**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**Form 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2007**

 

**Commission file number: 000-16936**

 

----

 

**WorldWater &Solar Technologies Corp.**

**(formerlyWorldWater & Power Corp.)**

(Name of issuer in its charter)

 

| **Delaware**                                                    | ** ** | **33-0123045**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                            |       |                                     |
| **200 Ludlow Drive, Ewing, NJ**                                 | ** ** | **08638**                                |
| (Address of principal executive offices)                        |       | (Zip Code)                               |

 

Issuer’s telephone number **(609) 818-0700**

 

Securities registered under Section 12(b) of the ExchangeAct: **None**

 

Securities registered under Section 12(g) of the ExchangeAct:

**Common Stock, $0.001 par value**

 

                                                Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

 

                                                Indicate bycheck mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o  No x

 

                                                Check whetherthe issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes x  No o

 

                                                Check if thereis no disclosure of delinquent filers in response to Item 405 ofRegulation S-K is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

 

                                                Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large  accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o                    |   | Smaller reporting company o |
|---------------------------------|--------|--------------------------|--------|-------------------------------------------------|--------|----------------------------------|
|                            |   |                     |   | (Do not check if  a smaller  reporting company) |   |                             |

 

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

 

                                                The issuer’srevenues for its most recent fiscal year was $18,466,020.

 

                                                On June 29,2007 the aggregate market value of the voting stock held by non-affiliates ofthe registrant was approximately $227,009,279.

 

                                                As of February 29,2008 the Registrant had outstanding 189,352,674 shares of Common Stock and 6,778,989shares of Preferred Stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

                                                None.

 

 

 

----

 

**TABLE OF CONTENTS**

 
| **PART I**   | 3                                                                                                                              |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------|
| ** **        | **ITEM 1. BUSINESS**                                                                                                      | 3 |
|              | a)                                                                                                                             |   | Overview | 3 |
|              | b)                                                                                                                             |   | Major Customers By  Geographic Location | 4 |
|              | c)                                                                                                                             |   | Implementation Strategy | 6 |
|              | d)                                                                                                                             |   | Products  and Services | 7 |
|              | e)                                                                                                                             |   | Marketing | 8 |
|              | f)                                                                                                                             |   | Research  and Development | 9 |
|              | g)                                                                                                                             |   | Intellectual  Property | 9 |
|              | h)                                                                                                                             |   | Source And Availability of Components | 9 |
|              | i)                                                                                                                             |   | Competitive Conditions Affecting the Company | 10 |
|              | j)                                                                                                                             |   | Subsidiaries | 10 |
|              | k)                                                                                                                             |   | Government  Regulations | 10 |
|              | l)                                                                                                                             |   | Employees | 10 |
|              | m)                                                                                                                             |   | Risks  and Uncertainties | 10 |
|              |                                                                                                                           | **ITEM 1A. RISK FACTORS** | 12 |
| ** **        | **ITEM 1B. UNRESOLVED STAFF COMMENTS**                                                                                         | 20 |
| ** **        | **ITEM 2. PROPERTIES**                                                                                                    | 20 |
| ** **        | **ITEM 3. LEGAL PROCEEDINGS**                                                                                             | 21 |
| ** **        | **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS**                                                          | 21 |
| **PART II**  | 21                                                                                                                             |
| ** **        | **ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY,  RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES** | 21 |
|              | a)                                                                                                                             |   | Price  Range of Common Stock | 21 |
|              | b)                                                                                                                             |   | Holders  of Common Stock | 22 |
|              | c)                                                                                                                             |   | Dividends | 22 |
|              | d)                                                                                                                             |   | Preferred  Stock | 22 |
|              |                                                                                                                           | **ITEM 6.  SELECTED FINANCIAL DATA** | 24 |
| ** **        | **ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS**                   | 24 |
| ** **        |                                                                                                                           | **OVERVIEW** | 24 |
| ** **        |                                                                                                                           | **CRITICAL ACCOUNTING POLICIES AND ESTIMATES** | 25 |
| ** **        |                                                                                                                           | **REVENUE RECOGNITION** | 26 |
| ** **        |                                                                                                                           | **ALLOWANCE FOR DOUBTFUL ACCOUNTS** | 26 |
| ** **        |                                                                                                                           | **ACCOUNTING  FOR INCOME TAXES** | 26 |
| ** **        |                                                                                                                           | **RESULTS OF OPERATIONS OF YEARS ENDED DECEMBER 31, 2007  AND 2006** | 28 |
| ** **        |                                                                                                                           | **COMPARISON OF YEARS ENDED DECEMBER 31, 2007 AND  2006** | 29 |
| ** **        |                                                                                                                           | **RESULTS OF OPERATIONS OF YEARS ENDED DECEMBER 31,  2006 AND 2005** | 30 |
| ** **        |                                                                                                                           | **COMPARISION OF YEARS ENDED DECEMBER 31, 2006 AND  2005** | 31 |
| ** **        |                                                                                                                           | **HISTORICAL  CASH FLOW ANALYSIS** | 33 |
| ** **        |                                                                                                                           | **LIQUIDITY AND CAPITAL RESOURCES** | 34 |
| ** **        |                                                                                                                           | **COMMITMENTS  AND GUARANTEES** | 36 |
| ** **        |                                                                                                                           | **INCOME TAXES** | 36 |
| ** **        |                                                                                                                           | **ACQUISITION** | 36 |
| ** **        |                                                                                                                           | **RECENT ACCOUNTING PRONOUNCEMENTS** | 37 |
| ** **        | **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK**                                                  | 38 |
| ** **        | **ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA**                                                                  | 39 |
| ** **        | **ITEM 9. CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**                         | 70 |
| ** **        | **ITEM 9A. CONTROLS AND PROCEDURES**                                                                                      | 70 |
| **PART III** | 71                                                                                                                             |
| ** **        | **ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND  CORPORATE GOVERNANCE**                                                     | 71 |
| ** **        | **ITEM 11. EXECUTIVE COMPENSATION**                                                                                       | 74 |
| ** **        | **ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**              | 79 |
| ** **        | **ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS AND DIRECTOR INDEPENDENCE**                                         | 80 |
| ** **        | **ITEM 14. PRINCIPAL ACCOUNTANT STATEMENT FEES AND  SERVICES**                                                                 | 81 |
| ** **        | **ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES**                                                                                  | 82 |
|                   |                                                                                                                                |  |  |  |  |  |  |

 

2

----

 

**PART I.**

 

**ITEM 1. BUSINESS**

 

**a)             OVERVIEW**

 

                WorldWater & SolarTechnologies Corp. (“WorldWater/Company”) is an international solar engineeringand project management company with unique, high-powered solar electrictechnology and expertise, providing alternative energy solutions to a widevariety of customers in both domestic and international markets. Until 2002,WorldWater’s business was focused exclusively on providing developing countrieswith water and power solutions. Since then, following power advances in itstechnology, the Company has placed increasing emphasis on domestic markets,principally in California, New Jersey, and their surrounding states, and isaddressing the needs of residential, commercial and industrial customers, in boththe public and private sectors. The Company will continue to selectively submitproposals to various foreign governments in need of solving critical watersupply and energy problems using the Company’s proprietary solar technology.

 

                With significantly rising energyprices and related shortages, along with significant state and federalincentives, and utility company rebate programs, domestic markets have emergedas the Company’s highest priority. The Company believes it is uniquelypositioned to deliver a wide range of product and service offerings, fromsolar-powered equipment and installations, both fixed and mobile, tolarge-scale, turnkey solar energy and water system solutions, specializing invariable frequency drive (VFD) applications that deliver high customer value.The foundation and enabler for these offerings is WorldWater’s substantialtechnical expertise and proprietary solar technology, including its AquaMaxTMSystem, AquaDriveTM Controller, AquaMeterTM Water Meter, and MobileMaxPureTM.

 

                The Company’s patented AquaMaxTMsolar electric system, capable of operating pumps and motors up to1,000 hp for irrigation, refrigeration and cooling, and water utilities,make it a breakthrough product delivering mainstream pumping capacity poweredby solar technology. The AquaMaxTM System has an electronic board that reads andtranslates the output of direct current (DC) from solar panels, converting theflow into alternating current (AC) for delivery to the electric grid, waterpumps or any 3-phase AC motor. These hybrid solar irrigation pumps are able tooperate on solar alone or in combination with the electric grid or diesel generators. Among the unique advantagesof the Company’s proprietary solar technology is that, in the event of a gridoutage, load can be seamlessly and automatically transferred to the solarelectric system for continued operation without interruption and withoutoperator intervention.

 

                WorldWater’s proprietarytechnology permits the use of high power (up to 1,000 hp) AC motors andpumps, an option previously unavailable from solar power. AC pumps are widelyavailable in countries throughout the world, allowing replacement pumps andparts to be supplied on a local basis. Other forms of solar-poweredphotovoltaic (PV) pumping systems currently available use less reliable andless durable DC pumps or custom AC pumps, which are more costly and notcommonly in use.

 

                By employing the hybrid AquaMaxTMirrigation system, which can operate motors up to 1,000 horsepower by sunshinealone or in combination with the existing electric grid or diesel, a farmer canirrigate at little or no additional cost over what is paid currently forirrigation powered by grid electricity. There is limited ongoing maintenancecost associated with the sun power source used to drive the irrigationequipment.

 

                When a farmer is not irrigating,the sun is developing electricity through WorldWater’s system, and the power isreturned to the electric utility for credit, a form of storage for later use,or for direct utility bill credit (depending upon the state). This process iscalled net metering and is already in operation in New Jersey and California aswell as 38 other states. By automatically switching between solar and otherpower sources, the AquaMaxTM enables a farmer to protect against a loss ofirrigation ability during daylight power shortages or blackouts. The functionalityof this technology goes far beyond the agricultural applications and isextremely well-suited for a wide range of industrial and commercial uses.

 

                WorldWater’s continuingcommitment to its technology and innovation is demonstrated in the developmentof the MobileMaxPureTM, a self-contained, trailer-mounted solar-powered systemdesigned to pump and purify water for both drinking and food preparation. Thissystem has the ability to draw surface water from contaminated city resources,lakes, streams, canals, ponds, rivers, wells or other sources and turn it intoclean, drinkable water for thousands of people per day. A predecessor of MobileMaxPure was and is still being used in the recovery efforts in Waveland, MS inthe U.S. Gulf Coast in the wake of Hurricane Katrina.

 

On January 28,2008, the Company completed the acquisition of ENTECH, Inc.   With thecombined technologies of the Company and ENTECH, we believe our solar systemswill be capable of generating and delivering electrical and thermal energy onsite at prices competitive to retail prices without relying on governmentsponsored rebates. ENTECH’s patented concentrator technology allows for theinstallation of large solar “farms” with greatly reduced requirements for solarcell materials (silicon or multi-junction). Due to the advantages of ENTECH’sconcentrator, a significantly lesser amount of silicon used in flat plate solar

 

3

----

 

modules is required bycurrent ENTECH modules to generate the same electrical power. Consequently, theENTECH technology greatly lessens the impact of the silicon material shortagecurrently constricting flat plate solar panel supply. ENTECH concentratorsutilize a two-axis tracker to follow the sun’s position throughout the day,maximizing energy production.

 

ENTECH’stechnology can produce photovoltaic electricity, or thermal energy (heat) forcommercial uses such as for heating and/or air conditioning. When applied in acombined fashion for onsite power applications, the cost to the customer can besignificantly less for electricity generated and for BTU’s of heat providedversus separate competing systems currently on the market while beingcompetitive with current retail energy prices.

 

ENTECHwill maintain its identity, location, and business operations in bothterrestrial and space solar energy. The Company anticipates, but can provide noassurance, ENTECH will continue to perform its contract work for NASA, the U.S.Department of Defense, and other customers, as well as its internal R&Dprograms leading to improved future products.

 

TheCompany was incorporated in the state of Nevada on April 3, 1985 under thename of Golden Beverage Company. In April 1997, the Company entered into areverse merger transaction with WorldWater, Inc., a Delaware corporationformed in January 1984. Since the merger transaction, the Company,operating under the name of WorldWater Corp., has been engaged exclusively inthe solar/water power industry. In June of 2000, the Company shareholdersvoted to change the state of incorporation from Nevada to Delaware. In June 2005,the Company shareholders voted to change the name to WorldWater &Power Corp. from WorldWater Corp. Effective May 2, 2007 the Company announced thatthe Board of Directors had approved a change in its corporate name toWorldWater & Solar Technologies Corp. On September 7, 2007, legalconfirmation of the name change was confirmed. The Company stock ispublicly traded on the NASDAQ OTC Bulletin Board under the symbol WWAT.OB.

 

TheCompany’s executive office, research and development facility is located at 200Ludlow Drive, Ewing, New Jersey 08638. WorldWater conducts research anddesigns, develops and markets proprietary technology relating to solar energyand water engineering, including solar power projects and international watermanagement consulting, at this location.

 

**b)             MAJORCUSTOMERS BY GEOGRAPHIC LOCATION**

 

**CALIFORNIA**

 

                The Company entered theCalifornia agriculture market in 2002 with the implementation of a 50 hpirrigation pumping system for a cotton farm in the San Joaquin Valley. In 2003,WorldWater installed its first solar refrigeration system at a food processingfacility near Bakersfield, CA. In the first half of 2004, WorldWater supplied aone megawatt (MW) solar electric system at Cerro Coso Community College,Ridgecrest, CA, the largest PV installation on a U.S. community college campus.In December 2004, WorldWater completed the installation of a major solarirrigation pumping system at a citrus ranch in San Diego County, CA, whichpowers a 200 hp irrigation pump.

 

                Consistent with the Company’sfocus on domestic projects, and specifically in California, and surroundingstates, WorldWater, in September 2005, through its wholly-ownedsubsidiary, WorldWater Holdings Inc., acquired the assets of MJD Solutions, Inc.,a Nevada Corporation, doing business as Quantum Energy Group (Quantum).Quantum, based in Applegate, California, is a solar energy, construction andproject management company, and will assist in the sales, design andinstallation of residential, commercial, and institutional solar projects.

