
              )Reserve
                  for bad debts
              
              
              1,865
              
              
              (11,190
              )Contribution
                  carryover
              
              
              -
              
              
              (3,581
              )Warranty
                  reserve
              
              
              (2,075
              )
              
              (612
              )Deferred
                  income
              
              
              74,600
              
              
              (351,242
              )Obsolete
                  inventory
              
              
              (35,858
              )
              
              (111,527
              )Compensation
                  (Options)
              
              
              (700,233
              )
              
              (713,405
              )Net
                  operating loss carryforwards
              
              
              (2,468,710
              )
              
              (2,674,798
              )Valuation
                  allowance
              
              
              3,028,561
              
              
              3,925,622Net
                  deferred tax expense
              
              $
              -
              
              $
              -





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





F
          - 22




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***




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





A
      reconciliation of income tax expense from continuing operations at the federal
      statutory rate to income tax expense from continuing operations at the Company’s
      effective rate is as follows:


Year
                  Ended December 31,2006
              
              2005Computed
                  tax at the expected federal statutory rate
              
              
              34.00
              %
              
              34.00
              %State
                  income taxes, net of federal income tax benefits
              
              
              3.30
              
              
              3.30Deferred
                  income
              
              
              (4.16
              )
              
              -Derivative
                  loss
              
              
              3.16
              
              
              (6.63
              )Other
              
              
              (6.02
              )
              
              (1.04
              )Valuation
                  allowance
              
              
              (30.28
              )
              
              (29.63
              )Effective
                  income tax rates
              
              
              0.00
              %
              
              0.00
              %




The
      temporary differences gave rise to the following deferred tax asset (liability)
      at December 31, 2006 and 2005:


2006
              
              2005Excess
                  of tax over book accounting depreciation
              
              $
              (21,025
              )
              $
              10,999Obsolete
                  inventory
              
              
              155,218
              
              
              119,360Accrued
                  compensation
              
              
              6,714
              
              
              76,540Warranty
                  reserve
              
              
              38,181
              
              
              36,106Contribution
                  carryover
              
              
              7,124
              
              
              7,124Deferred
                  income
              
              
              276,642
              
              
              351,242Compensation
                  (options)
              
              
              1,791,837
              
              
              1,091,604Reserve
                  for bad debt
              
              
              9,325
              
              
              11,190NOL
                  carryforwards
              
              
              8,097,009
              
              
              5,628,299




**NOTE** **14** **- COMMITMENTS AND CONTINGENCIES**





**OPERATING
      LEASES**




The
      Company leases two buildings and equipment under various operating leases,
      which
      generally have renewal options of one to five years. Rental Expense for the
      years ended December 31, 2006 and 2005 was $166,730 and $243,813,
      respectively.





Future
      minimum lease payments for the years ending December 31, are as
      follows:


2007
              
              $
              215,5802008
              
              
              177,2342009
              
              
              50,4802010
              
              
              7402011
              
              
              -$
              444,034





F
          - 23




**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***




**NOTE** **14** **- COMMITMENTS AND CONTINGENCIES** **- (continued)**





**LITIGATION**





The
      Company was a party to one lawsuit, Kirby D. Cochran vs. EAU Technologies,
      Inc.,
      in the Third Judicial District Court, Salt Lake County, case number 050920678.
      This matter related to an alleged breach of contract by the Company. The Company
      has entered into a “Stipulation for Entry of Judgment,” (the “Stipulation”)
      whereby it agreed to pay the plaintiff $83,500 as follows: $25,000 upon the
      execution of the Stipulation (which has been paid), and $58,500 on or before
      September 16, 2006. All payments required under the Stipulation were paid on
      time.





**OTHER
      COMMITMENTS**





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





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


Management
        has determined that certain stock options and warrants granted for services
        may
        not have been properly treated for income tax withholding purposes. Management
        is reviewing all granted options and warrants with professional tax accountants
        to determine the proper treatment. In addition, in the past the Company has
        classified several consultants and officers as independent contractors for
        federal and state tax purposes. This classification could be challenged by
        the
        applicable taxing authorities for some or all of these individuals. Management
        believes that it is reasonably estimatable and probable that the amount of
        liability to the Company will be $200,000. The Company has estimated the
        potential tax liability as a range between $129,000 and $524,000.





**NOTE
      15** **- DISCONTINUED OPERATIONS**





In
      September 2006, the Company sold our investment in Equilease, Inc. (“Equilease”)
      to EOWORP, L.L.C., (“EOWORP”) a related party. Equilease provided equipment
      financing for certain Zerorez franchisees, also related parties. The sole assets
      of Equilease were Notes Receivables. The Company was the sole owner of Equilease
      and had consolidated the operations of Equilease into the Company’s books. The
      terms of the agreement called for EOWORP to pay to the Company the current
      value
      of the Notes Receivables held by Equilease. Further, EOWORP agreed to pay off
      other certain payables owed to the Company by Zerorez, a related party. The
      total cash consideration paid to the Company was $452,559. The Company
      recognized income from operations of discontinued operations in the amount
      of
      $28,248 and $36,339 for the years ended December 31, 2006 and 2005,
      respectively. The Company recorded a loss on disposal of discontinued operations
      in the amount of $50.





