|U. S. SECURITIES AND EXCHANGE COMMISSION
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|Washington, D.C. 20549                  
|FORM 10-KSB                             
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|(Mark One) |                                                                                                                                            
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|[X]        | ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004                 
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|[   ]      | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________.
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|Commission file number 0-28291                  
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|Capacitive Deionization Technology Systems, Inc.
|Operating under CDT Systems, Inc.               
|(Name of small business issuer in its charter)  



|Texas                           | 86-0867960                     
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|(State or other jurisdiction of | (I.R.S. Employer Identification
|Incorporation or organization   |                                
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|13636 Neutron Rd., Dallas, TX           | 75244-4410
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|(Address of principal executive office) | (Zip Code)
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|Issuer's telephone number (972) 934-1586                   
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|Securities registered pursuant to Section 12(b) of the Act:
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|Title of each class | Name of each exchange on which
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|                    | Registered                    



|Securities registered pursuant to Section 12(g) of the Act:                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|$.0001 par value common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(Title of class)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.                      Yes  X     No                                                                                                                                                                        
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|Check if disclosure of delinquent filers in response to item 405 of Regulation S-B is not 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.   [   ]                                                                                                                                                              
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|State issuer's revenues for its most recent fiscal year $0.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|The aggregate market value of voting stock of the Registrant held by non-affiliates, computed by reference to the closing price of such stock on February 28, 2005, was approximately $3,964,205. For purposes of this computation, all executive officers, directors and ten percent (10%) beneficial owners of the Registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and ten percent (10%) beneficial owners are affiliates.
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|State the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date.                                                                                                                                                                                                                                                                                                                                                                                              
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|(As of February 28, 2005)                     19,278,276 shares                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10- KSB (e.g., Part I, Part II, etc.) into which the documents incorporate: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed documents should be clearly described for identification Transitional Small Business Disclosure Format (Check one).              Yes ___; No __X_.
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|PART I                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|Item 1:  Description of Business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|Capacitive Deionization Technology Systems, Inc. (formerly FarWest Group, Inc.), which does business as CDT Systems, Inc. (CDT Systems or the Company), is the successor company to FarWest Group, Inc. By proxy vote the shareholders of the company approved changing the name of FarWest Group, Inc. to Capacitive Deionization Technology Systems, Inc. at the July 31, 2001 annual shareholders meeting. The Amended Articles of Incorporation were then filed with the State of Nevada and the Company's bylaws were also amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Far West Group Inc. ("FarWest") had been organized under the laws of the state of Nevada in July 1996. In July of 1996, FarWest was merged with Pro Vantage Corporation, an inactive public Company that was incorporated in 1992 in the State of Florida. FarWest was the surviving Company in that merger. Concurrently, the FarWest Pump Company ("Pump Company"), an Arizona corporation formed in 1986 became a wholly owned subsidiary of the Company. From July 1996 through December 31, 1999, FarWest operated FarWest Pump Company as an operating subsidiary. The operations of Pro Vantage were discontinued in July 1996, immediately following the merger with FarWest Group, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|In November 1999, FarWest's Board of Directors completed the sale of the Pump Company to the Pump Company's management by making deferred payments of $270,000 to Pump Company for its assumption of all existing liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|Technology                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|In January 1997, the Company entered into a manufacturing and marketing license agreement with Lawrence Livermore National Laboratories ("Lawrence Livermore") whereby the Company obtained the rights to Lawrence Livermore's patented Capacitive Deionization Technology (CDT). (That technology is described below.) The manufacturing and marketing license is effective for the life of the patents (up to 17 years), with most such patents expiring by the year 2016. To maintain the license the Company must make contracted minimum annual royalty payments to Lawrence Livermore, in the amount of $25,000 per year. The Company will owe Lawrence Livermore royalty payments varying from one (1%) percent of product revenue to a maximum of five (5%) percent of product revenue. The Company is also liable to reimburse Lawrence Livermore for foreign patent filing fees. These fees are incurred by Lawrence Livermore as patents are filed and renewed in foreign countries. During 2004, these fees totaled over $71,000. Although the Company is the only licensee for water applications using the carbon aerogel technology which is the basis of the Company's capacitive deionization technology, the license is non-exclusive in that Lawrence Livermore could license other entities to use some or all of the technology covered by the existing license with the Company. However, any such license would be limited to Lawrence Livermore technology as it existed in 1996 and would not reflect any enhancements made by the Company. The Company originally named its product a "brick", but in 2003 filed an application to trademark the name "AquaCellTM".
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|The Company's capacitive deionization technology, or CDT, uses deionization to convert a contaminated water supply into a "clean" water stream and a separate waste stream. As implemented by the Company, the technology involves coating pairs of electrodes with a carbon coating known as carbon aerogel. The carbon aerogel is porous and has an extremely high ratio of ion collection area to surface area, due to the structure of the aerogel. The ion collection area presented by carbon aerogel is greater than 60,000 times the surface area of the electrode. In the Company's system, a salt water or impure water stream is passed through an electrostatic field established between pairs of electrodes coated with carbon aerogel. The negative electrode attracts positively charged ions such as chloride or nitrate. Those ions are pulled out of suspension of the water stream and held by the electrodes in the carbon aerogel, until either the power is turned off or the electrode charge is reversed. As a result, with a relatively low application of energy, the Company's technology is able to remove a wide variety of contaminants or other molecules from a water stream through the creation and holding of charged particles.                                                                                                                                                                                                                                                                                                                                                                                                                        
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|The Lawrence Livermore license authorizes the Company to enhance, manufacture and market CDT, specifically in the fields of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|Brackish Water and Seawater Conversion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Industrial and Agriculture Ground Water Remediation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Pure Water for Boiler Applications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Ultra Pure Water for Manufacturing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Nuclear Waste Remediation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Medical Applications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|The aerogel product licensed from Lawrence Livermore Laboratories in January 1997 operated at low voltage levels (compatible with solar energy sources) with resulting favorable operating economics, however, the cost of manufacture with the original Lawrence Livermore technology was too expensive to be commercially competitive. Company efforts have been focused on cost reduction programs which also have improved the operational efficiency of the technology while reducing the manufacturing costs. Systems were also developed which allows the waste stream to access both sides of carbon aerogel, as opposed to the single side of carbon aerogel accessible in the Lawrence Livermore technology. The Company is continuing to develop proprietary improvements to further reduce the cost of the manufacturing process and improve the efficiencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|The Company had research and development expenses totaling approximately $701,000 for the year ending December 31, 2004, and $599,000 for the year ending December 31, 2003. Since licensing the technology the Company has spent over seven million dollars in research and development, manufacturing processes, and automation design. In pilot tests CDT has proven to be a successful technology for pure and ultra pure water requirements which require output water of one part per million total dissolved solids (TDS). CDT provides an effective solution for these applications, and is also effective when used in pure and ultra pure applications in conjunction with other water technologies. Test results also indicate that CDT is an economically viable technological alternative to reverse osmosis, the most widely used water purification system, for a broad spectrum of large-scale brackish water and industrial remediation and pure and ultra-pure applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|While the basic carbon aerogel patent is owned by the U.S. Government, through The University of California and Lawrence Livermore, there are a number of improvements in material sciences and processing which have been developed by, and are proprietary to the Company, which are not required to be licensed back to Lawrence Livermore. These enhancements account for the significant improvement in the cost effectiveness of CDT. The Company's strategies include filing patents with regard to certain of the improvements, treating other improvements and developments as trade secrets and pursuing intellectual property strategies for the protection of the technology developed by the Company from the Lawrence Livermore and internally developed technology. The Company requires that a Confidentiality Agreement be executed prior to providing technological information to prospective clients. The Company recognizes the risk of a prospective client violating the Confidentiality Agreement and knowingly disclosing the Company's proprietary information including trade secrets. The Company continues to monitor and enforce all such relationships and will vigorously enforce such agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|The Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|The Company is the sole business and technology partner of Lawrence Livermore for the development and commercialization of Carbon Aerogel for water purification applications. In 1997 Lawrence Livermore granted the Company a worldwide license for the manufacturing and distribution of Carbon Aerogel and Capacitive Deionization Technology (CDTTM). Lawrence Livermore spent over $40 million and 10 years developing the technology to help solve the world's increasing water crisis. Today the world recognizes that water is our most vital resource. Water is essential for life and the economic health of communities throughout the world. However, global fresh water supplies are being consumed at a staggering rate. A severe water supply shortage is projected. It is estimated that over half a billion people depend on non-renewable sources. Many areas of the world presently lack an adequate supply of water. Technically, between the water that flows in rivers and that which lies in underground aquifers and in the oceans of the world, there is sufficient water to support the current population; however, only a small percentage (approx. 