 

                During 2007, the Companycompleted four commercial projects with recognized revenue of  $406,488 and had one commercial project inprogress as of December 31, 2007, with recognized revenue of $13,347,523.The Company completed fifteen residential projects with aggregate revenue of$666,657 in 2007.  The Company had oneresidential project under contract as of December 31, 2007 in the amountof $34,326.   This project is expected tobe completed in the first quarter of 2008.

 

**COLORADO**

 

On March 5, 2008,the Company announced that it has broken ground on the 2-Megawatt solar systemfor Denver International Airport (DIA). The solar installation will supply 3.5million kilowatt-hours of clean energy annually for the airport and is valuedat over $13 million. Since first announced last year, the project faced someunavoidable delays but is now scheduled for completion by August, in time forthe Democratic National Convention. DIA is the fifth busiest internationalairport in the U.S. and served nearly 50 million passengers in 2007.

 

4

----

 

**NEW JERSEY**

 

                The Company entered the NewJersey agricultural market in 2003 with the completion of a 24 kW solarelectrical system at Flatbrook Farm, an organic meat and poultry farm inMontague, NJ. The New Jersey Board of Public Utilities (BPU) has authorized acomprehensive range of incentives which took effect in January 2004 andwhich will support more than $600 million worth of new PV installations inthe state over the next five years. The Company has made New Jersey a targetstate for the commercial and residential markets.

 

                14 commercial projects werecompleted in 2007 with recognized revenue of $2,691,901.

 

                The company recognized revenueof $34,453 in 2007 from a NJBPU grant that is for research in the developmentof cost effective, grid-tied motor drives for photovoltaic applications.

 

                Three residential projects, withrecognized revenue of $323,720 in 2007, were completed as of December 31,2007.

 

                In the fourth quarter of 2007,the Company recognized revenue on twelve units of Mobil MaxPure®,via a related party sale to a principal shareholder, in the amount of $900,000.

 

                The company had one additionalcontract signed in the first quarter of 2007. This $5,660,928 contract is for a700 kW DC solar power generation system. The contract is subject tofinancing by the customer and approval of a rebate by the New Jersey Board ofPublic Utilities as ofDecember 31, 2007.

 

**TEXAS**

 

                The Company completed oneproject in the first quarter of 2007 in Texas, with recognized revenue of$51,274.

 

**INTERNATIONAL**

 

                WorldWater operated in thePhilippines from 1997 to 2006 when the Company delivered 25 solar powered pumpsfor installation by the National Irrigation Authority (NIA) under a directivefrom former President Fidel V. Ramos. The Company had a Philippinesubsidiary, WorldWater (Phils) Inc. from 1997 to 2006. The Company is evaluatingits Philippine strategy and, as of December 31, 2006, the Company haswritten down all non-cash assets of the subsidiary.  The company does not plan on doing anybusiness in the Philippines in 2008.

 

                In 2005, the Company was awardeda $360,000 grant by the U.S. Trade and Development Agency (USTDA) to supportcompletion of a pilot project for water supply in Sri Lanka. Billings of$213,054 were rendered as of December 31, 2006. Revenue of $3,348 wasrecognized in 2007. The project is designed to assess the hydro-geologicalconditions of the project area, and to provide safe, sustainable water suppliesto people in six villages near the tsunami-ravaged southern coast of Sri Lanka.Subject to satisfactory results of WorldWater’s ground water assessment study,WorldWater anticipates further contracts with the Ministry of Urban Developmentand Water Supply to pump and deliver water to 13,600 people in approximately4,000 households in the six villages through use of its AquaMaxTM solar waterpumping systems.

 

**ACQUISITION**

 

InJune, 2006, the Company announced that it entered into a letter of intent withENTECH, Inc., based in Keller, Texas, to acquire all the outstanding stockof ENTECH upon completion of the necessary due diligence and after obtainingappropriate financing. ENTECH, a private company formed in 1983, is a developerand manufacturer of advanced concentrating solar photovoltaic and thermaltechnologies for terrestrial and space power applications. ENTECH has developedconcentrator solar power systems, supplied solar power for space missions forNASA, and installed ground-based concentrating solar systems in North America.

 

Toobtain the exclusive opportunity through December 31, 2006 to conduct duediligence, the Company made a $500,000 non-refundable payment to ENTECH in2006. From June 2006 through early 2007, we performed due diligence reviewof business, legal and financial matters relating to the acquisition of ENTECH,and negotiations were ongoing regarding the terms of definitive agreements,however, no agreement was completed as originally anticipated under theoriginal letter of intent.

 

On May 25, 2007, theCompany entered into a second letter of intent to acquire ENTECH. This letterof intent was subsequently amended on August 1, 2007 to extend the date bywhich the merger must be completed. On October 29, 2007, the Company and 

 

5

----

 

ENTECH entered into anAgreement and Plan of Merger. The merger was completed on January 28,2008. Specifically, ENTECH merged with and into a wholly-owned subsidiary ofthe Company and the subsidiary survived the merger as a wholly-owned subsidiaryof the Company. Under the terms of the merger agreement, WorldWater paid thefollowing consideration to ENTECH stockholders in 2008:

 

·                  $4.5 million in cash, (in additionto, $500,000 that was paid during 2007), and

 

·                  19,672,131 shares of the Company’scommon stock for an aggregate value of $42,295,082. This determination of value is based on a $2.15 per sharevalue of the Company’s common stock, which was its estimate of the fair marketvalue of its common stock for a reasonable period before and after the date ofmerger agreement, October 29, 2007.

 

Additionally,the ENTECH stockholders are entitled to receive future earn-out considerationcalculated as 5% of Merger Sub’s gross revenues determined in accordance withgenerally accepted accounting principles until the accumulated total of suchearn-out payments paid by WorldWater to the ENTECH stockholders equals $5.0million. WorldWater also was responsible for the payment of $1.3 millionof ENTECH’s liabilities, which was paid at the closing on January 28,2008.

 

Withthe combined technologies of the Company and ENTECH, the Company believes itssolar systems will be capable of generating and delivering electrical andthermal energy on site at prices competitive to retail prices without relyingon government sponsored rebates. ENTECH’s patented concentrator technologyallows for the installation of large solar “farms” with greatly reducedrequirements for solar cell materials (silicon or multi-junction). Due to theadvantages of ENTECH’s concentrator, a significantly lesser amount of siliconused in flat plate solar modules is required by current ENTECH modules togenerate the same electrical power. Consequently, the ENTECH technology greatlylessens the impact of the silicon material shortage currently constricting flatplate solar panel supply. ENTECH concentrators utilize a two-axis tracker tofollow the sun’s position throughout the day, maximizing energy production.

 

ENTECH’stechnology can produce photovoltaic electricity, or thermal energy (heat) forcommercial uses such as for heating and/or air conditioning. When applied in acombined fashion for onsite power applications, the cost to the customer can besignificantly less for electricity generated and for BTU’s of heat providedversus separate competing systems currently on the market while beingcompetitive with current retail energy prices.

 

ENTECHwill maintain its identity, location, and business operations in bothterrestrial and space solar energy. The Company anticipates that ENTECH willcontinue to perform its contract work for NASA, the U.S. Department of Defense,and other customers, as well as its internal R&D programs leading toimproved future products.

 

Inaddition to the $500,000 non-refundable standstill payment to ENTECH in 2006,we made another $500,000 standstill payment in the second quarter 2007 whichwas released to the ENTECH stockholders prior to the completion of the mergertransaction. Due diligence fees of $411,442 through December 31, 2007 and alongwith the two $500,000 payments to ENTECH, resulted in a capitalized amount of$1,411,442, which has been included in Deferred costs and advances to acquiree– ENTECH on the Consolidated Balance Sheet.  Such amount will be added to the totalpurchase price consideration.

 

Inaddition to the consideration to be paid to ENTECH’s stockholders, WorldWaterwas required to provide to ENTECH $5.0 million of working capital toprovide research and development engineering related to the implementation of anew manufacturing plant in Texas. Approximately $2.7 million of working capital was provided to ENTECH asof December 31, 2007, of which $500,000 was expensed as research anddevelopment expense on WorldWater’s Statement of Operations in the quarterending September 30, 2007.   Thebalance of such funds was recorded as tangible assets or was in the bankaccounts of ENTECH as of the acquisition date. The remaining $2.3 million of working capital was provided to ENTECHsubsequent to December 31, 2007 and prior to the merger which was completed on January 28, 2008.

 

**c)             IMPLEMENTATIONSTRATEGY**

 

                James S. Farrin was appointedInterim CEO on January 23, 2006, with Quentin T. Kelly, the founderof the Company, retaining the Chairman’s role.

 

                Mr. Farrin established astrategy direction which was to optimize 2006 revenue by focusing the salesforce on two states, New Jersey and California, and the engineering/operationsdepartment on effective implementation of booked projects.

 

                In accordance with his contract,James Farrin left the company effective January 23, 2007. Mr. Farrinhas continued to assist the Company, in the role of consultant.

 

6

----

 

Upon Mr. Farrin’sdeparture, Mr. Kelly resumed the role of CEO.

 

On March 14, 2008 the Companyannounced that its Chief Executive Officer, Quentin T. Kelly was resigning hisposition as CEO effective March 20, 2008; Mr. Kelly will remain as anon-executive Chairman. Mr. Kelly’s contract compensation package andstock options will not be affected as he will continue to provide services tothe Company.

 

Frank Smith joined the companyin the position of COO effective February 5, 2007 with the mission todevelop the sales, marketing and operational infrastructure required to takethe company to $100 million in revenue. Effective March 21, 2008 Dr. Smithwas promoted to CEO.  As the finance andhuman resource areas were simultaneously improved by the Chief FinancialOfficer, Larry Crawford, through the addition of a new IT system, SOXimplementation and additional financial professionals, Frank Smith addedsignificantly to the company’s engineering, sales and operational capabilitiesthrough strategic additions in those areas.

 

On January 28, 2008, the Companycompleted the acquisition of  ENTECH, Inc.   With the combined technologies of theCompany and ENTECH, we believe our solar systems will be capable of generatingand delivering electrical and thermal energy on site at prices competitive toretail prices without relying on government sponsored rebates. ENTECH’spatented concentrator technology allows for the installation of large solar “farms”with greatly reduced requirements for solar cell materials (silicon ormulti-junction). Due to the advantages of ENTECH’s concentrator, asignificantly lesser amount of silicon used in flat plate solar modules isrequired by current ENTECH modules to generate the same electrical power.Consequently, the ENTECH technology greatly lessens the impact of the siliconmaterial shortage currently constricting flat plate solar panel supply. ENTECHconcentrators utilize a two-axis tracker to follow the sun’s positionthroughout the day, maximizing energy production.

 

ENTECH’s technology can produce photovoltaicelectricity, or thermal energy (heat) for commercial uses such as for heatingand/or air conditioning. When applied in a combined fashion for onsite powerapplications, the cost to the customer can be significantly less forelectricity generated and for BTU’s of heat provided versus separate competingsystems currently on the market while being competitive with current retailenergy prices.

 

ENTECH will maintain its identity, location,and business operations in both terrestrial and space solar energy. The Companyanticipates that ENTECH will continue to perform its contract work for NASA,the U.S. Department of Defense, and other customers, as well as its internalR&D programs leading to improved future products.

 

The Company is implementingappropriate processes, policies, and procedures to make the Company moreeffective and to increase productivity. In addition, the Company is improvingthe organization by making key additions to the infrastructure, especiallyproject managers and application engineers to better handle the increasing loadof projects to be implemented.

 

**d)             PRODUCTS AND SERVICES**

** **

**SOLAR POWER SYSTEMS**

 

WorldWater’s photovoltaic (PV)net-metering systems are designed to “zero out” electrical usage charges forresidential, commercial, industrial, and governmental applications. Suchelectrical usage charges are reduced and potentially eliminated because thesystems generate clean electricity from the sun and, when the power from thesun exceeds the amount consumed by the facility, are able to “spin the meterbackwards,” thus accumulating credit from the local electric utilities. Thesesystems allow organizations to manage their present and future energy costs bysignificantly reducing the energy purchased from the utility. Therefore,hedging escalation of electricity charges over time, the net-metered clientwill be significantly less affected.

 

On January 28, 2008, the Companycompleted the acquisition of  ENTECH, Inc.   With the combined technologies of the Companyand ENTECH, we believe our solar systems will be capable of generating anddelivering electrical and thermal energy on site at prices competitive toretail prices without relying on government sponsored rebates. ENTECH’spatented concentrator technology allows for the installation of large solar “farms”with greatly reduced requirements for solar cell materials (silicon ormulti-junction). Due to the advantages of ENTECH’s concentrator, asignificantly lesser amount of silicon used in flat plate solar modules isrequired by current ENTECH modules to generate the same electrical power.Consequently, the ENTECH technology greatly lessens the impact of the siliconmaterial shortage currently constricting flat plate solar panel supply. ENTECHconcentrators utilize a two-axis tracker to follow the sun’s positionthroughout the day, maximizing energy production.

 

7

----

 

ENTECH’s technology can producephotovoltaic electricity, or thermal energy (heat) for commercial uses such asfor heating and/or air conditioning. When applied in a combined fashion foronsite power applications, the cost to the customer can be significantly lessfor electricity generated and for BTU’s of heat provided versus separatecompeting systems currently on the market while being competitive with currentretail energy prices.

 

**SOLAR WATER SYSTEMS**

 

AquaMaxTM high-yield hybridirrigation pumps take solar water pumping systems to unprecedented productionlevels. WorldWater has the technological capability to drive motors and pumpsup to 1,000 hp, delivering thousands of gallons of water per minute by solarenergy alone, or in automatic combination with the electric grid or dieselgenerators. Irrigating fields in remote areas with solar power requires no fuelcosts, limited maintenance, while generating no noise and no pollution. WithWorldWater’s hybrid systems, if sunlight is not available or decreases as aresult of cloud cover, the AquaMaxTM can automatically switch to an alternatepower source: diesel generation, batteries, or the electric grid.