The
      following is a summary of the results of operations for Equilease:


Year
                  EndedDecember
                  31,2006
              
              2005Interest
                  Income
              
              $
              28,248
              
              $
              43,847Loss
                  on disposal of discontinued operations
              
              
              (50
              )
              
              -Net
                  Income
              
              $
              28,198
              
              $
              43,847




F
          - 24





**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***




**NOTE
        15** **- DISCONTINUED OPERATIONS - (continued)**
 
 The
        following is a summary of the results of operations for Equilease:
  Year
                      EndedDecember
                      31,2006
                  
                  
                  2005Interest
                      Income
                  
                  $
                  28,248
                  
                  $
                  43,847Loss
                      on disposal of discontinued operations
                  
                  
                  (50
                  )
                  
                  -Net
                      Income
                  
                  $
                  28,198
                  
                  $
                  43,847





**NOTE
      16** **- GOING CONCERN**




The
      Company has incurred significant losses and has had negative cash flows from
      operations. As a result, at December 31, 2006, the Company has had a high level
      of equity financing transactions and additional financing will be required
      by
      the Company to fund its future activities and to support its operations.
      Management is seeking to obtain sufficient funding for its operations through
      either debt or equity financing. However, there is no assurance that the Company
      will be able to obtain additional financing. Furthermore, there is no assurance
      that rapid technological changes, changing customer needs and evolving industry
      standards will enable the Company to introduce new products and services on
      a
      continual and timely basis so that profitable operations can be attained. The
      Company’s ability to achieve and maintain profitability and positive cash flows
      is dependent upon its ability to achieve positive sales and profit margins
      and
      control operating expenses. Management plans to mitigate its losses in the
      near
      term through the further development and marketing of its trademarks, brand
      and
      product offerings.





**NOTE
      17 - LOSS PER SHARE**





Basic
      earnings per share is based on the weighted effect of all common shares issued
      and outstanding, and is calculated by dividing net income by the weighted
      average shares outstanding during the period. Diluted earnings per share is
      calculated by dividing net income by the weighted average number of common
      shares used in the basic earnings per share calculation plus the number of
      common shares that would be issued assuming exercise or conversion of all
      potentially dilutive common shares outstanding. At December 31, 2006, the
      Company had outstanding warrants and notes payable convertible into shares
      of
      common stock, which were not used in the computation of loss per share because
      their effect would be anti-dilutive. Dilutive loss per share was not presented,
      as the Company had no common stock equivalent shares for all periods presented
      that would affect the computation of diluted loss per share.


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




For
                  the YearsEnded
                  December 31,2006
              
              2005Loss
                  from operations available toCommon
                  shareholders (numerator)
              
              $
              (8,515,357
              )
              $
              (13,248,250
              )Weighted
                  average number of commonshares
                  outstanding used in loss pershare
                  for the period (denominator)
              
              
              10,541,203
              
              
              8,602,812Loss
                  per share
              
              
              (0.81
              )
              
              (1.54
              )




F
          - 25


**EAU
      TECHNOLOGIES, INC.**


**(** **Formerly
      Electric Aquagenics Unlimited, Inc.)**





***NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS***





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




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


The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006,
      the first day of the Company’s fiscal year 2006. The Company’s financial
      statements as of and for the year ended December 31, 2006 reflect the impact
      of
      SFAS 123(R). In accordance with the modified prospective transition method,
      the
      Company’s financial statements for the prior year have not been restated to
      reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation
      expense recognized under SFAS 123(R) for the year ended December 31, 2006 was
      $1,162,439 related to employee stock options issued and vesting during the
      period. During the year ended December 31, 2005, the Company recognized $602,100
      in compensation expense related to other stock options.





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in our Statement of Operations.
      Stock-based compensation expense recognized in our Statements of Operations
      for
      the year ended December 31, 2006 assumes all awards will vest, therefore no
      reduction has been made for estimated forfeitures.


**NOTE
          18 - SUBSEQUENT EVENTS**
 
 On
          October 27, 2006, the Company entered into a stock purchase agreement with
          Peter
          F. Ullrich, a shareholder of the Company, whereby Mr. Ullrich agreed to
          purchase
          a total of 2,307,692 newly issued shares of $0.0001 par value common stock
          of
          the Company for a purchase price of $1.30 per share in a private transaction,
          for total consideration of $3,000,000. Under the terms of the agreement,
          Mr.
          Ullrich purchased 1,153,846 shares on October 27, 2006 and will purchase
          the
          remaining 1,153,846 shares in January, 2007. As part of the transaction,
          Water
          Science agreed that this transaction would not cause an adjustment to the
          conversion price of the Senior Convertible Note issued to Water Science
          in
          September 2005, nor would it cause an adjustment to the exercise price
          of the
          warrants issued to Water Science in September 2005. On January 10, 2007,
          the
          Company completed the stock purchase agreement with Mr. Ullrich.
 
 In
          March
          2007, the Company signed a non-binding Letter of Intent with an unrelated
          third
          party to explore the possible sale of the Company’s Consumer Products division.
 
 In
          March
          2007, we were served a summons notifying us of a lawsuit that has been
          started
          against us and Zerorez, a related party, in the King County District Court,
          in
          the State of Washington. This matter involves a product sold and applied
          by a
          franchisee of a related party. The complaint alleges unspecified amounts
          of
          damages, and treble damages under the Washington Consumer Protection Act.
          The
          complaint erroneously alleges that Zerorez is owned by the Company. We
          are in
          the early stages of investigating this complaint. The Company intends to
          vigorously defend this matter.
  F
        - 26