3%) of it is safe to drink or use for agriculture without some form of purification. According to experts on the world's water crisis, by the year 2025 the number of people that wi1l live in regions of severe water shortages will reach 3 billion.                                                                                                                                                                                                                                                      
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|Potential clients for the Company's CDT technology include government organizations in developing nations, particularly those in the Middle East, North Africa and Asia Pacific regions where access to sustainable amounts of potable water is of increasing concern. In addition to government organizations seeking to provide appropriate water supplies for their citizens, the Company has had discussions with domestic, international and humanitarian groups interested in the Company's technology as a means of providing relief in areas with significant medical problems exist which result from shortages of clean water. The recent Asian tsunami disaster has resulted in several groups inquiring about the Company's mobile systems for immediate and long-term reconstruction needs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|The technology has market applications in industries such as electronic manufacturing, food processing, medical and pharmaceutical manufacturing and multiple wastewater treatment applications. CDT is capable of treating a wide range of water inputs and has the unique capability to provide with a single CDT system a programmable range of outputs, including potable water for human consumption, agriculture and irrigation applications, or pure and ultra-pure water for industrial and medicinal use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|The Company has established an outsourcing arrangement with Carbon-Carbon Advanced Technology (C-CAT) in Fort Worth, Texas to provide Pyrolization technology and services to the Company. C-CAT is a NASA certified design and manufacturing contractor for carbon-carbon material sciences which includes aerogel. C-CAT's existing Pyrolization capacity will satisfy CDT Systems Pyrolization requirements forecast for 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|In January 2004, the Company completed a Joint Venture Agreement ("JV Agreement") with Air Water, Inc. of Osaka, Japan. Air Water will own 67% and the Company 33% of the CDT/Air Water Joint Venture. The Joint Venture will initially assemble AquaCells in Japan with carbon aerogel provided by the Company. If approved by the U.S. government, the Joint Venture would have first right of refusal to establish a turnkey manufacturing facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|In December 2004, the Company established an outsourcing arrangement in Toronto, Canada for the polymerization of carbon aerogel. This partnership will provide contractual increasing quantities of carbon aerogel which will then be pyrolized at the C-Cat facility in Fort Worth. The Canadian capacity should satisfy CDT 's polymerization requirements as forecast for 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|With the outsourcing agreements with VML and C-CAT, combined with Air Water's packaging technology, the Company has the potential to reduce short-term capital requirements while accelerating the manufacturing schedule of CDT AquaCells.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|The Company completed an exclusive license for carbohydrate-based porous carbon material science technology with TDA Research, Inc. (TDA) in Colorado. This technology, which is identified by the Company as "S-One", will provide both lower cost materials and a more friendly environmental manufacturing material basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|CDT Systems has a marketing and manufacturing agreement with Radical Waters, Ltd., Johannesburg, South Africa for Electrochemical Activation (ECA) technology. Marketed as "Activated Water", this disinfection process destroys microbes and biologicals. It has been successfully tested on anthrax, botulism and other biologicals. In addition, it prevents bio-film or scaling build-up. Combining CDT with ECA technology provides a purification system which eliminates both contaminates and biologicals, as well as reducing scaling and fouling within the AquaCells.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|The Company has introduced a CDT Mobile System for industrial and emergency applications. Governments are evaluating the CDT Mobile System for industrial remediation of brackish groundwater, including oil and gas and other contaminated ground water pump and clean applications. With ECA, the CDT Mobile Systems also meets anti-terror related biological needs. A CDT Mobile System provides immediate on site capacity to produce up to 30,000 gallons of potable water per day (depending on TDS levels) to help resolve emergency water requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|Sales and Marketing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|CDT Systems' marketing strategy is to operate as a provider of CDT units and required electronic control systems to builders of water treatment plants and to contractors that provide environmental and industrial remediation systems. A significant portion of the sales and marketing budget is dedicated to providing pilot units on a demonstration, discounted or rental basis to prospective clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|The Company's sales and marketing strategy is to emulate successful Original Equipment Manufacturers' (OEM) strategy. The headquarters marketing organization will consist of industry sales managers and application analysts; Brackish, Pure and Ultra Pure and Oil and Gas Managers will each have multiple industry specialists to support sales and marketing opportunities. The second phase will be to add geographic management in Asia-Pacific, Africas and the Americas. These managers may be located on site in their area. Additionally, industry and geographical management will be added when justified.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|The Company does not plan to develop the capability to act as a prime contractor for engineering, constructing, operating, and owning treatment plants. It will engineer and construct pilot plants, and support the proposing, planning, training and maintenance activities of prime contractors who contract to install CDT-based plants. The Company will evaluate opportunities for Build to Own and Operate (BOO) and Build to Own, Operate and Transfer (BOOT) opportunities with prime contractors whereby the company will participate in an ongoing revenue stream.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|The Company has successfully established potential alliance partners, domestic and international, capable of engineering and executing major water treatment plant construction and operations. Strategic partners are continuing to be provided demonstration Mini AquaCells to test and develop applications. Strategic partners are encouraged to also become equity investors and financial partners in the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Item 2:  Description of Properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|The Company maintains Corporate offices at 13636 Neutron Rd., Dallas, Texas 75244. This includes approximately 3,500 square feet of corporate, administrative and operations space. An engineering laboratory has been equipped to manufacture the initial supply of the recently licensed S-One materials. An engineering computer center has also been established for source water testing and liaison with Texas A&M University and other strategic partners. Additional warehouse space is available in the immediate area on a month-by-month basis. This lease expires in December 2005. The Company has been at this location since December 2000 when the corporate headquarters were relocated from Tucson, Arizona.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|The Company has had discussions with investment groups in Northern California to design and build a research and development center adjacent to Lawrence Livermore. The Research Center would be an approximate 25,000 square foot facility, with plans to install a CDT system capable of providing pure and ultra pure water to Lawrence Livermore, as well as potable water to the city of Livermore, CA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|Item 3:  Legal Proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|There were no legal proceedings instituted by or against the Company during 2003 or 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|Item 4:  Submission of Matters to a Vote of Security Holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|The Company has filed all quarterly and annual reports on a timely basis since the Company was relisted on the Over the counter Bulletin Board (OTCBB) with the trading symbol of CDTN in February 2004. The public may read and copy any material files with the SEC at the SEC's Public Relations Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and/or obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the Company has become an electronic filer and, as such, all items filed by the Company with the SEC which contain reports, information statements, and other information regarding issuers that file electronically with the SEC will be available at the SEC's website. That site is available at http://www.sec.gov. The Company also maintains an Internet site, which contains information about the Company. The site is available at http://www.CDTWater.com.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|PART II                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|Item 5:  Market for Common Equity and Related Stockholder Matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|Stock Prices and Dividend Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|The Common shares of the Company traded on the NASDAQ Over-the-Counter market under the trading symbol "FWST" from July 1996 through December 2, 1999, at which time the Company's shares were removed from the NASDAQ Over-the-Counter system and began to trade in the "pink sheets." The Company was approved by the NASD, effective February 10, 2004, for listing the Company on the Over the Counter Bulletin Board (OTCBB). The following NASDAQ supplied table sets forth for the period indicated the high and low bid prices during the period from January 1, 2003 to December 31, 2004. The quotations below reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. For current price information, CDT Systems shareholders are encouraged to consult publicly available sources. The current trading symbol is CDTN.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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| | 2004           | High | Low
| | -------------- | ---- | ---
| | First Quarter  | .51  | .25
| | Second Quarter | .45  | .21
| | Third Quarter  | .50  | .19
| | Fourth Quarter | .38  | .20
| |                |      |    
| | 2003           | High | Low
| | First Quarter  | .55  | .30
| | Second Quarter | .40  | .21
| | Third Quarter  | .45  | .25
| | Fourth Quarter | .51  | .32
| |                |      |    