 

The patented AquaDriveTMcontroller converts solar DC current to AC, then supplies the AC power to amotor or pump from either the solar array or the grid (or other sources such asdiesel generators, wind generators, etc.) or simultaneously from both sources.The hybrid operation is programmed to be completely automatic so manualintervention is not required to switch from one power source to the other.

 

WorldWater has crossed anothertechnological threshold in the deployment and use of photovoltaics intopreviously conventional electricity areas. Idyllwild Water District inCalifornia is the first water utility to be fully self-sustainable by solarpower, in addition to saving up to 70% of the electricity costs of itsoperation. WorldWater’s technology runs its booster pumps and operates itsmajor wells while also is available to perform net metering and provide back-uppower capability in the event of grid power interruption. Should the grid fail,disengagement from the grid will occur and power will be assumed by the solarequipment, allowing operations to continue running until the electric grid isrestored, with solar power eliminating the use of diesel or natural gas duringthis potentially peak demand period. WorldWater believes it is uniquelypositioned to provide this service to the water utility market, as well as theagricultural market.

 

Mobile Max Pure® is a portable,solar-powered pumping and water purification system. A self-contained,stand-alone unit, the Mobile Max Pure® also is equipped with a satellite-basedcommunications system and a 3KW inverter with battery bank for emergency powerneeds. Compact and rugged, easy to operate and maintain, the Mobile Max Pure®harnesses the power of the sun to bring water and electricity to those in need.

 

The Mobile Max Pure® unit is capable ofpurifying up to 30,000 gallons of potable water daily and can draw from bothsurface and well water sources. It can be powered by solar power alone or incombination with an optional back-up generator. The Mobile Max Pure® water purificationsystem incorporates a multi-stage micro filtration process and ultravioletlight treatment to sanitize water contaminated by dirt, silt, bacteria, cysts,parasites, viruses and other pathogens.

 

Mobile MaxPowerTM is a 1.3kilowatt solar array that feeds electric current through WorldWater’s patentedAquaMaxTM technology, which then pumps 200 gallons of water per minute from anywater source, deep or surface. The unit is built into a 21-foot trailer forportability.

 

**e)             MARKETING**

 

Today, the price of theWorldWater commercial systems marketed in California and New Jersey ranges fromapproximately $300,000 to several million dollars. Residential solarinstallations average $30,000 to $50,000. In California, WorldWater has a salesand technical support office in Applegate, north of Sacramento. WorldWater’seast coast and international operations are managed from its headquarters in Ewing,New Jersey.

 

The market for the photovoltaicindustry is significantly increasing, aided by steep increase in oil prices.The total market is expected to soar from $5 billion to $27 billionby 2020 (Source: March 2006 Electric Power Monthly published by the EnergyInformation Administration of the U.S. Department of Energy). Managementbelieves that WorldWater is positioned to capitalize on this trend with itssolar expertise and proprietary technology in both power and water.

 

WorldWater provides solarsolutions for water and power by:

 
|   | · | Combining the two technological requirements of solar engineering and  water engineering, thus enabling the Company to more effectively implement  sustainable turnkey programs; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
|   | · | Utilizing Company specialists to locate and evaluate power sources;                                                                                                              |
|   |   |                                                                                                                                                                             |
|   | · | Conducting site assessments to appropriately size solar electrical  and water pumping and electrical systems;                                                                    |
|   |   |                                                                                                                                                                             |
|   | · | Installing the Company’s proprietary solar products;                                                                                                                        |
|   |   |                                                                                                                                                                             |
|   | · | Focusing sufficient resources on community preparation and  capacity-building for the technology;                                                                                |
|   |   |                                                                                                                                                                             |
|   | · | Arranging project financing.                                                                                                                                                     |

 

 

 

8

----

A key marketing strategy is theutilization of strategic alliances. WorldWater, as a water and power solutionsprovider, has partnered with major international organizations to enhance itsfinancing capabilities and with local organizations to enhance projectimplementation.

 

WorldWater has a longstandingrelationship with the U.S.-based firm Vincent Uhl Associates forhydro-geological studies and with Morehouse Engineering, a power systemcontrols engineering firm. The companies have collaborated successfully in anumber of international markets. Vincent Uhl Associates has located, drilledand tested new groundwater sources in the Americas, Africa and Asia including adetailed analysis of the available water resources in Sri Lanka; MorehouseEngineering has teamed with the Company in Africa and Pakistan.

 

**f)             RESEARCH AND DEVELOPMENT**

 

A key strategy of WorldWater isto continue developing innovative, cutting edge products to meet water andelectricity needs with proprietary solar technology. The Company was awarded apatent in 2001 on the electronic board controller, AquaDriveTM, of the AquaMaxTMsystem. In 2003, the Company also was awarded a patent on its automaticswitching technology, which enables the system to perform multiple functionssuch as water pumping and battery charging and also to switch automaticallybetween solar and grid-tied, diesel or battery power sources. Through the endof 2007, the Company has been granted six patents, with five more pending (seetable below).

 

**g)            INTELLECTUAL PROPERTY**

 

WorldWater has obtained sixpatents and continuations-in-part for its newly developed electronics systemsand has filed for protections of its patents. WorldWater engineers ThomasMcNulty, Sr., Dr. Anand Rangarajan, Douglas Williams, andQuentin T. Kelly, Chairman and former Chief Executive Officer, togetherwith Princeton University engineers, have been issued patents, all of which areassigned to WorldWater. Among other patents, the Company holds patents on theelectronic board controller AquaDriveTM of the AquaMaxTM system and on anelectronic board that allows, in case of the interruption of service in an ACgrid power system, the automatic transfer to solar-powered systems foruninterrupted operation of motors and other power loads. The following tableshows the Company’s existing patents and pending patent applications.

 

**INTELLECTUAL PROPERTY**

 
| ** **                                     | ** ** | **Domestic/**          | ** ** | ** **          | ** ** | ** **          | ** ** | ** **     |
|------------------------------------------------|------------|------------------------|------------|---------------------|------------|---------------------|------------|----------------|
| **Patent Title**                               | ** ** | **International**      | ** ** | **Patent File No.** | ** ** | **Status**          | ** ** | **Expiration** |
| Solar Thermal Powered Water Pump               |       | Domestic               |       | U.S. 5,163,821      |       | Granted             |       | 2011           |
| Bias controlled DC to AC converter and systems |       | Domestic               |       | US 6,275,403        |       | Granted             |       | 2018           |
| Switchable Multiple Source Power Supply        |       | Domestic               |       | US 6,583,522        |       | Granted             |       | 2020           |
| Bias controlled DC to AC converter and systems |       | Int’l Philippines |       | 1-1999-03261        |       | Granted             |       | 2019           |
| No load motor cutoff method and apparatus      |       | Domestic               |       |                |       | Pending             |       |           |
| AC/DC Hybrid Power System                      |       | Domestic               |       | US 7,145,265 B2     |       | Granted             |       | 2025           |
| Maximum Power Point Motor Control              |       | Domestic               |       | US 7,148,650 B1     |       | Granted             |       | 2025           |
| Multiple Motor Operation using Solar Power     |       | Domestic               |       |                |       | Pending             |       |           |
| Using a Variable Frquency for Non motor Loads  |       | Domestic               |       |                |       | Pending             |       |           |
| Mobile MaxPure                                 |       | Domestic               |       |                |       | Pending/Provisional |       |           |
| Solar Power Control Using Irradiance           |       | Domestic               |       |                |       | Pending             |       |           |

 

**h)            SOURCE AND AVAILABILITY OFCOMPONENTS**

 

The solar modules used in theCompany’s systems are composed of silicon and other photovoltaic materials.Suppliers of solar modules include Sharp Electronics, GE Energy LLC, SolarWorld(formerly Shell Solar), Kyocera, BP Solar, SunTech, RWE Schott, and EMCORECorporation (“EMCORE”). WorldWater orders solar modules and related articlesfrom several suppliers and has not entered into any exclusive term supplycontracts, except that WorldWater has entered into a letter agreement withEMCORE under which EMCORE will be the Company’s exclusive supplier ofmulti-junction cells subject to certain conditions.

 

Sub-contractors currentlymanufacture components of the AquaMaxTM systems in the United States. WorldWaterwill continue to source components, specifically solar modules, worldwide,based on quality and cost considerations.

 

 

9

----

 

**i)             COMPETITIVE CONDITIONS AFFECTINGTHE COMPANY**

 

The Company’s products competewith both conventional power generation and other renewable energytechnologies. The main competitive technologies are fossil-fuel generators, andelectric grid extension. The cost of installing a solar energy system may bemore or less than the cost of an electric grid extension, depending on theparticular installation. However, the life-cycle cost benefit of thesolar-driven motor or pump is the reduction in ongoing electric costs. Solargeneration is a hedge against escalation in fossil fuel prices, without thenegative pollution attributes. The initial cost of acquiring a diesel pump isless than the initial cost of a solar pumping system, but the ongoingincremental operating and maintenance costs of the diesel pump are greater and,in remote areas, the supply of fuel and spare parts are not always readily available.

 

The Company’s most commonlyencountered solar pumping competitor is Grundfos A/S of Denmark, a manufacturerof a large range of water pumps, including a solar pump line. The Grundfospumps run off a specially wound AC motor. Aero-Environment of California hassomewhat similar technology using limited size AC pumps. There are a number ofother solar pump companies, including Solar Jack of the US, Sun Motor ofCanada, Southern Cross of Australia, and Total Energie from Europe, whichproduce limited horsepower DC pumps. The Company offers the only systems ableto operate conventional AC powered pumps up to 1000 hp.

 

**j)             SUBSIDIARIES**

 

WorldWater has the followingactive 100% wholly-owned domestic subsidiaries

 

WorldWater Holdings Inc.,dba Quantum Energy Group

 

ENTECH, Inc.

 

WorldWater has the following100% wholly-owned inactive subsidiaries:

 

WorldWater, Inc.

 

WorldWater EastAfrica Ltd.

 

WorldWater Pakistan(Pvt.), Ltd.

 

**k)            GOVERNMENT REGULATIONS**

 

Compliance with federal, state,and local provisions regarding the production and discharge of materials intothe environment is expected to have no effect on capital expenditures, earningsand competitive position. The Company has a program to comply fully with theU.S. Foreign Corrupt Practices Act.

 

**l)             EMPLOYEES**

 

On December 31, 2007, thecompany employed 93 people on a full-time basis. The Company also hiresconsultants on an as-needed basis and has informal arrangements with two waterconsulting companies, the hydrogeological firm of Vincent Uhl Associates andMorehouse Engineering, specialists in power control, and water/wastewatertreatment systems integration.

 

**m)           RISKS AND UNCERTAINTIES**

 

*Fixed-price Contracts*

 

The Company utilizesfixed-price contracts which result in business risk, such as:

 
|   | · | uncertainty in estimating the technical aspects and effort involved  to accomplish the work within the contract scope and schedule; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                |
|   | · | labor availability and productivity;                                                                                                |
|   |   |                                                                                                                                |
|   | · | supplier and subcontractor pricing and performance; and                                                                             |
|   |   |                                                                                                                                |
|   | · | availability and pricing of components (particularly solar modules).                                                                |

 

 

10

----

 

*Intellectual Property Rights*

 

The Company relies on a varietyof intellectual property rights in the performance of its product and servicedelivery to its customers. The Company may not be able to preserve theseintellectual property rights in the future and these rights could beinvalidated, circumvented or challenged. In addition, the laws of some foreigncountries in which our equipment may be sold do not protect intellectualproperty rights to the same extent of the United States. Failure to protect theCompany’s proprietary information and successfully defend challenges orinfringement proceedings against the Company could materially and adverselyaffect the Company’s competitive position.

 

*Technological Developments*

 

The market for our equipmentand services is characterized by continual technological developments toprovide better and more reliable performance and services. If the Company is notable to design, develop, and produce commercially competitive products andcomplete installation in a timely manner in response to changes in technology,the business and revenues could be materially and adversely affected.Similarly, if the Company’s proprietary technologies and equipment becomeobsolete, it may no longer be competitive and its business and revenues couldbe materially and adversely affected.

 

*Technical Personnel*

 

The engineering servicesprovided by the Company are complex and highly engineered and often must beperformed in harsh conditions. The Company’s success depends on its ability toemploy and retain technical personnel with the ability to design, utilize andenhance these products and services. In addition, our ability to expand ouroperations depends in part on our ability to increase our skilled labor force.The demand for skilled workers is high and the supply is limited. A significantincrease in wages paid by competing employers could result in a reduction ofour skilled labor force and/or increases in wage rates that we must pay. Ifeither of these events were to occur, our cost structure could increase, ourmargins decrease and our growth potential could be impaired.

 

*Government Incentives*

 

The competitiveness of ourtechnology and equipment is very much dependent upon governmental and utilityrebates and incentives. If these rebates and incentives were to be materiallyreduced or eliminated, the Company’s business and revenues could be materiallyand adversely affected.

 

*Effective Internal Controls*

 

Effective internal controls arenecessary for the Company to provide reliable financial reports. In addition, Section 404of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate and reporton its internal controls over financial reporting and have its independentauditors annually attest to its evaluation, as well as issue their own opinionon the Company’s internal controls over financial reporting, beginning with ourAnnual Report on Form 10-K for the year ending December 31, 2007.

 

The Company has prepared forcompliance with Section 404 by strengthening, assessing and testing itssystem of internal controls to provide the basis for its report. The process ofstrengthening its internal controls and complying with Section 404 isexpensive and time-consuming, and requires significant management attention.The Company cannot be certain that these measures will ensure that it willmaintain adequate controls over its financial processes and reporting in thefuture. Furthermore, as the Company grows its business, its internal controlswill become more complex and will require significantly more resources toensure its internal controls remain effective.

 

In February 2007, theCompany engaged RSM McGladrey, who is completing the process of performing aSarbanes-Oxley Act Consulting engagement designed to assist the Company in itsefforts to comply with SOX Section 404, “Management’s Assessment ofInternal Controls.” As of June 30, 2007, it was determined that theCompany met the criteria for an accelerated filing, which requires the Company,as well as its external auditor to attest to the internal controls overfinancial reporting in the fiscal year ending December 31, 2007.

