ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

When used in this Form 10-SB and in future filings by the Company with the Commission, statements identified by the words "believe", "positioned", "estimate", "project", "target", "continue", "will", "intend", "expect", "future", "anticipates", and similar expressions express management's present belief, expectations or intentions regarding the Company's future performance within the meaning of the Private Securities Litigation Reform Act of 1995. The safe harbor in the Private Securities Litigation Act of 1995 does not apply to statements made in this document. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligations to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Overview

The following discussions and analysis should be read in conjunction with the Company's financial statements and the notes presented following the financial statements. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

Aquacell Water, Inc. builds water treatment systems for the municipal, industrial and commercial sectors of the water treatment and purification industry. We design, manufacture, install and service our custom designed turnkey systems that treat from hundreds to millions of gallons of water per day for a variety of applications, including treatment of process water for public drinking water, manufacturing, purification of water for bottling plants and food service, and removal of contaminants from municipal drinking water systems. Our customers range from drinking water providers and manufacturers, to defense contractors and the military.

We provide a process for removing arsenic from drinking water with zero wastewater discharge requiring no onsite chemicals. This process reduces both the capital and operating costs for municipalities. As of January 2006, municipalities are required to be in compliance with a mandate lowering the allowable level of arsenic in drinking water from 50 parts- per-billion to ten. We anticipate a significant portion of our business in 2009 will be in arsenic removal systems.

The adsorbent media used for arsenic removal, as well as other consumable products in our systems, must be replaced generally on an annual basis. The replacement media provides an on-going revenue source for systems installed by the Company, as well as potentially for systems installed by competitors.

AQUACELL WATER, INC. AND SUBSIDIARY

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and all available information. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to recording various accruals, income taxes, the useful lives of long-lived assets, such as property and equipment and intangible assets, and potential losses from contingencies and litigation. We believe the policies discussed below are the most critical to our financial statements because they are affected significantly by management's judgments, assumptions and estimates.

Revenue Recognition

The Company's revenues primarily consist of the sale of water treatment equipment to customers. The Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed and determinable, and collectability of the resulting receivable is reasonably assured. Such conditions are typically met upon delivery of the equipment to the customers.

The Company classifies amounts billed for shipping and handling as revenue in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Costs incurred for shipping and handling are included in cost of sales.

Income Taxes

The Company accounts for income taxes using the asset and liability method described on SFAS No. 109, "Accounting For Income Taxes", the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of Water's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than no that some portion or all of the deferred tax assets will not be realized.

Results of Operations

For the three months ended September 30, 2008, revenues were $83,000, representing a decrease of $389,000, or 82%, over the same period of the prior year. This decrease was attributable to new system orders shipped by the Company during the prior year quarter for arsenic removal. New system sales have been delayed for the quarter ended September 30, 2008.

Net loss for the three months ended September 30, 2008 decreased to $265,000, as compared to 403,000 for the same period of the prior year. The decrease in loss is primarily attributable to the decreased payroll and selling, general and administrative expenses as the Company controls its overhead expenses commensurate with the decrease in revenue.

AQUACELL WATER, INC. AND SUBSIDIARY

Liquidity and Capital Resources

Cash used by operations during the quarter ended September 30, 2008 amounted to $40,000. Net loss of $265,000 was reduced by compensation expense of $9,000, related party receivables in the amount of $56,000, accounts payable and accrued liabilities of $39,000, related party payables of $42,000, accrued officer compensation of $79,000, accrued interest payable of $2,000, customer deposits of $51,000, and was increased by increases in accounts receivable of $53,000.

There was no cash provided from or used by investing activities for the quarter ended September 30, 2008. Cash provided by financing activities was approximately $40,000, entirely from bank overdrafts.

Cash used by operations during the quarter ended September 30, 2007 amounted to $328,000. Net loss of $403,000 was reduced by compensation expense of $9,000, related party receivables in the amount of $60,000, related party payables of $267,000, customer deposits of $18,000, and was increased by accounts payable and accrued liabilities of $56,000 and by increases in accounts receivable of $222,000.

There was no cash provided from or used by investing activities for the quarter ended September 30, 2008. Cash used by financing activities was approximately $14,000, entirely from payments made on the lines of credit agreements.

Management believes that its anticipated borrowings, equity raise and cash flows expected to be generated from future operations will be sufficient to meet presently anticipated needs for working capital and capital expenditures through at least the next 12 months; however, there can be no assurance in that regard. Water presently has no material commitments for future capital expenditures.