|As disclosed in "Recent Financings" below, the Company sold unregistered securities at prices ranging from $.20 to $.25 in 2004 and from $.17 to $.25 in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|As of February 28, 2005 the Company had 19,278,276 Common Shares issued and approximately seven hundred (700) shareholders of record.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|Recent Financings and Sales of Unregistered Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|During 2004, the Company issued $1,464,925 in convertible debt and notes payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|A private placement of 440,700 shares of the Company's rule 144 common stock was completed during the quarter ended December 31, 2004. The private placement provided the Company $10,000 in cash through the issuance of 40,000 shares; 87,100 shares were issued for $21,775 of professional services; 61,000 shares were issued for $15,250 of engineering services; 112,600 shares were issued for $28,150 of accounts payable and 140,000 shares were issued for  $35,000 of accrued wages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|A private placement of 633,127 shares of the Company's rule 144 common stock was completed during the quarter ended September 30, 2004. The private placement provided the Company $53,250 in cash through the issuance of 239,667 shares; 74,300 shares were issued for $18,575 of professional services; 101,000 shares were issued for $25,250 of engineering services; 121,160 shares were issued for $30,290 of accounts payable; 22,000 shares were issued for $5,500 of accrued wages and 75,000 shares were issued for $18,750 of notes payable.                                                                                                                                                                                                                                                                                                                                                                                                          
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|During the second quarter 2004, three-year convertible debentures, convertible at $.20 per share, provided $5,000 to the Company. In addition, a private placement of 337,400 shares of the Company's rule 144 common stock was completed. The private placement provided the Company $35,000 in cash through the issuance of 160,000 shares; 108,400 shares were issued for $27,100 of professional services and 69,000 shares were issued for $17,250 of engineering services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|During the first quarter 2004, three-year convertible debentures, convertible at $.50 per share, provided $132,425 to the Company. In addition, a private placement of 1,093,700 shares of the Company's rule 144 common stock was completed. The private placement provided the Company $113,300 in cash through the issuance of 461,200 shares; 140,000 shares were issued for $35,000 of engineering services, 276,500 shares were issued for $69,125 of professional services; and 216,000 shares were issued to settle $50,000 of accounts payable and $4,000 of wages payable.                                                                                                                                                                                                                                                                                                                                                                              
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|During the fourth quarter of 2003, a private placement of 1,101,461 shares of the Company's Rule 144 common stock was completed. Of this total, 439,844 shares were issued for cash amounting to $73,262. In addition, 351,669 shares were issued for accounts payable of $108,057, 43,400 shares were issued for engineering, research and development amounting to $7,359 and 266,548 shares were issued for legal and professional services amounting to $44,425.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|During the third quarter of 2003, a private placement of 799,700 shares of the Company's Rule 144 common stock was completed. Of this total, 594,800 shares were issued for cash of $99,300. In addition, 30,000 shares were issued for accounts payable penalties amounting to $5,004, 70,000 shares were issued for engineering, research and development amounting to $11,682 and 104,900 shares were issued for legal and professional services amounting to $17,506.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|During the second quarter of 2003, a private placement of 570,400 shares of the Company's Rule 144 common stock was completed. Of this total, 191,000 shares were issued for cash of $31,340. In addition, 15,000 shares were issued for accounts payable penalties of $2,500, 136,000 shares were issued for engineering, research and development amounting to $22,667, 212,400 shares were issued for legal and professional services amounting to $35,400 and 16,000 shares were issued for interest expense of $2,667. During the second quarter 2003, the Company issued 710,000 shares to officers in consideration of $177,500 of accrued salaries. Also during the second quarter, as ordered by a legal settlement, the Company issued 125,000 shares of common stock amounting to $31,250. These transactions, combined with the private placement mentioned above, resulted in a total of 1,405,400 shares being issued in the second quarter of 2003.
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|During the first quarter 2003, a private placement of 262,600 shares of the Company's rule 144 common stock was completed; 107,000 shares were issued for cash of $25,000; 20,000 shares were issued for engineering services amounting to $5,000, 120,600 shares were issued for professional services amounting to $30,150; and 15,000 shares were issued for services provided by an Advisory Board member amounting to $3,750.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|The Rule 144 shares referred to above were issued in reliance upon Section 4(2) of the Securities Act of 1933.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|The Company has no fixed dividend policy. The Board of Directors may consider dividend distributions from time to time having regard to operating results, capital requirements, and general financial condition and requirements. The Company has paid no dividends at any time. For the foreseeable future, it is anticipated that the Company will use all available cash to finance its operations and that dividends will not be paid to shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|Item 6:  Management's Discussion and Analysis of Financial Condition and Results 
              of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|In 2003, the Company recognized revenues of $15,000 through its new Japanese joint venture partner, Air Water, Inc. In 2004, there was no revenue recognized by the Company; however, in the second quarter of 2005, the Company anticipates generating an ongoing revenue stream, although such cannot be assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|The Company was funded initially through the merger with the Pump Company and assets provided by the co-founder. The Company has obtained over $10 million working capital from private placements, debt financing and debt conversions. Strategic partners, management and private placements have provided more than $5 million of the working capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|Primary usage of the working capital has been for continuing technology development. Significant amounts have been committed to improving and then developing new patentable manufacturing processes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|Operations for the Next Twelve Months                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|Business opportunities will rely on the Company executing its polymerization, pyrolization and assembly outsourcing plans. The Company plans to produce over 3,000 Aqua Cells in the next twelve months, dependent on financing and fully implementing outsourcing capacities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|To meet the fourth quarter 2005 and next year's anticipated product requirements, the Company must obtain the capital necessary for its planned Texas manufacturing facility, capital equipment and required personnel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|The Company has expanded its commitment to developing a team of strategic partners by providing demonstration AquaCells for technology and application testing. To date, demonstration AquaCells are implemented in Japan, Australia, Holland and Canada, as well as the U.S. Ongoing CDT application development is active at Texas A&M University, Texas Water Development Board, Colorado School of Mines, U.S. Bureau of Reclamation, as well as several multi-national corporate strategic partners' identified applications including:                                                                                                                                                                                                                                                                                                                                                                                                                      
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|* | Multi-year nationwide installations and a Joint Venture operation with R&D support from an Asian-Pacific government
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|* | Industrial ground water remediation for Coal Bed Methane (CBME) gas wells                                          
|* | Boiler input and polishing in the U. S. and Japan                                                                  
|* | Brackish water purification in conjunction with the State of Texas and the Water Development Board                 
|* | Multiple CDT Mobile Systems from the U.S. and international governments for security requirements                  
|* | Humanitarian Mobile On-site Reconstruction Purification Systems - Asia Pacific (Tsunami)                           
|* | Chinese government test systems in cooperation with Texas A&M University.                                          
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|Texas A&M University, the Texas Agricultural Experiment Station (TAES), and the Texas Water Resources Institute (TWRI) have executed a five-year Partnering Agreement with the Company to provide basic concepts, procedures and programs to provide programs of research, technology development and outreach between CDT Systems, Inc. and TWRI.                                                                                                                          
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|CDT Systems, TAES and TWRI will cooperate to develop comprehensive programs to achieve maximum efficiency in desalination and water treatment technologies. The parties will cooperate in the execution of the programs by providing the resources needed for the testing, evaluation and field usage of desalination technologies; where possible, the parties will consolidate and disseminate research results to cooperating industries and to the scientific community.
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|Texas A&M and the Company will implement the Partnering Agreement as a factor in achieving Texas A&M's goal of being the Advanced Water Technology and Support Center for Texas and North America, as well as a recognized Water Center for the World. To strengthen Texas A&M's position, the Company, with Texas A&M's support, plans to locate its manufacturing operations in the Bryan/College Station area.                                                           
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|The Company recognizes the extent of the financial investment necessary to support the planned business activities. There is no guarantee that the Company can complete the above-referenced financing; however, the Company is negotiating the following options:                                                                                                                                                                                                          
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|* | Convertible debt financing from private investment group                                                                                  
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|* | Working capital from a Regional Investment Bank, including equity and debt                                                                
|* | Expansion of current strategic and investment alliances                                                                                   
|* | International joint ventures                                                                                                              
|* | An alliance with industry and government partners to accelerate pilot systems for the Powder River CBME Gas Wastewater Remediation Project
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|Management believes that the required funding for operations will be achieved. However, there is no assurance that such funding will be obtained.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|To accelerate operations, the Company has focused on establishing multiple outsourcing partnerships. This strategy reduces the short-term capital requirements while providing manufacturing capabilities and experience. Although losses will continue during 2005, it is projected that the outsourcing strategy, combined with successful working capital, will result in the Company having positive cash flow the following year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|Need for Additional Financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|The Company has raised over $10 million of working capital since inception. Over $5 million has been cash investments from strategic partners, management and private placements, including debt. The remaining $5 million of capital resulted from debt conversion or services for equity contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|The Company's current business plan and projections reflect capital requirements of $16 million during the next 18 months, including $4.5 million of asset financing, in order to continue operations and construct the new plant. There is no assurance that this financing will be completed; however, as previously indicated, the Company's outsourcing partnership strategy provides for continuing operations during the financing cycle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|As previously indicated, utilization of the Company's CDT technology will require the establishment of a carbon aerogel production facility to produce CDT systems for clients which incorporate carbon aerogel-based capacitive deionization technology. The Company plans to complete a 160,000 square foot production facility in Texas. The manufacturing facility capital equipment requirements during the first two years will total approximately $8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|There can be no assurances that the Company will be successful in generating sufficient revenues from its planned activities or in raising sufficient capital to allow it to continue as a going concern which contemplates increased operating expenses, acquisition of assets, and the disposition of liabilities in the normal course of business. These factors can affect the ability of the Company to implement its general business plan including the completion of the required manufacturing facilities and continued proprietary CDT product improvements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|Technology                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|Capacitive Deionization Technology, which was licensed from Lawrence Livermore, has been and continues to be the foundation of the Company's future. The Company has concentrated its efforts on adding proprietary enhancements to CDT to provide insulation from not only other technologies but as protection if Lawrence Livermore decided to consider other licensees. Any other licensee would have to license Lawrence Livermore's 1996 CDT Technology and avoid CDT System's proprietary rights and trade secrets to enter the market. To date, Lawrence Livermore has referred potential licensees to CDT Systems rather than encourage those companies to pursue a license for the CDT technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|CDT Systems' Aqua Cell technology, the enhanced foundation of carbon aerogel operation, is a unique electrochemical process that operates at low voltage (1.3 vdc) and low pressure (15 psi). The heart of the CDTTM is the "AquaCell". Each CDTTM AquaCell consists of 250 sheets of Carbon Aerogel material, over which the source water stream passes. The role of Aerogel is to provide greatly increased "parking places" for the temporary storage of the ions, which are being removed from the source water. When the AquaCell becomes saturated with removed contaminants (ions), it is scheduled to an offline status and the source water continues to be routed to other AquaCells, which have been regenerated. The loaded AquaCell is then shorted out or reverse-polarized, expelling the contaminants into a waste stream for disposal or recycling.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|The Company completed a license agreement with TDA Research, Wheat Ridge, Colorado, whereby the Company obtained exclusive worldwide rights to TDA's patented "Porous Carbons from Carbohydrate" for "the manufacture of electrodes for use in capacitive deionization systems for the separation of ions from water to make purified water and water with increased concentration of ions; and the manufacture of porous carbon materials for use as thermal insulation." The 2 nanometer to 50 nanometer nanotechnology has the potential to provide the Company with an alternative environmental friendly manufacturing option to its current resorcinol formaldehyde technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|Other Business Matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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|Government Approvals and Regulations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|The Company understands that governmental approvals, particularly those from the Environmental Protection Agency with respect to emission controls at any aerogel manufacturing facility established by the Company, will be necessary for the establishment of the Company's operations. The Company is currently working with the Texas Commission on Environmental Quality and other regulatory agencies to insure that all environment requirements are met for the North Texas CDT manufacturing facility. The Company plans to strictly adhere to compliance with federal, state, and local laws or regulations which have been enacted or adopted to protects the environment. To date, these laws and regulations have not had, nor are they expected in the future, to have a material adverse effect upon the Company's operations, product development, capital expenditures, earnings or financial position. The expenditures required comply with Environmental Protection Agency statutes and regulations are included in the financial plan to establish the manufacturing facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|Information Regarding and Factors Affecting Forward-Looking Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|This annual report on Form 10-KSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as "may," "believe," "expect," "intend," "plan," "seek," "anticipate," "estimate," or "continue" or the negative of those words or other variations or comparable terminology. All statements other than statements of historical fact included in this annual report on Form 10-KSB, including the statements under "Item 1. Description of Business" and "Item 6. Management's Discussion and Analysis or Plan of Operation" and located elsewhere in this annual report on Form 10-KSB regarding the financial position and liquidity of the Company are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from the Company's expectations, are disclosed in this annual report on Form 10-KSB. The Company does not undertake any obligation to publicly revise its forward-looking statements to reflect events or circumstances that arise after the date of this annual report on Form 10-KSB.
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|Important factors that could cause actual results to differ materially from those in the forward-looking statements in this annual report on Form 10-KSB include changes from anticipated levels of operations, customer acceptance of existing or new products, anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, access to capital, delays and disruptions in the shipment of the Company's products, government regulations and the ability of the Company to meet its stated business goals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|Item 7:  Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|Information required by this item appears in the Financial Statements and Auditor's Report for CDT Systems Inc. for December 31, 2004 and 2003 as listed under Item 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|Item 8:  Changes in and Disagreements with Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|There have been no disagreements on accounting and financial disclosures from the inception of the Company through to the date of this Form 10KSB.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|Item 8A: Disclosure Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|Within ninety days of this Report, the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our most recent evaluation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|The Company's independent registered public accounting firm has communicated to the audit committee a reportable condition regarding the Company's system of internal controls. The firm noted a reportable condition with respect to the inadequacy of staffing levels in the financial reporting function that could result in an inability to meet financial reporting objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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|PART III                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|Item 9: Compliance with Section 16(a) of the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|The Company has not adopted a formal code of ethics that apples to the Company's principal executive officer, principal financial officer or principal accounting officer. To date, the Company has been a development stage entity with no principal operating activities, limited resources and only four employees. Because of these factors, the Company has not had the ability to adopt a formal code of ethics, but management expects to adopt such a code during 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|(Also see Item 11: Security Ownership of Certain Beneficial Owners and Management).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|Item 10: EXECUTIVE COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|Executive Name and Principal Position                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
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| | Dallas Talley - | Chairman, CEO (and acting CFO until July 2003) 
| | --------------- | -----------------------------------------------
| | Phil Marshall   | Chief Financial Officer, beginning July 1, 2003
| |                 |                                                