 

In March 2007, the Companyengaged Microstrategies, Inc. to provide an improved IT, financialreporting, and ERP system to enhance efficiencies and financial and operatingcontrols as it works to implement Sarbanes-Oxley requirements and procedures.On January 1, 2008, the Company went live with a new financial reportingsystem.

 

A material weakness regarding the Company’s failure to design andmaintain adequate and timely controls over financial reporting was identifiedduring the 2007 audit; the Company is currently working to allocate additionalresources to the financial reporting area.

 

11

----

 

The Company operates in variouscountries that are subject to risks peculiar to each country. With respect toany particular country, these risks may include:

 
|   | · | expropriation and nationalization of our assets (including  intellectual property) in that country;       |
|--------|--------|-----------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                      |
|   | · | political and economic instability;                                                                       |
|   |   |                                                                                                      |
|   | · | social unrest, acts of terrorism, force majeure, war or other armed  conflict;                            |
|   |   |                                                                                                      |
|   | · | inflation;                                                                                                |
|   |   |                                                                                                      |
|   | · | currency fluctuations, devaluations and conversion restrictions;                                          |
|   |   |                                                                                                      |
|   | · | confiscatory taxation or other adverse tax policies;                                                      |
|   |   |                                                                                                      |
|   | · | governmental activities that limit or disrupt markets, restrict  payments or limit the movement of funds; |
|   |   |                                                                                                      |
|   | · | governmental activities that may result in the deprivation of  contract rights; and                       |
|   |   |                                                                                                      |
|   | · | trade restrictions and economic embargoes imposed by the United  States and other countries.              |

 

In 2007, foreign contractrevenue was limited to grant revenue, funded by USTDA, of $1,400, derived fromwork in Sri Lanka. Unsettled political conditions, social unrest, acts ofterrorism, force majeure, war or other armed conflict, exploitation or othergovernmental actions, inflation, exchange controls or currency devaluation mayresult in increased business risk in these regions.

 

**Item 1A. RISKFACTORS**

** **

**We have historically incurred losses andlosses may continue in the future.**

 

Since 1997,we have lost money. In the fiscal year ended December 31, 2007, we sustained lossesfrom operating activities of $14,456,285; the accumulated deficit as ofDecember 31, 2007 was $64,009,607. Future losses are likely to occur.Accordingly, we may experience significant liquidity and cash flow problems andadditional operating losses if we are not able to raise additional capital asneeded and on acceptable terms and, in such events, our operations may bereduced or curtailed.

 

**If we are unable to raise additional capitalto finance operations, our business operations will be curtailed.**

** **

Our operationshave relied almost entirely on external financing to fund our operations. Suchfinancing has historically come from a combination of borrowings from, and saleof common and convertible preferred stock to, third parties. We will need toraise additional capital to fund our anticipated operating expenses and futureexpansion. Among other things, external financing will be required to cover ouroperating costs. The sale of our common stock to raise capital may causedilution to our existing shareholders. Our inability to obtain adequatefinancing will result in the need to curtail business operations. Any of theseevents would be materially harmful to our business and may result in a lowerstock price.

 

**Our common stock may be affected by limitedtrading volume and may fluctuate significantly.**

** **

There hasbeen a limited public market for our common stock, and an active trading marketfor our common stock may not develop. As a result, this could reduce ourshareholders’ ability to sell our common stock in short time periods, orpossibly at all. Our common stock has experienced, and is likely to experiencein the future, significant price and volume fluctuations which could reduce themarket price of our common stock without regard to our operating performance.In addition, we believe that factors such as quarterly fluctuations in ourfinancial results and changes in the overall economy or the condition of thefinancial markets could cause the price of our common stock to fluctuatesubstantially.

 

**Failure to retain or attract key personnelwill have a material negative impact on the sales, development and enhancementof our products.**

** **

Our futuresuccess depends, in significant part, on the continued services of keyofficers. We may not able to find an appropriate replacement for any of our keypersonnel. Any loss or interruption of our key personnel’s services could havea material negative impact on our ability to develop our business plan. TheCompany maintains a key man life insurance policy on Quentin Kelly in theamount of $1,100,000.

 

In addition,our business plan relies heavily on attracting and retaining industryspecialists with extensive technical and industry experience and existingrelationships with many industry participants. Our business plan also reliesheavily on attracting and retaining qualified technical employees so we canfully develop and enhance our technology. The markets for many of ourexperienced employees are extremely competitive. The sale of our products, andthe future development and enhancement of our products will be limited if weare not successful in our efforts to recruit and retain the personnel we willneed.

 

12

----

 

**Our projects require substantial up-front costs beforeany revenues will be realized.**

** **

A significant portion ofour revenue is expected to be derived from projects which require significantup-front expense to us. Revenues are not realized until the projects or certainsignificant milestones are met or are completed. Our failure, or any failure bya third-party with which we may contract, to perform services or deliver ourproducts on a timely basis could result in a substantial loss to us.

 

**We may not be able to protect our intellectualproperty rights, and we inadvertently may be infringing on the intellectualproperty rights of others, which could result in significant expense and lossof intellectual property rights.**

 

If a court determines thatwe infringed on the rights of others, we may be required to obtain licensesfrom such other parties and may be required to pay significant sums as damagesto such parties. The persons or organizations holding the desired technologymay not grant licenses to us or the terms of such licenses may not beacceptable to us. In addition, we could be required to expend significantresources to develop non-infringing technology, or to defend claims ofinfringement brought against us.

 

We rely on theregistration of trademarks and trade names, as well as on trade secret laws andconfidentiality agreements with our employees. In addition, we may need toexpend significant resources to protect and enforce our intellectual propertyrights.

 

**Any failure to meet thetechnological requirements of our customers may hinder sales of our products.**

 

Our ability to continue toincrease sales and use of our products is dependent on the advancement of ourexisting technology. In order to obtain and maintain a significant marketshare, we are required to continually make advances in technology. Any failuresin such research and development efforts could result in significant delays inproduct development and have a material adverse effect on us. We may encounterunanticipated technological obstacles which either delay or prevent us fromcompleting the development of our products and processes.

 

**Competitive conditionsaffecting WorldWater may limit our growth and profitability.**

 

Our products compete with bothconventional and solar technologies that generate electric power. The maincompetitive technologies are diesel or gasoline generators and electrical gridline extension.

 

The cost of installing a solararray to drive a pump or motor may be more or less than the cost of grid lineextension, depending upon the extent of the grid line extension. However, thecost of operating a pump or motor driven by solar power is less expensive thanthe cost of running a conventional electric pump or motor because of theon-going cost of electric energy from the local electric utility. It should benoted that the cost of electric line extension is usually subsidized bygovernment authorities, which can impact our ability to compete withinstallation costs.

 

The initial cost of acquiring adiesel pump or motor is less expensive than the initial cost of a solar pump.However, the operations and maintenance cost of the diesel pump or motor isgreater than a solar driven pump or motor; in remote areas, availability offuel and spare parts are also unreliable. An end user can pay off the higherinstallation cost of the solar driven pump or motor over time from the savingsotherwise spent on operations and maintenance of the diesel pump.

 

Our proprietary technologypermits use of “off-the-shelf” AC pumps and motors—AC driven pumps and motorsare available in countries throughout the world, allowing replacement andmaintenance parts to be supplied on a local basis. Other forms of solar poweredphotovoltaic (PV) pumps and motors currently available use less reliable andless durable DC pumps and motors or custom AC pumps which are more costly andnot readily available in most developing countries.

 

In many regions of the world,competitive products are not available. In those markets where competitionexists, the most commonly encountered competitors are Grundfos A/S of Denmark,a manufacturer of a large range of water pumps including a solar pump line, andAero-Environment of California, which produces AC pumps. There are a number ofother solar pump companies including Solar Jack of the US, Sun Motor of Canada,Southern Cross of Australia, and Total Energie from Europe which produce DCpowered pumps. Our competitors generally have far greater financial resources,more experienced marketing organizations and a greater number of employees thanwe do.

 

We may not be successful in competing with these competitors for new customers orin retaining existing customers. Our results of operations will likely sufferif we cannot compete with larger and better-capitalized companies.

 

13

----

** **

**Our marketing efforts indeveloping nations have encountered significant obstacles that have impededsales.**

 

In addition to our marketingefforts in the United States, we market our products to developing nations. Theability of these customers to order and pay for our products and services isdependent on a variety of factors including government approval, adequatefunding and vigorous testing procedures. We have experienced significantobstacles in marketing products and services in developing nations, includingdelays caused by budget constraints, bureaucratic inefficiencies and regimechanges.

 

**Our directors are notpersonally liable and are indemnified for breach of fiduciary duties.**

 

Our Certificate ofIncorporation provides, as permitted by the Delaware General Corporation Law(“the DGCL”), and with certain exceptions, that our directors shall not bepersonally liable to us or our stockholders for monetary damages for breach offiduciary duty as a director. These provisions may discourage our stockholdersfrom bringing suit against a director for breach of fiduciary duty and mayreduce the likelihood of derivative litigation brought by stockholders againsta director. In addition, our bylaws provide for mandatory indemnification ofdirectors and officers to the fullest extent permitted by the DGCL.

 

**We depend on a limitednumber of suppliers of components for our systems, and any delay in supplycould affect our ability to fill orders.**

 

We currently purchase parts andmaterials from a limited number of suppliers. In addition, althoughhistorically we have not been dependent on any one supplier or group ofsuppliers of components for our systems, we may become dependent in the future.The inability to obtain certain components on a timely basis would limit ourability to complete projects in a timely manner.

 

**No dividends have beenpaid by the Company.**

 

We have never paid, nor do weanticipate paying, any cash dividends on our common stock. Future debt, equityinstruments or securities may impose additional restrictions on our ability topay cash dividends.

 

**Delaware law and ourcharter may inhibit a takeover of our company that stockholders may considerfavorable.**

 

Provisions of Delaware law,such as its business combination statute, may have the effect of delaying,deferring or preventing a change in control of our company, even if suchtransactions would have significant benefits to our stockholders. As a result,these provisions could limit the price some investors might be willing to payin the future for shares of our common stock.

 

**We are subject to foreignexchange rate fluctuations that may result in losses.**

 

Operations overseas are subjectto foreign currency exchange rate fluctuations. We may suffer losses due toadverse foreign currency exchange rate fluctuations.

 

**If we fail to maintain aneffective system of internal controls, we may not be able to accurately reportour financial results. As a result, current and potential stockholders couldlose confidence in our financial reporting, which could harm our business andthe trading price of our common stock.**

 

Effective internal controls arenecessary for us to provide reliable financial reports. We have in the pastdiscovered, and may in the future discover, areas of our internal controls thatneed improvement. In addition, Section 404 of the Sarbanes-Oxley Act of2002 requires us to evaluate and report on our internal controls over financialreporting and have our independent auditors annually attest to our evaluation,as well as issue their own opinion on our internal controls over financialreporting, beginning with our Annual Report on Form 10—K for the fiscalyear ending December 31, 2007. We have prepared for compliance with Section 404by strengthening, assessing and testing our system of internal controls toprovide the basis for our report. The process of strengthening our internalcontrols and complying with Section 404 is expensive and time consuming,and requires significant management attention. We cannot be certain that thesemeasures will ensure that we will maintain adequate controls over our financialprocesses and reporting in the future. Furthermore, as we rapidly grow ourbusiness, our internal controls will become more complex and will requiresignificantly more resources to ensure our internal controls overall remaineffective. Failure to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operatingresults or cause us to fail to meet our reporting obligations. If we or ourauditors discover a material weakness, the disclosure of that fact, even ifquickly remedied, could reduce the market’s confidence in our financialstatements and harm our stock price.

 

**TheCompany has a limited number of authorized common shares available.**

 

As of March 12, 2008, the Company had93,391 authorized and unissued shares of common stock. The board of directorshas approved an increase in the Company’s authorized common stock from 275,000,000shares to 450,000,000 shares and the issue will 

** **

14

----

 

be voted on by the Company’sstockholders at the next stockholders meeting which is expected to occur in May 2008.If the increase in the authorized number of shares is not approved by theCompany’s stockholders, the Company may not have the ability to raise capitalfunds that may be necessary to further develop its core business, to fund otherpotential acquisitions, to finance working capital requirements, to have sharesavailable for use in connection with its stock option plans, and to pursueother corporate purposes that may be identified by the board of directors.

 

**The solar power industryis currently experiencing an industry-wide shortage of polysilicon. Thisshortage poses several risks to our business, including possible constraints onrevenue growth and possible decreases in our gross margins and profitability.**

 

There is currently an industry-wide shortageof polysilicon, which has resulted in significant price increases in solarcells. Polysilicon is an essential raw material used in the production of solarcells. We expect that the average spot price of polysilicon will continue toincrease in the near-term. Increases in polysilicon prices could increase theprice we pay for solar cells, which could impact our manufacturing costs andour net income. Even with these price increases, demand for solar cells hasincreased, and many of our principal competitors have announced plans to addadditional manufacturing capacity. As this manufacturing capacity becomesoperational, it may increase the demand for polysilicon in the near-term andfurther exacerbate the current shortage. Polysilicon is also used in thesemiconductor industry generally and any increase in demand from that sectorwill compound the shortage. The production of polysilicon is capital intensiveand adding additional capacity requires significant lead time. While we areaware that several new facilities for the manufacture of polysilicon are underconstruction, we do not believe that the supply imbalance will be remedied inthe near-term, which could lead to higher prices for, and reduced availabilityof, solar cells.

 

**As polysilicon supplyincreases, the corresponding increase in the global supply of solar cells andpanels may cause substantial downward pressure on the prices of our products,resulting in lower revenues and earnings.**

 

The scarcity of polysilicon has resulted inthe underutilization of solar panel manufacturing capacity. As additionalpolysilicon becomes available in the future, we expect solar panel productionglobally to increase. Decreases in polysilicon pricing and increases insolar panel production could each result in substantial downward pressure on theprice of solar cells and panels, including our products. Such pricereductions could have a negative impact on our revenue and earnings, andmaterially adversely affect our business and financial condition.