|Accrued
|-------



| | Name          | Year | Compensation (1) | Non-CashCompensation (2) | TotalCompensation
| | ------------- | ---- | ---------------- | ------------------------ | -----------------
| | Dallas Talley | 2004 | $130,574         | $10,000                  | $140,574         
| | Phil Marshall | 2004 | $146,947         | $0                       | $146,947         
| | Dallas Talley | 2003 | $81,820          | $57,500                  | $139,320         
| | Phil Marshall | 2003 | $54,315          | $11,685                  | $66,000          
| |               |      |                  |                          |                  
| |               |      |                  |                          |                  



|(1) | Amounts earned, not necessarily paid during the year.                          
|--- | -------------------------------------------------------------------------------
|(2) | Represents the issuance of common stock in satisfaction of unpaid compensation.
|    |                                                                                



|Paid
|----



|Name          | Year | Compensation (3)
|------------- | ---- | ----------------
|Dallas Talley | 2004 | $179,233        
|Phil Marshall | 2004 | $106,188        
|Dallas Talley | 2003 | $18,399         
|Phil Marshall | 2003 | $ 7,860         
|              |      |                 



|(3) | Included in Accrued Compensation above, but not necessarily paid in the year accrued.
|--- | -------------------------------------------------------------------------------------
|    |                                                                                      



|MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Dallas Talley, Chairman and CEO, has over twenty-five years of high tech senior executive experience. He has been CEO of New York Stock Exchange and NASDAQ companies including Qantel Business Computers, Televideo Systems and Zentec Corp. He has also been founder and director of several emerging companies. Mr. Talley was Managing Partner of an international technology development group specializing in technology transfers in Asia Pacific, Europe and selected developing nations. He served on the Board of Directors of the American Electronics Association (AEA) from 1984 to 1989 and served as Chairman of AEA's Silicon Valley Chapter. Since joining the Board of Directors in 1998, Mr. Talley has been responsible for maintaining and expanding the company's relationship with Lawrence Livermore National Laboratories and for implementing the company's private placements and strategic alliances.                                                                                                                                                                                                                                                                  
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|Phil Marshall, Chief Financial Officer, has over thirty years experience in financial management and audit services. He has been a Principal or Partner for over twenty years with KMG Main Hurdman, KPMG Peat Marwick, Jackson & Rhodes, and Whitley Penn. His public accounting experience includes multinational companies with extensive SEC reporting in a variety of operating companies including environmental, manufacturing and service companies. Mr. Marshall joined the Company in the third quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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|Stock Option Grants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|The Company does not provide cash compensation for the members of the Company's Board of Directors, in their roles as directors. (Directors who are employees receive compensation for their services as employee of the Company.) However, each director is reimbursed for direct expenses incurred due to service on the Board of Directors. Each director who is not an employee is granted an option to acquire 100,000 shares of the Company's Common Stock, for three years service on the Board of Directors. One third of the options granted to each "outside" director are vested on the date of grant and one third on each of the next two anniversaries of the date they joined the Board of Directors. In addition, the company established an Advisory Board in 2000. The Advisory Board provides assistance to management and the Board of Directors as well as establishing a strong network of senior Executives, Government leaders, and Financial associates throughout the world. The Chairman of the Advisory Board receives an option for 100,000 shares and all other members receive an option for 75,000 shares with the same vesting schedule as the Board of Directors.
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|The Company has reserved 800,000 shares for issuance under the 2000 Stock Option Plan and 1,200,000 shares under the 2001 Stock Option Plan. All the options under the 2000 Plan have been issued and 925,000 options are available under the 2001 Plan as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|Section 16(a) of the Exchange Act, requires the Company's officers, directors and persons who beneficially own more than ten percent of the Common Stock to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission. Officers, directors and greater than ten percent beneficial owners also are required by rules promulgated by the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
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|As of the date of filing this report, Mr. Marshall has filed a report on Form 3. However, the filing by Mr. Marshall was not on a timely basis. As of the date of filing this report, Mr. Talley has filed a report on Form 4. However, the filing by Mr. Talley was not on a timely basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|Item 11:  Security Ownership and Certain Beneficial Owners and Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|Directors and Officers of Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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|The following persons served as directors of the Company for the year ended December 31, 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|[Shares outstanding as of December 31, 2004 totaled 18,870,726.]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|Name and Age        | Position                                          | Director Since | Shares BeneficiallyOwned | % of Stock
|------------------- | ------------------------------------------------- | -------------- | ------------------------ | ----------
|Dallas Talley (71)  | Chairman, CEO, Chief Financial Officer            | 1998           | 995,000  (1)             | 5.27      
|Thomas Friezen (46) | Chairman Audit Committee                          | 1997           | 406,800                  | 2.16      
|Takeshi Ogata (66)  | Director                                          | 2000           | 205,000                  | 1.09      
|Ann Heywood (59)    | Chairman Compensation Committee                   | 2000           | 100,000                  | 0.53      
|Robert Blaney (50)  | Director (Terminated effective December 31, 2004) | 2001           | 100,000                  | 0.53      
|Joe R. Brooks (76)  | Non-voting Secretary                              | 1999           | 40,000                   | 0.21      
|                   

|Advisory Board                                                    
|------------------------------------------------------------------
|                                                                  
|Members of the Advisory Board for the year ended 12-31-04 include:

|Name           | Position | Member Since | Shares Beneficially Owned | % of Stock
|-------------- | -------- | ------------ | ------------------------- | ----------
|Robert Gary    | Chairman | 2000         | 390,000                   | 2.07      
|Chester Nosal  | Member   | 2000         | 988,560                   | 5.24      
|Tommy Thompson | Member   | Dec. 2001    | 275,000                   | 1.46      
|               |          |              |                           |           

|All current executive officers, Board of Directors and Advisory Board members as a group | 3,815,360 (2) | 20.22
|---------------------------------------------------------------------------------------- | ------------- | -----
|                                                                                         |               |      

|(1) | Includes shares held by spouse.
|--- | -------------------------------
|(2) | Includes unexercised options.  
|    |                                

|Beneficial Owners:
|------------------

|Name                                            | Number of Shares | % of Stock
|----------------------------------------------- | ---------------- | ----------
|Clark Vaught                                    | 2,256,500        | 11.96     
|                                                |                  |           
|Total Officers, Directors and Beneficial Owners | 6,064,260        | 32.18     
|                                                |                  |           

|The only officer or director listed in the foregoing table having any options or warrants to acquire additional shares, which are exercisable during the 60 days after the date hereof is Phil Marshall who has 80,000 shares exercisable at $.17 per share as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|Board of Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|The Company's Board of Directors at year-end 2004 consisted of (5) members. The Company's By-Laws permit the Board of Directors to consist of any number of members greater than two (2) as determined by the then current Board of Directors. The Advisory Board has been appointed by the Board of Directors to act as the nominating committee for selecting members of the Board of Directors which will be submitted to shareholders for proxy election at the 2004 annual meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|Dallas Talley, see MANAGEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|Tom Friezen, Mr. Friezen is chairman of the Audit Committee. Mr. Friezen, a registered CPA, is the CFO of a $150 million food processing company. He is responsible for financial, banking and legal activities of his company. He was responsible for two stock offerings and a public debt placement, which raised over $65 million in capital. He was also responsible for a $27 million business acquisition. He is also responsible for SEC Reporting and Compliance, taxation and shareholder relations within his company. He has served on the CDT Systems Board of Director since 1997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
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|Takeshi Ogata: Mr. Ogata is a senior executive with Itochu Corporation of Tokyo, Japan. Within Itochu he has served as a Managing Director of Itochu Machinery and Information Group and Senior Managing Director as well as President of Itochu Construction. He is currently Chairman of Itochu's Innotech Corporation. Mr. Ogata was the leader in Itochu's corporate redirection into high technology businesses with a resulting $30 billion equity valuation. He was founder and Chairman of several Itochu technology companies including CTC, the largest systems integrator in Japan with an equity value of $10 billion and J-SAT, a joint venture of Itochu Sumitomo and NTT communications. Mr. Ogata also serves as a business consultant for the Company in Japan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Ann Cochran Heywood: Ms. Heywood, serves as Chairman of the Compensation Committee. She has a broad background in early stage funding activities, technology development and commercialization, and longer-term management of technical organizations in the public and private sectors. She started the Russian Medical Technology program. Ms. Heywood is currently engaged in converting a Russian weapons assembly facility to the fabrication of kidney dialysis systems. She served as Deputy Secretary for Technology at the California Environmental Protection Agency (CalEPA) and also served as Vice President of Corporate Development at Thermatrix Corporation. Ms. Heywood has managed activities for technology development programs for LLNL, SAIC, TRW and the U.S. Department of Energy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Joe R. Brooks: (Non-voting Secretary to the Board of Directors). Mr. Brooks served as Vice President Marketing Administration for Management Systems Division of Pitney Bowes Corporation. Mr. Brooks was CFO of Qantel Business Computer and instrumental in a two hundred million dollar LBO transaction. He served as Controller of Mohawk Data Sciences; and Controller for the General Electric Computer Corporations, Western Region.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|ADVISORY BOARD                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Robert J. Gary, Chairman: Mr. Gary spent twelve years in managerial positions with General Electric's Large Power Apparatus Group. He was the Executive Vice President and General Manager of the Generating Company of Texas Utilities, a position he held until retirement. He was then appointed consulting Vice President to assist the President and Chairman of TU Electric. Mr. Gary has also served as an executive advisor on Westinghouse's Advance Design Nuclear Reactor Committee, the Atomic Industrial Forum Three Mile Island Recovery Committee and the Texas Utilities Blue Ribbon Task Force on Three Mile Island. In addition, he was co-founder of the Electrical Power Research Institute (EPRI) and a member of the Board of Directors of the American Mining Congress. Since 1992, Mr. Gary has concentrated only on humanitarian projects involving agriculture, environmental, medical, electrical and water. Mr. Gary continues to focus on water matters, the increasing scarcity and quality, and how to innovatively advance technical solutions for water problems. Mr. Gary has been active in the development of CDT Systems, and has been instrumental in the company's worldwide strategy including implementing other water-based technologies within the CDT Systems group.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Chester W. Nosal, Mr. Nosal has been associated with CDT Systems since 1998 and was instrumental with the successful investment negotiations with ABB. He is an active advisor and consultant to the company on international policy and opportunities. He is currently an affiliate of Pillsbury Winthrop in Washington, D.C. Mr. Nosal's law practice encompasses tax, international and telecommunications matters from domestic to global in scope. He was Senior Partner and head of the International Department with a practice in the Washington office of Winston & Strawn. Mr. Nosal also has been involved in business as an investor and director in many domestic and international corporations. He has served as a legal advisor to numerous countries and governments. His practice has included counseling countries on economic development, conducting legal audits of foreign legal, business and governmental systems and advising on foreign affairs; counseling, implementing, negotiating, structuring, and closing United States and international transactions in the following areas: telecommunications, worldwide merger and acquisitions/dispositions, joint ventures, licensing and franchising.                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Tommy L. Thompson,Mr. Thompson provides consulting and management services to Flour Corporation. His duties include designing and executing recovery plans for troubled projects. He is also responsible for developing strategy and implementation plans for new markets. As Chief Operating Officer of International Isotopes, Inc., his responsibilities included construction of an FDA-approved radiopharmaceutical manufacturing facility. He also built and placed in to operation a cyclotron and a linear accelerator while working closely with Los Alamos Laboratory. Mr. Thompson also led the design and manufacture of a robotic manufacturing unit for International Isotopes. He has served as Executive Vice President of Coastal Power Company and resided several years in Hong Kong and Singapore while serving as Vice President of Dow Chemicals, Destec Energy (Asia) Corporation, Halliburton International and Brown and Root International Group. The early part of his career was spent with TXU in Dallas, Texas, including managing TXU's Generation Services Group where he had responsibility for a $100 million operating budget.                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Item 12:  Certain Relationships and Related Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|The Company has borrowed $1,368,000 and $433,000 as of December 31, 2004 and 2003, respectively, from certain related parties. Certain of the notes were past due as of December 31, 2004. The notes bear interest at rates ranging from 12% to 18% and, as of December 31, 2004, are convertible into 7,050,703 shares of common stock at prices ranging from $.13 to $.45 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Item 13:  Exhibits and Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|1.     Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|Financial Statements of CDT Systems, Inc. | Page                                                                                           
|----------------------------------------- | -----------------------------------------------------------------------------------------------
|                                          |                                                                                                
|(i)                                       | Independent Auditor's Report                                                                   
|                                          |                                                                                                
|(ii)                                      | Balance Sheets as of December 31, 2004 and 2003                                                
|                                          |                                                                                                
|(iii)                                     | Statements of Operations for the years ended                                                   
|                                          | December 31, 2004 and 2003 and
Cumulative Amounts Through December 31, 2004                    
|                                          |                                                                                                
|(iv)                                      | Statements of Changes in Stockholder's Equity (Deficit)                                        
|                                          | for the years ended December 31, 2004 and 2003 and
Cumulative Amounts Through December 31, 2004
|                                          |                                                                                                
|(v)                                       | Statement of Cash Flows for the years                                                          
|                                          | ended December 2004 and 2003 and
Cumulative Amounts Through December 31, 2004                  
|                                          |                                                                                                
|(vi)                                      | Notes to Financial Statements                                                                  

|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Board of Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Capacitive Deionization Technology Systems, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|We have audited the accompanying balance sheets of Capacitive Deionization Technology Systems, Inc. ("the Company") (a development stage company) as of December 31, 2004 and 2003, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended and for the period from January 1, 2000 (date entered development stage) through December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capacitive Deionization Technology Systems, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended and for the period from January 1, 2000 (date entered development stage) through December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's significant operating losses and its working capital deficit and stockholders' deficit raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.                                                                                                                                                                                                            
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|/s/  WEAVER & TIDWELL, L.L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Dallas, Texas                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|February 25, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.
|------------------------------------------------
|(A Development Stage Entity)                    
|BALANCE SHEETS                                  
|December 31, 2004 and 2003                      
|                                                
|Assets                                          
|                                                

|                              | 2004         | 2003           
|----------------------------- | ------------ | ---------------
|Current assets:               |              |                
|Cash                          | $    355,586 | $           333
|Accounts receivable           | -            | 10,000         
|Note receivable               | 40,000       | -              
|Total current assets          | 395,586      | 10,333         
|                              |              |                
|Furniture and equipment       | 37,421       | 25,294         
|Less accumulated depreciation | (25,442)     | (21,488)       
|Total furniture and equipment | 11,979       | 3,806          
|                              | $407,565     | $14,139        
|                              |              |                

|                                              
|----------------------------------------------
|Liabilities and Stockholders' Equity (Deficit)
|                                              

|Current liabilities:                                   |              |             
|------------------------------------------------------ | ------------ | ------------
|Accounts payable                                       | $    294,785 | $    476,934
|Wages payable                                          | 714,388      | 724,034     
|Accrued liabilities                                    | 286,927      | 227,846     
|Customer deposits                                      | 203,700      | 78,700      
|Severance payable to shareholder                       | -            | 154,000     
|Current portion of long-term debt                      | 374,816      | 247,671     
|Current portion of long-term debt - related parties    | 1,368,000    | 433,000     
|Payable to former subsidiary                           | -            | 31,808      
|Total current liabilities                              | 3,242,616    | 2,373,993   
|                                                       |              |             
|Long-term and convertible debt - related parties       | -            | 10,000      
|Other long-term debt                                   | 374,925      | 25,000      
|Commitments and contingencies                          | -            | -           
|                                                       |              |             
|Stockholders' equity (deficit):                        |              |             
|Preferred stock, $.0001 par value, 20,000,000 shares   |              |             
|authorized; none issued and outstanding                | -            | -           
|Common stock, $.0001 par value, 80,000,000 shares      |              |             
|authorized; 19,086,726 and 16,581,799                  |              |             
|shares issued; 18,870,726 and 16,581,799 outstanding   | 1,908        | 1,658       
|Additional paid-in capital                             | 8,635,991    | 7,994,471   
|Note receivable issued for stock                       | -            | (45,500)    
|Common stock subscription                              | -            | (11,111)    
|Accumulated deficit from previous operating activities | (3,523,977)  | (3,523,977) 
|Deficit accumulated during the development stage       | (8,323,898)  | (6,810,395) 
|Treasury stock, at cost -- 216,000 shares in 2004      | -            | -           
|Total stockholders' equity (deficit)                   | (3,209,976)  | (2,394,854) 
|                                                       | $407,565     | $14,139     
|                                                       |              |             
|                                                       |              |             
|                                                       |              |             

|See accompanying notes to financial statements.
|-----------------------------------------------
|21                                             
|                                               





|CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.                                                    
|----------------------------------------------------------------------------------------------------
|(A Development Stage Entity)                                                                        
|STATEMENTS OF OPERATIONS                                                                            
|Years Ended December 31, 2004 and 2003                                                              
|And Cumulative Operations as a Development Stage Entity 
(January 1, 2000 Through December 31, 2004)
|                                                                                                    



|                                                |              |              | Cumulative       
|----------------------------------------------- | ------------ | ------------ | -----------------
|                                                |              |              | Through          
|                                                | 2004         | 2003         | December 31, 2004
|                                                |              |              |                  
|Revenues                                        | $-           | $15,000      | $15,000          
|                                                |              |              |                  
|Operating expenses:                             |              |              |                  
|Cost of sales                                   | -            | 10,935       | 10,935           
|Common stock and options issued for services -- |              |              |                  
|General and administrative                      | 163,746      | 180,240      | 2,021,810        
|Common stock and options issued for services -- |              |              |                  
|Research and development                        | 92,750       | 53,740       | 393,348          
|Other research and development                  | 608,311      | 545,399      | 3,360,627        
|General and administrative (excluding           |              |              |                  
|amounts applicable to stock and options         |              |              |                  
|issued for services each period)                | 460,602      | 321,332      | 2,093,191        
|                                                | 1,325,409    | 1,111,646    | 7,879,911        
|                                                |              |              |                  
|Loss from operations                            | (1,325,409)  | (1,096,646)  | (7,864,911)      
|                                                |              |              |                  
|Other income (expense):                         |              |              |                  
|Other                                           | 25,217       | -            | 25,217           
|Interest expense                                | (213,311)    | (84,945)     | (484,204)        
|Total other expense                             | (188,094)    | (84,945)     | (458,987)        
|Net loss                                        | $(1,513,503) | $(1,181,591) | $(8,323,898)     
|                                                |              |              |                  
|Basic and diluted net loss per common share     | $(0.08)      | $(0.08)      |                  
|                                                |              |              |                  
|Weighted average common shares outstanding      | 18,139,429   | 14,690,911   |                  
|                                                |              |              |                  
|                                                |              |              |                  
|                                                |              |              |                  
|                                                |              |              |                  

|See accompanying notes to financial statements.
|-----------------------------------------------
|22                                             
|                                               

|CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.        
|--------------------------------------------------------
|(A Development Stage Entity)                            
|STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) 
|Years Ended December 31, 2004, 2003, 2002, 2001 and 2000
|                                                        