 

**The reduction orelimination of government and economic incentives could cause our revenue todecline.**

 

We believe that the growth of the market forour applications depends in large part on the availability and size ofgovernment-generated economic incentives. At present, the cost of producingsolar energy generally exceeds the price of electricity in the U.S. fromtraditional sources. As a result, to encourage the adoption of solartechnologies, the U.S. government and numerous state governments have providedsubsidies in the form of cost reductions, tax write-offs and other incentivesto end users, distributors, systems integrators and manufacturers of solarpower products. Reduction, elimination and/or periodic interruption of thesegovernment subsidies and economic incentives because of policy changes, fiscaltightening or other reasons may result in the diminished competitiveness ofsolar energy, and materially and adversely affect the growth of these marketsand our revenues. Electric utility companies that have significant politicallobbying powers may push for a change in the relevant legislation in ourmarkets. The reduction or elimination of government subsidies and economicincentives for solar energy applications, especially those in our targetmarkets, could cause our revenues to decline and materially and adverselyaffect our business, financial condition and results of operations.

 

**We act as the generalcontractor for our customers in connection with the installations of our solarpower systems and are subject to risks associated with construction, bonding,cost overruns, delays and other contingencies, which could have a materialadverse effect on our business and results of operations.**

 

We act as the generalcontractor for our customers in connection with the installation of our solarpower systems. All essential costs are estimated at the time of entering intothe sales contract for a particular project, and these are reflected in theoverall price that we charge our customers for the project. These costestimates are preliminary and may or may not be covered by contracts between usor the other project developers, subcontractors, suppliers and other parties tothe project. In addition, we require qualified, licensed subcontractors toinstall most of our systems. Shortages of such skilled labor could significantlydelay a project or otherwise increase our costs. Should miscalculations inplanning a project or defective or late execution occur, we may not achieve ourexpected margins or cover our costs. Also, some systems customers requireperformance bonds issued by a bonding agency. Due to the general performancerisk inherent in construction activities, it has become increasingly difficultrecently to secure suitable bonding agencies

 

 

15

----

 

willing to provide performancebonding. In the event we are unable to obtain bonding, we will be unable to bidon, or enter into, sales contracts requiring such bonding.

 

Delays in solar panel or othersupply shipments, other construction delays, unexpected performance problems inelectricity generation or other events could cause us to fail to meet theseperformance criteria, resulting in unanticipated and severe revenue andearnings losses and financial penalties. Construction delays are often causedby inclement weather, failure to timely receive necessary approvals andpermits, or delays in obtaining necessary solar panels, inverters or othermaterials. The occurrence of any of these events could have a material adverseeffect on our business and results of operations.

 

**The execution of ourgrowth strategy for our systems segment is dependent upon the continuedavailability of third-party financing arrangements for our customers.**

 

For many of our projects, ourcustomers have entered into agreements to finance the power systems over anextended period of time based on energy savings generated by our solar powersystems, rather than pay the full capital cost of purchasing the solar powersystems up front. For these types of projects, many of our customers choose topurchase solar electricity under a power purchase agreement with a financingcompany that purchases the system from us. These structured financearrangements are complex and may not be feasible in many situations. Inaddition, customers opting to finance a solar power system may forgo certaintax advantages associated with an outright purchase on an accelerated basiswhich may make this alternative less attractive for certain potentialcustomers. If customers are unwilling or unable to finance the cost of our products,or if the parties that have historically provided this financing cease to doso, or only do so on terms that are substantially less favorable for us orthese customers, our growth will be adversely affected.

 

The success of our systemssegment will depend in part on the continuing formation of such financingcompanies and the potential revenue source they represent. In deciding whetherto form and invest in such financing companies, potential investors weigh avariety of considerations, including their projected return on investment. Suchprojections are based on current and proposed federal, state and local laws,particularly tax legislation. Changes to these laws, including amendments toexisting tax laws or the introduction of new tax laws, tax court rulings aswell as changes in administrative guidelines, ordinances and similar rules andregulations could result in different tax consequences which may adverselyaffect an investor’s projected return on investment, which could have amaterial adverse effect on our business and results of operations.

 

**We may be subject tounexpected warranty expense; if we are subject to warranty and productliability claims, such claims could adversely affect our business and resultsof operations.**

 

The possibility of futureproduct failures could cause us to incur substantial expense to repair orreplace defective products. We have agreed to indemnify our customers and ourdistributors in some circumstances against liability from defects in our solarsystems. A successful indemnification claim against us could require us to makesignificant damage payments, which would negatively affect our financialresults.

 

Like other retailers,distributors and manufacturers of products that are used by consumers, we facean inherent risk of exposure to product liability claims in the event that theuse of our solar system products results in injury. We may be subject towarranty and product liability claims in the event that our solar power systemsfail to perform as expected or if a failure of our solar power systems results,or is alleged to result, in bodily injury, property damage or other damages.Since our solar power products are electricity producing devices, it ispossible that our products could result in injury, whether by productmalfunctions, defects, improper installation or other causes. Moreover, we maynot have adequate resources in the event of a successful claim against us. Wehave evaluated the potential risks we face and believe that we have appropriatelevels of insurance for product liability claims. We rely on our generalliability insurance to cover product liability claims and have not obtainedseparate product liability insurance. However, a successful warranty or productliability claim against us that is not covered by insurance or is in excess ofour available insurance limits could require us to make significant payments ofdamages. In addition, quality issues can have various other ramifications,including delays in the recognition of revenue, loss of revenue, loss of futuresales opportunities, increased costs associated with repairing or replacingproducts, and a negative impact on our goodwill and reputation, which couldalso adversely affect our business and operating results.

 

Warranty and product liabilityclaims may result from defects or quality issues in certain third-partytechnology and components incorporated into its solar power systems,particularly solar cells and panels, over which we have no control. While ouragreements with suppliers generally include warranties, such provisions may notfully compensate us for any loss associated with third-party claims caused bydefects or quality issues in such products. In the event we seek recoursethrough warranties, we will also be dependent on the creditworthiness andcontinued existence of these suppliers.

 

 

16

----

 

**Expansionof our manufacturing capacity has and will continue to increase our fixedcosts, which increase may have a negative impact on our financial condition ifdemand for our products decreases.**

 

We have recently expanded, and plan to continue toexpand, our manufacturing facilities. As we build additional manufacturinglines or facilities, our fixed costs will increase. If the demand for our solarpower products or our production output decreases, we may not be able to spreada significant amount of our fixed costs over the production volume, therebyincreasing our per unit fixed cost, which would have a negative impact on ourfinancial condition and results of operations.

 

**Existingregulations and policies and changes to these regulations and policies maypresent technical, regulatory and economic barriers to the purchase and use ofsolar power products, which may significantly reduce demand for our productsand services.**

 

The market for electricity generation products isheavily influenced by foreign, U.S. federal, state and local governmentregulations and policies concerning the electric utility industry, as well aspolicies promulgated by electric utilities. These regulations and policiesoften relate to electricity pricing and technical interconnection ofcustomer-owned electricity generation. In the U.S. and in a number of othercountries, these regulations and policies are being modified and may continueto be modified. Customer purchases of, or further investment in the researchand development of, alternative energy sources, including solar powertechnology, could be deterred by these regulations and policies, which couldresult in a significant reduction in the potential demand for our solar powerproducts. For example, without a regulatory mandated exception for solar powersystems, utility customers are often charged interconnection or standby feesfor putting distributed power generation on the electric utility network. Thesefees could increase the cost to our customers of using our solar power productsand make them less desirable, thereby harming our business, prospects, resultsof operations and financial condition.

 

We anticipate that our solar power products and theirinstallation will be subject to oversight and regulation in accordance withnational and local ordinances relating to building codes, safety, environmentalprotection, utility interconnection and metering and related matters. It isdifficult to track the requirements of individual states and design equipmentto comply with the varying standards. Any new government regulations or utilitypolicies pertaining to our solar power products may result in significant additionalexpenses to us and our resellers and their customers and, as a result, couldcause a significant reduction in demand for our solar power products.

 

**We willcontinue to be dependent on a limited number of third-party suppliers for keycomponents for our solar systems products during the near-term, which couldprevent us from delivering our products to our customers within requiredtimeframes, which could result in installation delays, cancellations,liquidated damages and loss of market share.**

 

In addition to our reliance on a small number ofsuppliers for its solar cells and panels, we rely on third-party suppliers forkey components for our solar power systems, such as inverters that convert thedirect current electricity generated by solar panels into alternating currentelectricity usable by the customer.

 

If we fail to develop or maintain our relationshipswith our limited number of suppliers, we may be unable to manufacture ourproducts or our products may be available only at a higher cost or after a longdelay, which could prevent us from delivering our products to our customerswithin required timeframes and we may experience order cancellation and loss ofmarket share. To the extent the processes that our suppliers use to manufacturecomponents are proprietary, we may be unable to obtain comparable componentsfrom alternative suppliers. The failure of a supplier to supply components in atimely manner, or to supply components that meet our quality, quantity and costrequirements, could impair our ability to manufacture our products or decreasetheir costs. If we cannot obtain substitute materials on a timely basis or onacceptable terms, we could be prevented from delivering our products to ourcustomers within required timeframes, which could result in installationdelays, cancellations, liquidated damages and loss of market share, any ofwhich could have a material adverse effect on our business and results ofoperations.

 

**Acquisitionsof other companies or investments in joint ventures with other companies couldadversely affect our operating results, dilute our stockholders’ equity, orcause us to incur additional debt or assume contingent liabilities.**

 

To increase our business and maintain our competitiveposition, we have acquired other companies and may in the future acquireadditional other companies or engage in joint ventures. Acquisitions and jointventures involve a number of risks that could harm our business and result inthe acquired business or joint venture not performing as expected, including:

 
|   | · | insufficient experience with technologies and  markets in which the acquired business is involved, which may be necessary to  successfully operate and integrate the business; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

17

----

 

 
|   | · | problems integrating the acquired operations,  personnel, technologies or products with the existing business and products; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|

 
|   | · | diversion of management time and attention from the  core business to the acquired business or joint venture; |
|--------|--------|---------------------------------------------------------------------------------------------------------------|

 
|   | · | potential failure to retain key technical,  management, sales and other personnel of the acquired business or joint  venture; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------|

 
|   | · | difficulties in retaining relationships with  suppliers and customers of the acquired business, particularly where such  customers or suppliers compete with us; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|   | · | subsequent impairment of the acquired assets,  including intangible assets; and |
|--------|--------|---------------------------------------------------------------------------------|

 
|   | · | assumption of liabilities including, but not limited  to, lawsuits, tax examinations, warranty issues, etc. |
|--------|--------|-------------------------------------------------------------------------------------------------------------|

 

To the extent that we invest in upstream suppliers ordownstream channel capabilities, we may experience competition or channelconflict with certain of our existing and potential suppliers and customers.Specifically, existing and potential suppliers and customers may perceive thatwe are competing directly with them by virtue of such investments and maydecide to reduce or eliminate their supply volume to us or order volume fromus.

 

For example, as a result of our acquisition of ENTECH,we now directly compete with some of our own suppliers of solar cells and panels.As a result, the acquisition could cause one or more solar cell and panelsuppliers to reduce or terminate their business relationship with us. Any suchreductions or terminations could adversely affect our ability to meet customerdemand for solar power systems, and materially adversely affect our results ofoperations and financial condition, which would likely materially adverselyaffect our results of operations and financial condition.

 

**The demandfor products requiring significant initial capital expenditures such as oursolar power products and services are affected by general economic conditions,such as increasing interest rates that may decrease the return on investmentfor certain customers or investors in projects, which could decrease demand forour systems products and services and which could have a material adverseeffect on our business and results of operations.**

 

The United States and international economies haverecently experienced a period of slow economic growth. A sustained economicrecovery is uncertain. In particular, terrorist acts and similar events,continued turmoil in the Middle East or war in general could contribute to aslowdown of the market demand for products that require significant initialcapital expenditures, including demand for solar cells and solar power systemsand new residential and commercial buildings. If the economic recovery slowsdown as a result of the recent economic, political and social turmoil, or ifthere are further terrorist attacks in the United States or elsewhere, we mayexperience decreases in the demand for our solar power products, which may harmour operating results.

 

We have benefited from historically low interest ratesin recent years, as these rates have made it more attractive for our customersto use debt financing to purchase our solar power systems. Interest rates havefluctuated recently and may eventually continue to rise, which will likelyincrease the cost of financing these systems and may reduce an operatingcompany’s profits and investors’ expected returns on investment. This risk isbecoming more significant to direct sales to financial institutions which sellelectricity to end customers under a power purchase agreement. This sales modelis highly sensitive to interest rate fluctuations and the availability ofliquidity, and would be adversely affected by increases in interest rates orliquidity constraints. Rising interest rates may also make certain alternativeinvestments more attractive to investors, and therefore lead to a decline indemand for our solar power systems, which could have a material adverse effecton our business and results of operations.

 

**Risks Related to ENTECH**

 
|   | · | **ENTECH’s products include complex  solar technology for markets which are subject to operational risks.** |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

 

ENTECH is engaged in the development of complex solartechnology for the solar energy market. The technology developed by ENTECH iscomplex and susceptible to unique engineering elements that are not tested inthe actual operating environment until commissioned. As a result, ENTECH mayincur unanticipated engineering requirements which may cause it to incuradditional operating, development and production expenses that have not beenanticipated.

 
|   | · | **The industry in which ENTECH  operates is highly competitive, which may result in a loss of market share or  a decrease in revenue or profit margin.** |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

 

18

----

 

ENTECH’s products and services are provided in a highlycompetitive environment. ENTECH’s products and services are subject tocompetition from a number of similarly sized or larger businesses which mayhave greater financial and other resources than are available to ENTECH.Factors that affect competition include timely delivery of products andservices, reputation, manufacturing capabilities, price, performance anddependability. Any failure to adapt to a changing competitive environment mayresult in a loss of market share and a decrease in revenue and profit margins.

 
|   | · | **ENTECH relies on a few key  employees whose absence or loss could disrupt its operations or adversely  affect its business.** |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

 

ENTECH’s continued success is dependent on thecontinuity of the key management, operating and technical personnel listedbelow. The loss of these key employees would have a negative impact on itsfuture growth and profitability. ENTECH does not maintain key person insuranceon any of these individuals.

 
|   | · | **ENTECH’s failure to attract and  retain qualified personnel could lead to a loss of revenue or profitability.** |
|--------|--------|------------------------------------------------------------------------------------------------------------------------|

 

The development, manufacture and installation ofENTECH’s products and services require continued access to qualified personnelat appropriate compensation levels. The labor market for these labor categories,including electrical engineers and experienced licensed electricians, has beenand is tightening. Further, the solar energy industry in general, and ENTECH’smarket in particular, has not attracted an adequate level of skilled personnelat all levels during the last two decades. The continuation of this trend couldimpact ENTECH’s growth and profitability as well as cause unanticipated qualitydifficulties.

 
|   | · | **Natural disasters, terrorism, acts  of war, international conflicts or other disruptions to ENTECH’s operations  could harm its business.** |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|

 

Natural disasters, acts or threats of war orterrorism, international conflicts, and the actions taken by the United Statesand other governments in response to such events could cause damage to ordisrupt ENTECH’s business operations or those of its customers, any of whichcould have an adverse effect on ENTECH’s business.

 

ENTECH could suffer a material loss as a result ofsuch disruptions because it is not possible to predict future events or theirconsequences, any of which could decrease demand for ENTECH’s products, make itdifficult or impossible for ENTECH to deliver its products, or disrupt itssupply chain.

 
|   | · | **ENTECH’s success depends upon its  ability to secure raw materials and supplies on acceptable terms.** |
|--------|--------|---------------------------------------------------------------------------------------------------------------|

 

Aluminum, steel and silicon represent a significantelement of ENTECH’s material cost. Significant increases in the prices of thesematerials can reduce ENTECH’s estimated operating margins if it is unable torecover such increases from customer revenues.

 
|   | · | **We have not yet fully evaluated the  disclosure controls and procedures and internal control over financial  reporting of ENTECH and its subsidiaries, and any deficiencies in ENTECH’s  internal controls that we may find would require us to spend resources to  correct those deficiencies and could undermine market confidence in our  reported consolidated financial information and reduce the market price of  our common stock.** |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Maintaining effective disclosure controls andprocedures and internal control over financial reporting is necessary for us toproduce reliable financial reports and is important in helping to preventfinancial fraud. We are currently subject to certain provisions of theSarbanes-Oxley Act of 2002 and the related rules of the Securities and ExchangeCommission, which require, among other things, our management to make quarterlyassessments of the effectiveness of our disclosure controls and procedures. Inthe future, we will be subject to additional requirements to annually assess and report on our internal control over financialreporting and our independent registered public accounting firm will berequired to issue a report on management’s assessment of our controls andprocedures, which will be included in our annual reports filed with the Securitiesand Exchange Commission. ENTECH is not currently subject to the Sarbanes-OxleyAct of 2002, and we are continuing to evaluate the strength of ENTECH’sdisclosure controls and procedures and internal control over financialreporting. If we identify any significant deficiencies or material weaknessesin ENTECH’s disclosure controls and procedures and internal control overfinancial reporting following the completion of the merger, we will be requiredto spend time and money to remedy those deficiencies. If we are unable tosufficiently integrate ENTECH’s disclosure and control structure into our

 

19

----

 

 

structureor correct any deficiencies we identify in a timely manner, we may conclude that these circumstancesconstitute a material weakness in disclosure controls and procedures and/orinternal control over financial reporting and that our disclosure controls andprocedures and/or internal control over financial reporting was not effective.Investors could lose confidence in our reported consolidated financialinformation as a result, and the market price of our common stock coulddecline.

 

**Risksrelated to the combined company**

** **

**·****      Thecombined company may not realize the anticipated benefits of the merger due tothe challenges associated with integrating the companies or other factors.**

** **

The success of the mergerwill depend in part on the success of management of the combined company inintegrating the operations, technologies, business, financial accountingsystems and personnel of the two companies following the effective time of themerger. The inability of the combined company to meet the challenges involvedin integrating successfully the operations of ENTECH and WorldWater orotherwise to realize any of the anticipated benefits of the merger couldseriously harm the combined company’s results of operations. In addition, theoverall integration of the two companies may result in unanticipated operationsproblems, expenses, liabilities and diversion of management’s attention. Thechallenges involved in integration include:

 
| · |   | coordinating and integrating sales and  marketing functions;                                                                                                                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                |
| · |   | demonstrating to the combined company’s  customers that the merger will not result in adverse changes in the business  focus or the quality of the products and services previously provided by each  company; |
|   |   |                                                                                                                                                                                                                |
| · |   | assimilating the personnel of both  companies and integrating the business cultures of both companies;                                                                                                              |
|   |   |                                                                                                                                                                                                                |
| · |   | consolidating corporate and administrative  infrastructures and eliminating duplicative operations; and                                                                                                             |
|   |   |                                                                                                                                                                                                                |
| · |   | maintaining employee morale and motivation.                                                                                                                                                                         |

 

WorldWater and ENTECH maynot be able to successfully integrate their operations in a timely manner, orat all, and the combined company may not realize the anticipated benefits ofthe merger, including potential synergies or sales or growth opportunities, tothe extent or in the time frame anticipated. The anticipated benefits andsynergies of the merger are based on assumptions and current expectations, notactual experience, and assume a successful integration. In addition to thepotential integration challenges discussed above, the combined company’sability to realize the benefits and synergies of the business combination couldbe adversely impacted to the extent either company’s relationships withexisting or potential customers, suppliers or strategic partners is adverselyaffected as a consequence of the merger.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

** **

The Company has receivedcomments from the staff of the Securities and Exchange Commission on theCompany’s proxy statement, Form 10-KSB for the year endedDecember 31, 2006 and Form 10-QSB for the quarterly period endedSeptember 30, 2007. The Company intends to respond to these comments in atimely fashion.

** **

**ITEM 2. PROPERTIES**

 

***New Jersey***

 

TheCompany’s executive office, research and development facility is housed in a30,000 square foot site located at 200 Ludlow Drive, Ewing, New Jersey 08638.The facility is leased under an operating lease commencing July 1, 2007,and expiring June 30, 2015. The Company also occupies 13,270 square feetat 55 Route 31 South, Pennington, NJ 08534. This facility is leasedunder an operating lease expiring on June 25, 2008.

 

***Colorado***

 

InSeptember 2007, the Company opened a sales and technical support office inGreenwood Village, CO under a six month lease expiring February 29,2008.  The Company now leases the facility on a month to month basis.

 

20

----

 

***California***

 

InSeptember 2005, the Company acquired Quantum Energy Group in Applegate,California which included the transfer of their five year lease expiring April 30,2009, with two five-year options to extend the lease.

 

InDecember 2007, the Company opened a sales office in Poway, CA under a twoyear lease expiring December 24, 2009.  This office will serves asthe sales center for Southern California.

 

InMarch 2007, the Company opened a technical support office in Fresno, CAunder a month to month lease.

 

***Texas***

 

InJanuary 2008, the Company acquired Entech, Inc. in Keller, TX whichincluded the transfer of their lease expiring June 1, 2009.

 

On March 7, 2008, the Company entered into a lease fora 71,000 square foot manufacturing facility in Fortworth, TX.  The lease is for a period of ten (10) yearsand provides for monthly payments that include rental expense, real estatetaxes & common area maintenance of $42,061 per month for the first five (5)years of the lease and payments of $46,395 in the final five (5) years.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

                Although WorldWater is involvedin ordinary, routine litigation from time to time incidental to its business,it is not presently a party to any other legal proceeding, the adversedetermination of which, either individually or in the aggregate, would beexpected to have a material adverse affect on the Company’s business orfinancial condition.

 

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

 

                None.

 

**PART II.**

 

**ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

a)             Price Range of Common Stock

 

                The Company’s common stock isincluded on the National Association of Securities Dealers Automated QuotationOTC Bulletin Board under the symbol “WWAT.OB.” The following table sets forththe quarterly high and low closing bid prices for the common stock as reportedon the OTC Bulletin Board for the periods indicated. These prices are based onquotations between dealers, and do not reflect retail mark-up, mark-down orcommissions, and may not necessarily represent actual transactions.

 

                There were no UnregisteredSecurities Sold during the quarter ended December 31, 2007.

 

21

----

 
| ** **      | ** ** | **High**   | ** ** | **Low**    | ** ** | **Close**  | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|
| **FISCAL 2007** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter   |       | $          | 0.69       |       | $          | 0.38       |       | $ | 0.60 |   |
| Second Quarter  |       | 1.58       |       | 0.52       |       | 1.52       |       |
| Third Quarter   |       | 2.52       |       | 1.07       |       | 1.92       |       |
| Fourth Quarter  |       | 2.36       |       | 1.70       |       | 1.96       |       |
|                 |            |            |            |            |            |            |            |  |  |  |

 
| ** **      | ** ** | **High**   | ** ** | **Low**    | ** ** | **Close**  | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|
| **FISCAL 2006** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter   |       | $          | 0.48       |       | $          | 0.31       |       | $ | 0.46 |   |
| Second Quarter  |       | 0.59       |       | 0.25       |       | 0.28       |       |
| Third Quarter   |       | 0.30       |       | 0.17       |       | 0.19       |       |
| Fourth Quarter  |       | 0.50       |       | 0.14       |       | 0.39       |       |
|                 |            |            |            |            |            |            |            |  |  |  |

 

b)            Holders of Common Stock

 

                On December 31, 2007 therewere approximately 673 holders of record of common stock. This number does notinclude beneficial owners of the common stock whose shares are held in thenames of various dealers, clearing agencies, banks, brokers and otherfiduciaries.

 

c)             Dividends

 

                To date, the Company has notdeclared or paid any dividends on common stock. The payment by the Company ofdividends, if any, is within the discretion of the Board of Directors and willdepend on its earnings, if any, capital requirements and financial condition,as well as other relevant factors. The Board of Directors does not intend todeclare any dividends in the foreseeable future.

 

d)            Preferred Stock

 

                As of December 31, 2007,the Company had 611,111 shares of Series B 7% Convertible Preferred Stock,500,000 shares of Series C 6% Convertible Preferred Stock, and 4,892,857shares of Series D Convertible Preferred Stock outstanding.

 

*Series B Convertible Preferred Stock*

 

       In2000, the Company issued 611,111 shares of Series B 7% three-yearConvertible Preferred Stock at $0.90 per share. The Series B PreferredStock proceeds were intended to be used by the Company for the initialoperating requirements of WorldWater (Phils) Inc., the Company’s Philippinesubsidiary. The conversion privileges, which expired September 2003, wereconvertible either into 10% of WorldWater (Phils) Inc. or into 611,111 commonshares of the Company.

 

It is the Company’s position that the holder of thesepreferred shares failed to convert to shares of the Company’s common stock inaccordance with the terms of issuance, and that the preferred shares expired onSeptember 8, 2003. It is the Company’s position that the obligations forthe payment of dividends on such shares also terminated on that date. TheCompany is engaged in negotiations with the holder of the Series Bpreferred shares to resolve the disputed terms of conversion.

 

*Series C Convertible Preferred Stock*

 

       TheCompany issued 750,000 shares of Series C 6% Convertible Preferred Stockat $1.00 per share. The Series C 6% Convertible Preferred Stock proceedswere used to fund: (i) a $500,000 payment made to ENTECH, Inc. (“ENTECH”)to secure a binding Letter of Intent allowing the Company the opportunity toconduct due diligence for the proposed acquisition of all of the common sharesof ENTECH by the Company or an affiliate; and (ii) due diligence expensesdirectly incurred in connection with the proposed acquisition transaction.

 

The Series C 6% Convertible Preferred Stock heldby each subscriber is convertible on an all or none basis, into either: (i) commonstock of the Company; or (ii) each holder’s proportionate share of a 6.5%interest in the entity formed for the purpose of purchasing the common sharesof ENTECH. Each holder of the Series C 6% Convertible Preferred Stock mayelect to convert into his or her proportionate share of a 6.5% interest in theentity formed to purchase the common stock of ENTECH during the 120 day periodfollowing the closing of the ENTECH transaction or, alternatively, may convertinto the common stock of the Company at any time prior to January 1, 2009.The conversion price to be used for conversions into common stock of theCompany will be equal to the closing bid price of the common stock on December 31,2006, equal to $0.39 per share of our common stock.

 

Dividends on the Series C 6% ConvertiblePreferred Stock accrue at the annual rate of 6%, payable the first day of eachmonth. The Dividend payable at December 31, 2007 was approximately $5,900.

 

During the third quarter 2007, three shareholdersexercised their right to convert 250,000 preferred shares at a per share priceof $0.39 to 641,025 shares of common stock.

 

22

----

 

At December 31, 2007 500,000 shares of Series CConvertible Preferred Stock remain outstanding.

 

*Series D Convertible Preferred Stock*

 

       On November 30, 2006, the Companyissued a press release announcing the entry into three agreements with EMCORECorporation (“EMCORE”), involving EMCORE’s agreement to purchase up to 26.5% ofWorldWater on a fully-diluted basis in exchange for $18 million. The threeagreements entered into on November 29, 2006, are an Investment Agreement(the “Investment Agreement”), a Registration Rights Agreement (the “RegistrationRight Agreement”) and a Letter Agreement (the “Letter Agreement”, and togetherwith the Investment Agreement and Registration Rights Agreement, the “Agreements”).The Boards of Directors of EMCORE and WorldWater each approved the Agreements.

 

Pursuantto the Investment Agreement, EMCORE agreed to invest up to $18.0 million(the “Investment”) in return for (i) six million, five hundred and twenty-threethousand, eight hundred and ten (6,523,810) shares of Series D ConvertiblePreferred Stock of WorldWater, par value $0.01 per share (the “Series DStock”) and (ii) six hundred and sixty-eight thousand, one hundred andthirty-nine (668,139) warrants to purchase six hundred and sixty-eightthousand, one hundred and thirty-nine (668,139) shares of Series D Stock(the “Warrants”). The Series D Stock and Warrants to be received by EMCOREare equivalent to an approximately thirty-one percent (31%) equity ownership inWorldWater, or approximately twenty-six and half percent (26.5%) on a fullydiluted basis.