|                                                            |              |            | Note        |            |              |               |           
|----------------------------------------------------------- | ------------ | ---------- | ----------- | ---------- | ------------ | ------------- | ----------
|                                                            | Common Stock | Additional | Receivable  | Common     |              |               |           
|                                                            |              |            | Paid-in     | Issued     | Stock        | Accumulated   | Treasury  
|                                                            | Shares       | Amount     | Capital     | For Stock  | Subscription | Deficit       | Stock     
|Balance, December 31, 1999 (Date of entrance as             |              |            |             |            |              |               |           
|a development stage entity)                                 | 6,684,507    | $    668   | $ 2,985,725 | $        - | $         -  | $(3,523,977)  | $        -
|Stock and warrants issued for cash                          | 909,100      | 91         | 1,361,131   | -          | -            | -             | -         
|Shares issued to convert debt                               | 200,000      | 20         | 99,980      | -          | -            | -             | -         
|Shares issued for services rendered                         | 321,325      | 32         | 387,818     | -          | -            | -             | -         
|Stock options issued as compensation                        | -            | -          | 357,261     | -          | -            | -             | -         
|Net loss                                                    | -            | -          | -           | -          | -            | (2,511,225)   | -         
|Balance, December 31, 2000                                  | 8,114,932    | 811        | 5,191,915   | -          | -            | (6,035,202)   | -         
|Stock and warrants issued for cash                          | 306,500      | 31         | 153,004     | -          | -            | -             | -         
|Shares issued to convert acccounts payable and debt         | 303,467      | 30         | 120,370     | -          | -            | -             | -         
|Shares issued for services rendered                         | 1,351,002    | 135        | 605,467     | -          | -            | -             | -         
|Stock options issued as compensation                        | -            | -          | 106,009     | -          | -            | -             | -         
|Net loss                                                    | -            | -          | -           | -          | -            | (1,678,311)   | -         
|Balance, December 31, 2001                                  | 10,075,901   | 1,007      | 6,176,765   | -          | -            | (7,713,513)   | -         
|Stock and warrants issued for cash                          | 739,940      | 74         | 240,381     | -          | -            | -             | -         
|Shares issued to convert acccounts payable and debt         | 561,534      | 49         | 175,343     | -          | -            | -             | -         
|Shares issued for services rendered                         | 1,251,929    | 132        | 442,058     | -          | -            | -             | -         
|Shares issued for note receivable                           | 350,000      | 35         | 174,965     | (175,000)  | -            | -             | -         
|Stock options issued as compensation                        | -            | -          | 25,770      | -          | -            | -             | -         
|Allowance provided for note receivable                      | -            | -          | -           | 113,750    | -            | -             | -         
|Net loss                                                    | -            | -          | -           | -          | -            | (1,439,268)   | -         
|Balance, December 31, 2002                                  | 12,979,304   | 1,297      | 7,235,282   | (61,250)   | -            | (9,152,781)   | -         
|Stock and warrants issued for cash                          | 1,332,644    | 133        | 228,769     | -          | -            | -             | -         
|Shares issued to convert acccounts payable                  | 1,061,669    | 6          | 285,551     | -          | -            | -             | -         
|Shares issued for services rendered                         | 1,174,848    | 189        | 219,171     | -          | -            | -             | -         
|Stock options issued as compensation                        | -            | -          | 14,620      | -          | -            | -             | -         
|Common stock subscription received                          | 33,334       | 33         | 11,078      | -          | (11,111)     | -             | -         
|Allowance provided for note receivable                      | -            | -          | -           | 15,750     | -            | -             | -         
|Net loss                                                    | -            | -          | -           | -          | -            | (1,181,591)   | -         
|Balance, December 31, 2003                                  | 16,581,799   | 1,658      | 7,994,471   | (45,500)   | (11,111)     | (10,334,372)  | -         
|Stock and warrants issued for cash                          | 900,867      | 90         | 211,460     | -          | -            | -             | -         
|Shares issued to convert payables and debt                  | 686,760      | 69         | 171,621     | -          | -            | -             | -         
|Shares issued for services rendered                         | 917,300      | 91         | 229,234     | -          | -            | -             | -         
|Warrants issued as compensation                             | -            | -          | 29,205      | -          | -            | -             | -         
|Writeoff of receivable                                      | -            | -          | -           | -          | 11,111       | -             | -         
|Offset note receivable against accounts payable             | -            | -          | -           | 45,500     | -            | -             | -         
|Common stock reacquired for the treasury
    (216,000 shrs) | -            | -          | -           | -          | -            | -             | -         
|Net loss                                                    | -            | -          | -           | -          | -            | (1,513,503)   | -         
|Balance, December 31, 2004                                  | 19,086,726   | $1,908     | $8,635,991  | $-         | $-           | $(11,847,875) | $-        
|                                                            |              |            |             |            |              |               |           
|                                                            |              |            |             |            |              |               |           
|                                                            |              |            |             |            |              |               |           
|                                                            |              |            |             |            |              |               |           
|                                                            |              |            |             |            |              |               |           

|See accompanying notes to financial statements.
|-----------------------------------------------
|23                                             
|                                               

|CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.                                                   
|---------------------------------------------------------------------------------------------------
|(A Development Stage Entity)                                                                       
|STATEMENTS OF CASH FLOWS                                                                           
|Years Ended December 31, 2004 and 2003                                                             
|And Cumulative Operations as a Development Stage Entity (January 1, 2000 Through December 31, 2004)
|                                                                                                   

|                                                     |              |              | Cumulative       
|---------------------------------------------------- | ------------ | ------------ | -----------------
|                                                     |              |              | Through          
|                                                     | 2004         | 2003         | December 31, 2004
|                                                     |              |              |                  
|Cash flows from operating activities:                |              |              |                  
|Net loss                                             | $(1,513,503) | $(1,181,591) | $(8,323,898)     
|Adjustments to reconcile net loss to net cash        |              |              |                  
|used in operating activities:                        |              |              |                  
|Depreciation                                         | 3,954        | 4,423        | 21,714           
|Shares issued for services                           | 229,325      | 219,360      | 1,884,327        
|Stock options issued as compensation                 | 29,205       | 14,620       | 532,865          
|Writedown of note receivable and subscription        | 11,111       | 15,750       | 140,611          
|Changes in operating assets and liabilities:         |              |              |                  
|Inventory                                            | -            | 10,500       | -                
|Accounts receivable                                  | 10,000       | (10,000)     | -                
|Note receivable                                      | (40,000)     | -            | (40,000)         
|Accounts payable and accrued liabilities             | 62,234       | 569,640      | 2,223,168        
|Net cash used in operating activities                | (1,207,674)  | (357,298)    | (3,561,213)      
|                                                     |              |              |                  
|Cash flows from investing activities:                |              |              |                  
|Purchase of furniture and equipment                  | (12,127)     | -            | (26,296)         
|                                                     |              |              |                  
|Cash flows from financing activities:                |              |              |                  
|Sale of common shares and warrants                   | 211,550      | 228,902      | 2,195,164        
|Net advances from shareholder                        | -            | -            | (96,388)         
|Net payments on long-term debt                       | (101,421)    | -            | (119,315)        
|Proceeds from notes payable to stockholders          | -            | -            | 161,500          
|Payments to former subsidiary                        | -            | -            | (238,192)        
|Additions to convertible debt and notes payable      | 1,464,925    | 128,000      | 1,650,925        
|Net cash provided by financing activities            | 1,575,054    | 356,902      | 3,553,694        
|                                                     |              |              |                  
|Net increase (decrease) in cash and cash equivalents | 355,253      | (396)        | (33,815)         
|                                                     |              |              |                  
|Cash at beginning of year                            | 333          | 729          | 389,401          
|                                                     |              |              |                  
|Cash at end of year                                  | $355,586     | $333         | $355,586         
|                                                     |              |              |                  
|                                                     |              |              |                  
|Supplemental disclosure:                             |              |              |                  
|Total interest paid                                  | $46,621      | $-           | $91,964          
|                                                     |              |              |                  
|                                                     |              |              |                  
|                                                     |              |              |                  

|Non-cash transactions:                                                                                
|------------------------------------------------------------------------------------------------------
|During 2004, the Company issued $152,940 of common stock for conversion of accounts and wages payable.
|During 2004, the Company issued $18,750 of common stock for conversion of notes payable.              
|During 2004, the Company offset a $45,500 note receivable against accounts payable.                   
|During 2004, $57,316 in accrued interest was added to existing notes payable.                         
|During 2003, the Company issued $285,557 of common stock for conversion of accounts and wages payable.
|During 2003, the Company converted $249,000 of accounts and wages payable to notes payable.           
|                                                                                                      
|See accompanying notes to financial statements.                                                       
|24                                                                                                    
|                                                                                                      