 

OnNovember 29, 2006, EMCORE invested $13.5 million in the Company,representing the first tranche of its $18 million investment, in returnfor which WorldWater issued to EMCORE (i) four million, eight hundred andninety two thousand, eight hundred and fifty seven (4,892,857) shares of Series DConvertible Preferred Stock and (ii) five hundred and five thousand andforty-four (505,044) warrants (the “Tranche A Warrants”) to purchase fivehundred and five thousand and forty-four (505,044) shares of Series DStock.

 

Theinvestment of the remaining $4.5 million second tranche (the “Tranche BClosing”) will be consummated subject to the execution of a definitivestrategic agreement between the Parties and certain other conditions set forthin the Investment Agreement. At the Tranche B Closing, WorldWater willissue to EMCORE (i) an additional one million, six hundred and thirtythousand, nine hundred and fifty-three (1,630,953) shares of Series DConvertible Preferred Stock and (ii) one hundred and sixty-three thousandand ninety-five (163,095) warrants to purchase one hundred and sixty-threethousand and ninety-five (163,095) shares of Series D Stock.

 

Inthe Investment Agreement, the Company and EMCORE made customaryrepresentations, warranties and covenants and the Company agreed to indemnifyEMCORE against certain potential losses incurred in connection with itsinvestment in the Company. Pursuant to the terms of the Investment Agreement,EMCORE has been granted the following rights, among others: (i) the rightto participate pro-rata in future financings and equity issuances by theCompany; (ii) certain rights to obtain information regarding the financialresults, financial performance, business and operations of WorldWater; and (iii) theright to nominate and appoint two individuals to WorldWater’s Board ofDirectors.

 

TheSeries D Stock has the designations, preferences and rights set forth inthe certificate of designation filed with the Secretary of State for the Stateof Delaware on November 29, 2006 (the “Certificate of Designation”).Pursuant to the Certificate of Designation, holders of Series D Stock havethe following rights, among others: (i) the sole right and discretion toconvert their shares of Series D Stock at any time and from time to timeinto such number of fully paid and non-assessable shares of common stock, parvalue $0.001, of WorldWater (the “Common Stock”) initially equal to such numberof shares of Series D Stock multiplied by ten, subject to certainadjustments as more fully set forth in the Certificate of Designation includingweighted average anti-dilution rights, (ii) the right to vote togetherwith the holders of Common Stock as a single class on all matters submitted fora vote of holders of Common Stock, (iii) for so long as the beneficialownership by the holders of Series D Stock (on a fully-diluted basis) doesnot fall below ten percent (10%) of the then outstanding shares of CommonStock, the exclusive right to elect two members of the Board of Directors ofWorldWater, (iv) for so long as the beneficial ownership by the holders ofSeries D Stock (on a fully-diluted basis) is between five percent (5%) andten percent (10%) of the then outstanding shares of Common Stock, the exclusiveright to elect one member of the Board of Directors of WorldWater, (v) certainliquidation preferences as detailed in the Certificate of Designation and (vi) theright to receive dividends in an amount equal to the amount of dividends thatsuch holder would have received had the holder converted its shares of Series DStock into shares of Common Stock as of the date immediately prior to therecord date for such dividend. The liquidity event is any change in controlwhereby the new person or entity has 50% or more beneficial ownership in theexisting company. Since the potential change in ownership is outside thecontrol of the company, the existing preferred shareholders would have theright to demand cash payment equal to the liquidation value of the preferredstock plus accrued dividends. Closure of the second tranche cannot take placeuntil a sufficient amount of new common shares are authorized by the Company’sshareholders.

 

TheSeries D Preferred Stock was classified out of permanent equity since itfit certain criteria in paragraph #2 of EITF Topic D-98 (“D-98”), however itwas not classified as a liability since it did not meet the requirements of aliability.  Topic D-98, paragraph 8,indicates the following “*For convertiblepreferred securities, any recorded discount resulting from allocation ofproceeds to the beneficial conversion feature is analogous to a dividend andshould be recognized as a return to the preferred shareholders over the*

 

23

----

 

*minimum period from the date of issuance to the date atwhich the preferred shareholders can realize that return (that is, through thedate of earliest conversion) using the effective yield method initially andthen allocated the remaining*.” In the Company’s case,the discount was recognized as a Preferred Stock Dividend on the day ofissuance since the earliest conversion date was immediately.  The Company recorded a debit to PreferredStock Dividend and a Credit to Additional Paid in Capital, which is inaccordance with Case 1(a) of Topic D-98.

 

Fullclosure of the second tranche cannot take place until new common shares areauthorized by the Company’s shareholders.

 

*Series Cand D Preferred Stock Classification*

 

TheSeries C and D Preferred Stock were classified out of permanent equitysince it fit certain criteria in paragraph#2 of EITF Topic D-98), however itwas not classified as a liability since it did not meet the definition of aliability. The warrants on the Series D Preferred Stock were classified asa current liability under the guidance established in FAS 150.

 

OnNovember 29, 2006, the Company recorded a beneficial conversion onpreferred stock dividends related to Series D Preferred Stock and Series DPreferred Stock Warrants, which needed to be recognized on the preferred sharesof 4,892,857 and Preferred D warrants of 505,044. After calculating theintrinsic value, based on the relative fair values of the warrants andpreferred stock, an adjustment of $4,066,796 was recorded as a preferred stockdividend. EITF 98-5 paragraph 8, indicates the following “*For convertible preferred securities, any recordeddiscount resulting from allocation of proceeds to the beneficial conversionfeature is analogous to a dividend and should be recognized as a return to thepreferred shareholders over the minimum period from the date of issuance to thedate at which the preferred shareholders can realize that return (that is,through the date of earliest conversion) using the effective yield method*.”In the Company’s case, the discount was recognized as a Preferred StockDividend on the day of issuance since the earliest conversion date wasimmediately. The Company recorded a debit to Preferred Stock Dividend and a Creditto Additional Paid in Capital, which is in accordance with Case 1(a) of  EITF 98-5.

 

The value of the warrants to purchase Series D preferred stock wascalculated by converting them to their common share equivalents, then utilizingthe Black-Scholes Method to arrive at a fair value.  The amounts allocated to the preferred stockand warrants were equivalent to their relative fair values.  At December 31, 2006, in accordance with SFASNo. 150, the warrants were re-valued from $954,827 to their redemptionamount of $1,393,827, resulting in interest expense of $439,000 during thefourth quarter of 2006.

 

*Liquidation Preference*

 

                Upon liquidation, holders of theSeries C and D Convertible Redeemable Preferred Stock will be entitled tothe greater of (1) a per share amount equal to the original purchase priceplus any dividends accrued but not paid and (2) the amount that the holderwould receive in respect of a share of Series C and D, preferred ifimmediately prior to dissolution and liquidation, all shares of Series Cand D Convertible Redeemable Preferred Stock were converted into shares ofcommon stock. The liquidation preference of Series C and D is $505,900 and$13,500,000, respectively.

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

                The data set forth below shouldbe read in conjunction with the Company’s financial statements and relatednotes and this “Management’s Discussion and Analysis of Financial Condition andResults of Operations” appearing elsewhere in this filing. The statement ofoperations data presented below for the fiscal years ended December 31,2007, 2006, and 2005 and the balance sheet data at December 31, 2007 and2006 have been derived from the audited financial statements appearingelsewhere in this filing. The statement of operations data presented below forthe fiscal years ended December 31, 2004, and 2003 and the balance sheetdata at December 31, 2005, 2004, and 2003 have been derived from auditedfinancial statements, not included elsewhere herein.

 
| ** **                                                                            | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **Operating Results**                                                                 | ** ** | **2007**                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                                                               |       | $                                 | 18,466,020 |   | $ | 17,333,681 |   | $ | 2,031,480 |   | $ | 5,837,224 |   | $ | 1,279,573 |   |
| Gross Profit (Loss)                                                                   |       | 1,738,838                         |       | 2,719,587 |   | (485,336 | ) | (149,085 | ) | 318,928 |   |
| Loss From Operations                                                                  |       | (14,456,285                       | )          | (5,257,298 | ) | (5,075,285 | ) | (6,087,358 | ) | (3,301,020 | ) |
| Loss Attributable to Common Shareholders                                              |       | (14,423,450                       | )          | (15,577,688 | )(1) | (6,377,646 | ) | (8,056,694 | ) | (3,924,774 | ) |
| Net Loss Per Basic & Diluted Share Attributable To  Common Shareholders |       | $                                 | (0.09      | ) | $ | (0.11 | ) | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.08 | ) |
| Weighted Average Common Shares Used in Per Share Calculation                          |       | 168,960,895                       |       | 135,921,421 |   | 93,767,378 |   | 65,360,690 |   | 51,008,306 |   |

 
| ** **                                                  | ** ** | **As of  December 31,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| **Balance Sheet Data**                                      | ** ** | **2007**                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash and Cash Equivalents                                   |       | $                            | 6,873,448  |   | $ | 5,770,595 |   | $ | 798,649 |   | $ | 38,852 |   | $ | 59,045 |   |
| Working Capital Surplus (Deficit)                           |       | 14,215,991                   |       | 9,294,450 | (1) | (674,523 | ) | (2,324,752 | ) | (2,350,312 | ) |
| Total Assets                                                |       | 31,489,988                   |       | 17,268,146 |   | 2,664,404 |   | 1,790,868 |   | 221,225 |   |
| Long term obligations—less current portion             |       | 268,073                      |       | 289,300 |   | 667,668 |   | 2,026,589 |   | 1,665,396 |   |
| Series C and D Preferred Stock; Series D Warrants |       | 11,679,561                   |       | 11,929,561 | (1) | — |   | — |   | — |   |
| Stockholders’ Equity (Deficiency)                      |       | 7,610,889                    |       | (1,862,724 | )(1) | (852,837 | ) | (4,273,641 | ) | (3,941,442 | ) |
|                                                             |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

----

(1) Amounts have been restated.  See Note 3 to the consolidated financialstatements.

 

**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

                Statements in this Management’sDiscussion and Analysis, and elsewhere in this Annual Report on Form 10 Kconcerning the Company’s outlook or future economic performance; anticipatedprofitability, gross billings, commissions and fees, expenses or otherfinancial items; and, statements concerning assumptions made or exceptions toany future events, conditions, performance or other matters constituteforward-looking statements which are made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are subject to risks, uncertainties, and otherfactors that could cause actual results to differ materially from those statedin such statements. Such risks, uncertainties and factors include, but are notlimited to, (1) that there can be no assurance that the Company will growand/or manage its growth profitably, (2) risks-associated reliance ongovernmental regulations, (3) competition, (4) the Company’s resultshave fluctuated in the past and are expected to fluctuate in the future, (5) theloss of services of key individuals which could have a material adverse effecton the Company’s business, financial condition or operating results, and (6) risksassociated with operating in emerging countries.

 

**OVERVIEW**

 

                WorldWater & SolarTechnologies Corp. (formerly WorldWater &Power Corp.) is aninternational solar engineering and project management company with unique,high-powered solar electric technology and expertise, providing alternativeenergy solutions to a wide variety of customers in both domestic andinternational markets. Until 2002, WorldWater’s business was focusedexclusively on providing developing countries with water and power solutions.Since then, the Company has placed increasing 

 

24

----

 

emphasison domestic markets, principally in California, New Jersey, and surroundingstates, and is addressing the needs of residential, commercial and industrialcustomers, in both the public and private sectors. The Company will continue toselectively submit proposals to various foreign governments in need of solvingcritical water supply and energy problems using the Company’s proprietary solartechnology.

 

                With significantly rising energyprices and related shortages, along with significant state and federalincentives, and utility company rebate programs, domestic markets have emergedas the Company’s highest priority. The Company believes it is uniquelypositioned to deliver a wide range of product and service offerings, fromsolar-powered equipment and installations, both fixed and mobile, tolarge-scale, turnkey solar energy and water system solutions, specializing invariable frequency drive (VFD) applications that deliver high customer value.The foundation and enabler for these offerings is WorldWater’s substantial technicalexpertise and proprietary solar technology, including its AquaMaxTM System,AquaDriveTM Controller, AquaMeterTM Water Meter, and Mobile MaxPure.

 

                The Company continues to evolvefrom an entrepreneurial operating mode to that of a fast growth company. Thistransition will mean development of more policies, procedures, and processes toenable effective implementation of booked projects.

 

                The Company plans to continuework to develop innovative new products to meet customer needs using newtechnology to seek to clearly differentiate its products from competitiveproducts.

 

                On January 28, 2008, the Company completed theacquisition of  ENTECH, Inc.   With the combined technologies of theCompany and ENTECH, we believe our solar systems will be capable of generatingand delivering electrical and thermal energy on site at prices competitive toretail prices without relying on government sponsored rebates. ENTECH’spatented concentrator technology allows for the installation of large solar “farms”with greatly reduced requirements for solar cell materials (silicon ormulti-junction). Due to the advantages of ENTECH’s concentrator, asignificantly lesser amount of silicon used in flat plate solar modules isrequired by current ENTECH modules to generate the same electrical power.Consequently, the ENTECH technology greatly lessens the impact of the siliconmaterial shortage currently constricting flat plate solar panel supply. ENTECHconcentrators utilize a two-axis tracker to follow the sun’s position throughoutthe day, maximizing energy production.

 

                ENTECH’s technology can produce photovoltaicelectricity, or thermal energy (heat) for commercial uses such as for heatingand/or air conditioning. When applied in a combined fashion for onsite powerapplications, the cost to the customer can be significantly less forelectricity generated and for BTU’s of heat provided versus separate competingsystems currently on the market while being competitive with current retailenergy prices.