|CAPACITIVE DEIONIZATION TECHNOLOGY SYSTEMS, INC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Notes to Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|December 31, 2004 and 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|1.   Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Capacitive Deionization Technology Systems, Inc. (formerly FarWest Group, Inc.), which does business as CDT Systems, Inc. (CDT Systems or the Company), is the successor company to FarWest Group, Inc. By proxy vote the shareholders of the company approved changing the name of FarWest Group, Inc. to Capacitive Deionization Technology Systems, Inc. at the July 31, 2001 annual shareholders meeting. The Amended Articles of Incorporation were then filed with the State of Nevada and the Company's bylaws were also amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Far West Group Inc. ("FarWest") had been organized under the laws of the state of Nevada in July 1996. In July of 1996, FarWest was merged with Pro Vantage Corporation, an inactive public Company that was incorporated in 1992 in the State of Florida. FarWest was the surviving Company in that merger. Concurrently, the FarWest Pump Company ("Pump Company"), an Arizona corporation formed in 1986 became a wholly owned subsidiary of the Company. From July 1996 through December 31, 1999, FarWest operated FarWest Pump Company as an operating subsidiary. The operations of Pro Vantage were discontinued in July 1996, immediately following the merger with FarWest Group, Inc.                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In November 1999, FarWest's Board of Directors completed the sale of the Pump Company to the Pump Company's management by making deferred payments of $270,000 to Pump Company for its assumption of all existing liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In January 1997, the Company entered into a manufacturing and marketing license agreement with Lawrence Livermore National Laboratories ("Lawrence Livermore") whereby the Company obtained the rights to Lawrence Livermore's patented Capacitive Deionization Technology (CDT). The manufacturing and marketing license is effective for the life of the patents (up to 17 years), with most such patents expiring by the year 2016. To maintain the license the Company must make contracted minimum annual royalty payments to Lawrence Livermore in the amount of $25,000 per year. The Company will owe Lawrence Livermore royalty payments varying from one (1%) percent of product revenue to a maximum of five (5%) percent of product revenue. The Company is also liable to reimburse Lawrence Livermore for foreign patent filing fees. These fees are incurred by Lawrence Livermore as patents are filed and renewed in foreign countries. During 2004 and 2003, these fees totaled over $71,000 and $50,000, respectively.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The Lawrence Livermore license authorizes the Company to enhance, manufacture and market CDT, specifically in the fields of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-    Brackish Water and Seawater Conversion
-    Industrial and Agriculture Ground Water Remediation
-    Pure Water for Boiler Applications
-    Ultra Pure Water for Manufacturing
-    Nuclear Waste Remediation
-    Medical Applications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The aerogel product licensed from Lawrence Livermore Laboratories in January 1997 operated at low voltage levels (compatible with solar energy sources) with resulting favorable operating economics; however, the cost of manufacture with the original Lawrence Livermore technology was too expensive to be commercially competitive. Company efforts have been focused on cost reduction programs which also have improved the operational efficiency of the technology while reducing the manufacturing costs. Systems were also developed which allows the waste stream to access both sides of carbon aerogel, as opposed to the single side of carbon aerogel accessible in the Lawrence Livermore technology. The Company is continuing to develop proprietary improvements to further reduce the cost of the manufacturing process and improve the efficiencies.                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Going Concern                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's significant operating losses and its working capital deficit and stockholders' deficit raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The Company was funded initially through investment by its co-founder. Since 1998 funding has been through private placements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The Company recognizes the extent of the financial investment necessary to support the planned business activities. There is no guarantee that the Company can complete the above-referenced financing; however, the Company is negotiating the following options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



|* | Convertible debt financing from private investment group                                                                                  
|- | ------------------------------------------------------------------------------------------------------------------------------------------
|* | Working capital from a Regional Investment Bank, including equity and debt                                                                
|* | Expansion of current strategic and investment alliances                                                                                   
|* | International joint ventures                                                                                                              
|* | An alliance with industry and government partners to accelerate pilot systems for the Powder River CBME Gas Wastewater Remediation Project
|  |                                                                                                                                           



|Business opportunities will rely on the Company executing its polymerization, pyrolization and assembly outsourcing plans. The Company's plans to produce over 3,000 Aqua Cells in the next twelve months is dependent on financing and expanding outsourcing capacities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|To meet the fourth quarter 2005 and next year's requirements, the Company must obtain the working capital necessary for its planned Texas manufacturing facility, capital equipment and required personnel. To meet these needs, capital must be received or committed by mid-year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The Company has expanded its commitment to developing a team of strategic partners by providing demonstration AquaCells for technology and application testing. To date, demonstration AquaCells are implemented in Japan, Australia, Holland and Canada, as well as the U.S. Ongoing CDT application development is active at Texas A&M University, Texas Water Development Board, Colorado School of Mines, U.S. Bureau of Reclamation, as well as several multi-national corporate strategic partners' identified applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|There can be no assurances given that the Company will be successful in generating sufficient revenues from its planned activities or in raising sufficient capital to allow it to continue as a going concern which contemplates increased operating expenses, acquisition of assets and the disposition of liabilities in the normal course of business. These factors can affect the ability of the Company to implement its general business plan including the completion of the required manufacturing facilities and continued proprietary CDT product improvements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The Company considers all liquid investments, with an original maturity of three months or less when purchased, to be cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Use of Estimates and Assumptions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates include valuation of common shares issued for compensation and services rendered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Furniture and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Furniture and equipment are stated at cost. Depreciation is computed principally by the straight-line method based on the estimated useful lives of five to seven years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Net Loss Per Common Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The Company calculates net loss per common share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the potential dilution of securities that could share in the earnings of the Company. Because the Company's potential dilutive securities are antidilutive, the accompanying presentation is only of basic loss per share. The numerator in the basic loss per share calculation is net loss. The denominator in the calculation is weighted average shares for each period.                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Stock-Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations ("APB 25"), in accounting for its stock-based compensation plans. Under APB 25, compensation cost is measured as the excess, if any, of the market price of the Company's stock at the date of the grant above the amount an employee must pay to acquire the stock. No compensation expense is recognized when the exercise price is equal to or greater than the market value of the stock on the day of the grant. The Financial Standards Board ("FASB") published SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) on January 1, 1996 which encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing rules, but are required to disclose pro forma net income (loss) as if SFAS No. 123 had been applied.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|The Company recorded $29,205 and $14,620 in expense during the years ended December 31, 2004 and 2003, respectively, under FASB Statement 123 for warrants issued to non-employees. The warrants were issued as services and financing costs in connection with certain sales of common stock of the Company. There is no future expense to be recorded in subsequent periods as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Following is the pro forma effect of the employee stock options which have vested each year as if the fair value-based method of SFAS No. 123 had been used:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                           |  | 2004          |  | 2003         
|-------------------------- |  | ------------- |  | -------------
|Net loss                   |  | $ (1,513,503) |  | $ (1,181,591)
|Effect of employee options |  | (11,578)      |  | (3,513)      
|Pro forma net loss         |  | (1,525,081)   |  | (1,185,104)  
|Per Share                  |  | $(0.08)       |  | $(0.08)      
|                           |  |               |  |              



|In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment", which will require the Company to expense the fair value of employee stock options beginning in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Using the fair value method, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants 2004: dividend yield of 0.0 percent; expected volatility of 93 percent; risk free interest rates of 2 percent and expected lives of two years; in 2003: dividend yield of 0.0 percent; expected volatility of 137 percent; risk free interest rates of 3.5 percent and expected lives of two years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Research and Development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Research and development expenditures are expensed when incurred. Research and development expenses amounted to $701,061 and $599,139 for the years ended December 31, 2004 and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Certain reclassifications, having no effect on reported net loss, were made to prior year data to conform to the current year classification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Implementation of New Financial Accounting Standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Effective January 1, 2003, the Company adopted the recognition and measurement provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 45 ("Interpretation 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the disclosures to be made by a guarantor in interim and annual financial statements about the obligations under certain guarantees. Interpretation 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company does not provide guarantees. As a result, this interpretation has not had a material impact on the financial statements.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) ("Interpretation 46"), "Consolidation of Variable Interest Entities." Application of this interpretation is required for interests in variable interest entities that are considered to be special-purpose entities for the year ended December 31, 2003. Application of Interpretation 46 for all other types of variable interest entities is required for the Company effective March 31, 2004. The company has no arrangements or relationships with special-purpose or variable interest entities at December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Interpretation 46 addresses the consolidation of business enterprises to which the usual condition (ownership of a majority voting interest) of consolidation does not apply. This interpretation focuses on controlling financial interests that may be achieved through arrangements that do not involve voting interests. It concludes that in the absence of clear control through voting interests, a company's exposure (variable interest) to the economic risks and potential rewards from the variable interest entity's assets and activities are the best evidence of control. If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary is required to include assets, liabilities and the results of operations of the variable interest entity in its financial statements.                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In December 2004, the FASB issued a revision to FASB No. 123R, "Share Based Payment" which will require the Company, beginning in the first quarter of 2006, to record as an expense the fair value of employee stock options issued. Presently and through 2005, the Company applies the provisions of APB 25, as described previously. The Company has not determined the transition method or effects of applying FASB No. 123R.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|2.   Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|During October 2000, a principal shareholder and co-founder resigned as Chairman, Director and Chief Executive Officer ("CEO"). As part of the severance agreement, the Company agreed to pay the former CEO $11,000 per month for fourteen months and the former CEO agreed to return 216,000 common shares of the Company. In addition, an account payable of $56,000 to the former CEO was cancelled. The obligation to the former CEO was satisfied and the shares returned to the treasury during 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3.   Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|There were no significant temporary differences between the Company's tax and financial bases, except for the Company's net operating loss carryforwards amounting to approximately $9,700,000 and $7,900,000 at December 31, 2004 and 2003, respectively. These carryforwards will expire, if not utilized, in 2012-2019.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company has deferred tax assets amounting to approximately $3,544,000 and $2,761,000 at December 31, 2004 and 2003, respectively, related to the net operating loss carryovers. The realization of the benefits from these deferred tax assets appears uncertain due to recurring net losses. Accordingly, a valuation allowance has been recorded which entirely offsets the deferred tax assets at the end of each period. The components of the net deferred tax asset are as follows at December 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|                                       | 2004        |  | 2003       
|-------------------------------------- | ----------- |  | -----------
|Operating loss carryforwards           | $ 3,544,000 |  | $ 2,761,000
|Accrued unpaid compensation            | 296,000     |  | 355,000    
|Note receivable allowance              | -           |  | 47,000     
|Other                                  | 1,000       |  | 1,000      
|Deferred tax asset valuation allowance | (3,841,000) |  | (3,164,000)
|                                       | $-          |  | $-         
|                                       |             |  |            



|4.   Long-term Debt, Notes Payable and Convertible Debt                                                                                                                                                                                                                                                                                                                              
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                     
|The Company has borrowed $1,368,000 and $433,000 as of December 31, 2004 and 2003, respectively, from certain related parties. Certain of the notes are past due as of December 31, 2004. The notes bear interest at rates ranging from 12% to 18% and, as of December 31, 2004, are convertible into 7,050,703 shares of common stock at prices ranging from $.13 to $.45 per share.
|The Company has certain other convertible debentures outstanding as of December 31, 2004 and 2003, bearing interest at rates from 10% to 15%. The debentures mature at various dates from December 31, 2003 to July 2007 and are convertible, as of December 31, 2004 into 1,577,354 shares of common stock of the Company at prices ranging from $.13 to $.50 per share.            
|                                                                                                                                                                                                                                                                                                                                                                                     
|The Company accrued $100,179 and $30,023 in interest to related parties in 2004 and 2003, respectively. Interest paid to related parties during 2004 amounted to $13,406.                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                     
|The Company has also borrowed $70,000 in short-term debt which matures in January 2005 and bears interest at 42%.                                                                                                                                                                                                                                                                    
|Following is a summary of maturities of all debt and convertible debentures as of December 31, 2004:                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                     



| | Year             |  |  | Amount     
| | ---------------- |  |  | -----------
| | 2005 or past due |  |  | $ 1,742,816
| | 2006             |  |  | --         
| | 2007             |  |  | 374,925    
| |                  |  |  | $2,117,741 
| |                  |  |  |            



|5.   Capital Stock                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                            
|The Company issued 900,867 shares for $211,550 at various dates during 2004 in a private placement at prices ranging from $.20 to $.25 per share.           
|                                                                                                                                                            
|The Company issued 686,760 shares to convert payables and debt amounting to $171,690 during 2004.                                                           
|                                                                                                                                                            
|The Company issued 1,332,644 shares for $228,902 at various dates during 2003 in a private placement at prices ranging from $.17 to $.25 per share.         
|                                                                                                                                                            
|The Company has issued stock options and warrants. A summary of the status of stock options and warrants is set forth below for the years ended December 31:
|                                                                                                                                                            



|                |           | 2004     |            |           | 2003     |           
|--------------- | --------- | -------- | ---------- | --------- | -------- | ----------
|                |           | Wgt.     |            |           | Wgt.     |           
|                |           | Avg.     |            |           | Avg.     |           
|                |           | Exercise | Price      |           | Exercise | Price     
|                | Shares    | Price    | Range      | Shares    | Price    | Range     
|Outstanding,    |           |          |            |           |          |           
|beginning       | 2,278,333 | $   .94  | $.17-$2.50 | 2,051,336 | $ 1.06   | $.33-$2.50
|                |           |          |            |           |          |           
|Granted         | 803,000   | $   .79  | $.50-$1.00 | 610,000   | $   .83  | $.17-$2.50
|                |           |          |            |           |          |           
|Expired/Revised | (65,000)  | $   .55  | $.55       | (58,000)  | $   .50  | $.50      
|                |           |          |            |           |          |           
|Exercised       | -         |          |            | (325,003) | $   .36  | $.25-$.50 
|                |           |          |            |           |          |           
|Outstanding,    |           |          |            |           |          |           
|ending          | 3,016,333 | $   .92  | $.17-$2.50 | 2,278,333 | $   .94  | $.17-$2.50
|                |           |          |            |           |          |           
|Options         |           |          |            |           |          |           
|exercisable,    |           |          |            |           |          |           
|ending          | 2,806,333 | $   .97  | $.17-$2.50 | 1,998,333 | $   1.07 | $.17-$2.50
|                |           |          |            |           |          |           



|The weighted average grant date fair value of options and warrants issued during the periods ended December 31, 2004 and 2003 was $.05 and $.04, respectively.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                              
|Following is a summary of the common shares issued for services rendered during the years ended December 31, 2004 and 2003:                                   



|                      |                 | Number    |             
|--------------------- | --------------- | --------- | ------------
|                      | Date            | of Shares | Amount      
|Professional services | Jan-Mar-- 04    | 416,500   | $    104,125
|Professional services | Apr-June -- 04  | 177,400   | 44,350      
|Professional services | July-Sept -- 04 | 175,300   | 43,825      
|Professional services | Oct-Dec -- 04   | 148,100   | 37,025      
|Total issued in 2004  |                 | 917,300   | $229,325    



|                      |                    | Number    |              
|--------------------- | ------------------ | --------- | -------------
|                      | Date               | of Shares | Amount       
|                      |                    |           |              
|Professional services | Jan - Mar - 03     | 155,600   | $      38,900
|Professional services | April -- June - 03 | 504,400   | 94,484       
|Professional services | July - Sept - 03   | 204,900   | 34,192       
|Professional services | Oct - Dec - 03     | 309,948   | 51,784       
|Total issued in 2003  |                    | 1,174,848 | $219,360     
|                      |                    |           |              



|6.   Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Lease Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company leases office space on a month-to-month basis. Rent expense for the years ended December 31, 2004 and 2003 amounted to $26,450 and $20,800, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Fair Value of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies.                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The fair value of financial instruments classified as current assets or liabilities including cash and cash equivalents and notes and accounts payable approximate carrying value due to the short-term maturity of the instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Concentration of Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Company invests its cash and certificates of deposit primarily in deposits with major banks. Certain deposits, at times, are in excess of federally insured limits. The Company has not incurred losses related to its cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Litigation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|There were no new legal proceedings instituted by or against the Company during 2004. The following proceedings were instituted in the year 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Three former employees of the Company's former subsidiary, FarWest Pump Co., filed a lawsuit in Maricopa County Superior Court alleging the Company failed to pay them certain wages and provide them with stock options. The former subsidiary of the Company, FarWest Pump, Inc., also entered the lawsuit and asserted various claims against the three former employees and their new employer, Duncan Pump, Inc., including conversion, civil conspiracy, wrongful interference with contractual relationships, and violation of trade secrets.                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|In the first quarter of 2003, one of the ex-employees agreed to a negotiated settlement whereby the Company would issue the ex-employee Rule 144 common stock. The Company completed the transaction, whereby the Rule 144 restriction was removed from the shares. The ex-employee has quarterly limitation on the amount of shares which can be sold. The resultant liability for the value of the settlement shares was accrued at December 31, 2002.                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The Plaintiffs again filed an appeal to review the statue of limitations ruling. On August 21, 2003, the Court of Appeals for the State of Arizona, Division One, found in favor of the Company on the basis that the plaintiffs' claims were time barred pursuant to Arizona Revised Statutes. The Court of Appeals also found that the Company, as the prevailing party, is entitled to certain costs in its appeals process. The plaintiffs' only remaining appeal process was to the Arizona Supreme Court. The time for the filing of a motion for reconsideration or petition for review has expired. The plaintiffs have also been directed by the court to compensate the Company for legal expenses incurred.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|2.     Exhibits                                                                                                                                                                                                                                                                                                                              
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                             
|(2)     Stock purchase Agreement (Revised) between FarWest Group, Inc. and New Pumpco dated May 24, 1999 for the acquisition of 100% of FarWest Pump Co. effective January 1, 1999 (Filed as Exhibit 2 (a) to Registration Statement on form 10SB dated February 14, 2000 Registrant N. CIK#0001098584 and incorporated herein by reference).
|                                                                                                                                                                                                                                                                                                                                             
|(2)     The Articles of Merger of Pro Vantage, Inc. into FarWest Group, Inc. dated July 2, 1996 (Filed as Exhibit 2.6 to Registration Statement on Form 10SB dated November 22, 1999 Registrant No. CIK#0001098584 and incorporated herein by reference).                                                                                    
|                                                                                                                                                                                                                                                                                                                                             
|(3i)    Articles of Incorporation of Registrant (Filed as to Exhibit Registration Statement on Form 10SB dated November 22, 1999 Registrant No. CIK#0001098584 and incorporated herein by reference).                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                             
|(3ii)   By-Laws of Registrant (Filed as Exhibit 2.2 to Registration Statement on form 10SB dated November 22, 1999 Registrant No. CIK#0001098584 and incorporated herein by reference).                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                             
|(2)     Specimen Copy of Common Stock Certificate (Filed as Exhibit 2.3 to Registration Statement on Form 10SB dated November 22, 1999 Registrant No. CIK#0001098584 and incorporated herein by reference).                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                             
|(10)    Lawrence Livermore License Agreement (Filed as Exhibit 10 to Registration Statement on Form 10SB dated November 22, 1999 Registrant No. CIK#0001098584 and incorporated herein by reference).                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                             
|(10) Investment Agreement Between FarWest Group, Inc. and Asea Brown Boveri, Inc. dated December 29, 1999 (Filed as Exhibit (g) to Registration Statement on Form 10SB dated February 14, 2000 Registrant No. CIK#0001098584 and incorporated herein by reference).                                                                          
|                                                                                                                                                                                                                                                                                                                                             
|(10) Letter of Intent for the Establishment of a Joint Venture - CDT Systems, Inc./Air Water, Inc. Entered into on January 30, 2004.                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                             

|Exhibit No. | Description                                                            
|----------- | -----------------------------------------------------------------------
|31.1        | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2        | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1        | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|32.2        | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            |                                                                        

|(b). Reports on 8-K                                                                                                                                                                                                                                                                                                                                                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                
|8K was filed by the registrant on August 26, 2003 relating to the Arizona Court of Appeals finding for the Company in a lawsuit against it by certain former employees.                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                
|8K was filed by the registrant on December 16, 2003 relating to the Company's establishment of a joint venture in Japan with Air Water, Inc.                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                
|8K was filed by the registrant on February 11, 2004 relating to the Company's approval for trading on the Over the Counter Bulletin Board and the completion of a joint venture in Japan.
8K was filed by the registrant on November 19, 2004 relating to the Company's bridge loan financing from Sand & Water International Capital, Inc.                                     
|                                                                                                                                                                                                                                                                                                                                                                                
|Item 14: Principal Accountant Fees and Services                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                
|Aggregate fees billed for each of the last two fiscal years for professional services by the Company's principal accountant for the audit of the annual financial statements and review of the financial statements included in the Company's Forms 10-QSB amounted to $19,500 for 2003 and $19,500 for 2004. The Company's audit committee has pre-approved all audit services.
|                                                                                                                                                                                                                                                                                                                                                                                
|Signatures                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                
|Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 has been signed by the following persons in the capacities indicated on the 8th day of April, 2005.                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                

|Signature          | Title                                    
|------------------ | -----------------------------------------
|                   |                                          
|/s/ Dallas Talley  | Chairman of the Board and Chief Executive
|Dallas Talley      | Officer                                  
|                   | (Principal Executive Officer)            
|                   |                                          
|/s/ Phil Marshall  | Chief Financial Officer                  
|Phil Marshall      | (Principal Financial Officer)            
|                   |                                          
|/s/ Thomas Friezen | Director                                 
|Thomas Friezen     |                                          
|                   |                                          
|/s/ Takeshi Ogata  | Director                                 
|Takeshi Ogata      |                                          
|                   |                                          
|/s/ Ann Heywood    | Director                                 
|Ann Heywood        |