 

                ENTECH will maintain its identity, location, andbusiness operations in both terrestrial and space solar energy. The Companyanticipates, but can provide no assurance, that ENTECH will continue to performits contract work for NASA, the U.S. Department of Defense, and other customers,as well as its internal R&D programs leading to improved future products.

 

                The cash raised through theissuance of convertible debt and private equity sales has provided the Companywith the working capital resources needed to meet its operating activities in2007 and 2006. The Company will continue to seek to raise significantadditional financing as required to fund the Company’s growing operations in2008.

 

OnSeptember 28, 2007, the Company raised $13,365,000 through a Stock andWarrant Purchase Agreement with the Quercus Trust, whereby the Quercus Trustpurchased 7.5 million shares of WorldWater’s common stock at a price of $1.782per share.

 

On February 13, 2008the Company announced that it has raised $35.64 million from The Quercus Trustin a private placement of 20,000 shares of WorldWater Series F ConvertiblePreferred Stock at a price of $1,782.00 per share.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

                The preparation of consolidatedfinancial statements in accordance with U.S. generally accepted accountingprinciples requires the Company to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, 

 

25

----

 

andrelated disclosure of contingent assets and liabilities. The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of theseconsolidated financial statements:

 

**REVENUE RECOGNITION**

 

                The Company derives revenueprimarily from fixed-price contracts through which the Company providesengineering, design, and procurement services, materials and equipment, andconstruction / installation services. Revenue is also generated through thesale of solar-related equipment and, to a lesser extent, from consultingprojects and government-funded grants.

 

                Contract revenues are recorded whenthere is persuasive evidence that a binding contractual arrangement exists, theprice is fixed and determinable, the Company has commenced work on the project,and collectibility is reasonably assured.

 

                Contract revenues are recognizedusing the percentage of completion method. The percentage of completion iscalculated by dividing the direct labor and other direct costs incurred by thetotal estimated direct cost of the project. Contract value is defined as thetotal value of the contract, plus the value of approved change orders.Estimates of costs to complete are reviewed periodically and modified asrequired. Provisions are made for the full amount of anticipated losses, on acontract-by-contract basis. These loss provisions are established in the periodin which the losses are first determined. Changes in estimates are alsoreflected in the period they become known. The Company maintains all the risksand rewards, in regard to billing and collection.

 

                Revenues from equipment salescontaining acceptance provisions are recognized upon customer acceptance. Cashpayments received in advance of product or service revenue are recorded ascustomer deposits.

 

                Revenues from consultingprojects are recognized as services are rendered. Grant revenues are recognizedwhen received, or if based on entitlement periods, when entitlement occurs.

 

**ALLOWANCE FOR DOUBTFUL ACCOUNTS**

 

                The Company maintains allowancesfor doubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. If the data we used to calculate theallowance provided for doubtful accounts does not reflect the future ability tocollect outstanding receivables, additional provisions for doubtful accountsmay be needed and the future results of operations could be materiallyaffected. In recording any additional allowances, a respective charge againstincome is reflected in the general and administrative expenses, and wouldreduce the operating results in the period in which the increase is recorded.

 

                The Company performed asensitivity analysis to determine the impact of fluctuations in our estimatesfor our allowance for doubtful accounts. As of December 31, 2007, theallowance for doubtful accounts was $221,000. If this amount were in error byplus or minus one percent of the account receivable balance, the impact wouldbe an additional $103,000 of income or expense.

 

**ACCOUNTING FOR INCOME TAXES**

 

                The Company is required toestimate its income taxes in each of the jurisdictions in which it operates aspart of its consolidated financial statements. This involves estimating theactual current tax in addition to assessing temporary differences resultingfrom differing treatments for tax and financial accounting purposes. Thesedifferences together with net operating loss carryforwards and tax credits maybe recorded as deferred tax assets or liabilities on the balance sheet. Ajudgment must then be made of the likelihood that any deferred tax assets willbe recovered from future taxable income. To the extent that the Companydetermines that it is more likely than not that deferred tax assets will not beutilized, a valuation allowance is established. Taxable income in futureperiods significantly different from that projected may cause adjustments tothe valuation allowance that could materially increase or decrease futureincome tax expense. As of December 31, 2007 and 2006 an allowance equal to100% of the deferred tax asset was recorded.

 

***Share-Based Compensation***

 

                On January 1, 2006, TheCompany adopted SFAS No. 123R, “Share-Based Payment,” which requires allcompanies to measure and recognize compensation expense at fair value for allstock-based payments to employees and directors. SFAS No. 123R is beingapplied on the modified prospective basis. Prior to the adoption of SFAS No. 123R,the Company accounted for its stock-based compensation plans for employees anddirectors under the recognition and measurement principles of AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related interpretations, and accordingly, the 

 

26

----

 

Companyrecognized no compensation expense related to the stock-based plans for grantsto employees or directors. Grants to consultants under the plans were recordedunder SFAS No. 123.

 

                Under the modified prospectiveapproach, SFAS No. 123R applies to new grants of options and awards ofstock as well as to grants of options that were outstanding on January 1,2006 and that may subsequently be repurchased, cancelled or materiallymodified. Under the modified prospective approach, compensation cost recognizedfor the year ended December 31, 2006 includes compensation cost for allshare-based payments granted prior to, but not yet vested on, January 1,2006, based on fair value as of the prior grant-date and estimated inaccordance with the provisions of SFAS No. 123R. Prior periods were notrequired to be restated to reflect the impact of adopting the new standard.

 

                We utilize the Black-Scholesoption pricing model to estimate the fair value of stock-based compensation atthe date of grant. The Black-Scholes model requires subjective assumptionsregarding dividend yields, expected volatility, expected life of options andrisk free interest rates. The assumptions reflect management’s best estimate.Changes in these assumptions can materially affect the estimate of fair valueand the amount of our stock-based compensation expenses.

 

27

----

 

**RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31,2007 AND 2006**(amounts are rounded to the nearest thousand)

 

*Contract Revenue.*  Contract revenue for 2007 amounts to$17,530,000, and represents 95% of the Company’s revenue. This revenue wasgenerated by domestic commercial and residential projects. The Companyimplemented an aggressive upgrade of the sales and marketing staff in 2007,along with taking a more aggressive approach to the bid proposal process.Staffing, both at an office and field crew level, were increased and skillsupgraded, which played a big part in the Company securing a $16.25 milliondeal with Fresno International Airport in Fresno. Overall, the increase inrevenue over 2007 was obtained as follows; In California, the Company completedfour commercial projects with recognized revenue of $406,000 and had onecommercial project in progress as of December 31, 2007, with recognizedrevenue of $13,347,000. The Company also completed fifteen residential projectswith aggregate revenue of $667,000. In New Jersey, fourteen commercial projectswere completed in 2007 with recognized revenue of $2,692,000.  Three residential jobs were completed withrecognized revenue of $324,000. In Texas, the company concluded a 2006 job,recognizing revenue of $51,000. One small international job was completed in2007, recognizing revenue of $3,000.

 

*Contract Revenue* — *Related Party*.  The Company also recorded related partyrevenue from a sale to a principal shareholder of 12 Mobil MaxPure®units, recognizing revenue of $900,000 in 2007.

 

*                GrantRevenue.*  The Companyrecognized grant revenue of $36,000 in 2007. This is composed of $1,400 fromthe U.S. Trade and Development Agency (USTDA) and $34,000 from the New JerseyBoard of Public Utilities (NJBPU). The USTDA grant is in connection with apilot project for water supply in Sri Lanka. This project is designed to assesssolar technology methods to provide safe, sustainable water supplies to peoplein six villages near the tsunami-ravaged southern coast of Sri Lanka. The NJBPUgrant is for research in the development of cost effective, grid-tied motordrives for photovoltaic applications. Both jobs were completed in 2007.

 

*                Cost ofContract Revenue.*  Cost ofcontract revenue consists primarily of third party construction andinstallation expense, materials and supplies required for construction andcomponent equipment, including the solar panels, solar array, inverters,variable speed drives and meters.

 

*                Cost ofGrant Revenue.*  Costassociated with grant revenue consists primarily of third party subcontractedcosts incurred for consulting expenses and prototype costs. The Companyexpenses internal research, engineering and development costs, as incurred. SeeResearch and Development expense below.

 

*                GrossProfit on Contracts.*  The Companygenerated gross profits on contracts totaling $1,489,000.  Gross profits were offset by warrantyreserves and other expenses not allocated to individual contracts totaling$135,000 in 2007.

 

*Gross Profit  onContracts- Related Party.*  TheCompany generated gross profits on related party contracts totaling $214,000.

 

*                GrossProfit on Grants.*  A Grossprofit of $36,000 in 2007 was earned in connection with the Company’s grantrevenue.

 

*                Marketing,General and Administrative Expenses.*  Marketing, general and administrativeexpenses amount to $15,369,000 in 2006, and consist primarily of salaries andrelated personnel costs, travel, professional fees, including legal andaccounting, rent, insurance, and other sales and marketing expenses.

 

*                DebtSourcing Fees and Commissions.*  The Company historically has financed itsoperations through a combination of convertible debt, convertible preferredstock, and equity.

 

*                Researchand Development Expense.* Research and development expense consists primarily of salary expensefor internal personnel, and related personnel costs, as well as prototype costsincurred to improve the design of the Company’s installations, and expand theCompany’s product line. Research and development are critical to the Company’sstrategic objectives of enhancing its technology to meet the requirements ofits targeted customers. The Company expects to maintain, if not increase, itscurrent level of expenditure for research and development on a going-forwardbasis.

 

28

----

 

**COMPARISON OF YEARS ENDED DECEMBER 31, 2007 AND2006**

(amountsare rounded to the nearest thousand)

 

*Contract Revenue.*  Contract revenue for the year ended December 31,2007 was $17,530,000, an increase of $413,000, or 2%, from $17,117,000 for2006. The Company continued its expanded revenue base with further continuingto upgrade the sales and marketing staff, along with taking a more aggressiveapproach to the bid proposal process. Staffing, both at an office and crewlevel, were increased and skills upgraded, which played a big part in theCompany securing the biggest contract in its existence, a $16.25 milliondeal with an international airport in Fresno, California. Overall, the inrevenue over 2007 was obtained as follows; In California, the Company completedfour commercial projects with recognized revenue of $406,000 and had onecommercial project in progress as of December 31, 2007, with recognizedrevenue of $13,347,000. The Company also completed fifteen residential projectswith aggregate revenue of $667,000. In New Jersey, fourteen commercial projectswere completed in 2007 with recognized revenue of $2,692,000.  Three residential jobs were completed withrecognized revenue of $324,000. In Texas, the company concluded a 2006 job,recognizing revenue of $51,000. One small international job was completed in2007, recognizing revenue of $3,000.

 

*Contract Revenue — Related Party*.  The Company also recorded related partyrevenue from a sale to a principal shareholder of 12 Mobil MaxPure®units, recognizing revenue of $900,000 in 2007 as compared to $0 in 2006.

 

*                GrantRevenue.*  Grantrevenue for the year ended December 31, 2007 was $36,000, a decrease of$181,000, or 84% from $217,000 for 2006. The fluctuation is a reflection of thetiming of grant awards and completion of associated tasks/milestones called forunder the grants. Grant revenue is expected to be an immaterial portion of theCompany’s revenue stream going forward into 2008.

 

*                Cost ofContract Revenue.*  The cost ofcontract revenue for the year ended December 31, 2007 was $16,042,000, anincrease of $1,630,000 or 11% from $14,411,000 in 2006. The increase in cost ofcontract revenue is principally the result of higher volume in 2007.

 

*Cost of Contract Revenue — Related Party*.  The Company also recorded related party costfrom from a sale to a principal shareholder of 12 Mobil MaxPure®units, of $685,000 in 2007 as compared to $0 in 2006.

 

*                Cost ofGrant Revenue.*  There was nocost of grant revenue recorded for the year ended December 31, 2007, ascompared to $203,000 in 2006.

 

*                GrossProfit on Contracts.*  The Companygenerated a gross profit on contracts in 2007 of $1,489,000, representing adecrease of $1,216,000, versus the gross profit of $2,705,000 in 2006. Grossprofits totaling $1,840,000 were attributable to 36 projects. Gross profitswere offset by $216,000 in gross losses generated by five projects. Grossprofits are also offset by warranty reserves and other expenses not allocatedto individual contracts totaling $135,000. The Company attributes the decreasein margin primarily to its main job at the Fresno Yosemite InternationalAirport in 2007, a highly competitively bidded contract, which generated agross profit margin of 8%, as opposed to the main job in 2006, that offered amargin of 27%. The Company continued to achieve better overall efficiencies,bid processes, and trained staff in support of the increasingly challenging andcomplex job bid process.

 

*Gross Profit on Contracts- Related Party.*  The Company generated gross profits onrelated party contracts totaling $214,000, as compared to $0 in 2006.

 

*Gross Profit from Grants.*  The Company generated gross profit of $36,000from grants in 2007, versus a gross profit of $14,000 in 2006.

 

*                Marketing,General and Administrative.*  Marketing, general and administrativeexpenses for the year ended December 31, 2007 were $15,369,000, anincrease of $7,594,000 or 98%, from $7,775,000 in 2006. The $7,594,000 increaseincludes increases in salaries and benefits of $2,278,000 associated withincreased headcount in 2007. The number of full-time employees increased from45 as of December 31, 2006 to 93 as of December 31, 2007. Theincreases were also a result of increases in professional fees totaling$2,900,000 made up of increased costs for legal, accounting, consulting andinvestor relations. Increases in Sales & Marketing of $700,000 were aresult of increased staff and more focus on international markets. Facilitiesand Office expenses were up $885,000 covering areas such as our new facility inEwing, recruiting expenses for high level staff, depreciation expense, andgeneral office supplies, printing and postage. Insurance expenses increased by$250,000 due to the need for increased coverages on high exposure contracts,and significant increase in overall headcount. Shareholders expense increasedby $160,000 due primarily to directors fees. Bad Debt write-offs, which the Companyrecorded as MG&A expense, increased by $318,000, mainly due to an isolatedlarge contract settlement related to revenue recognized prior to 2007. TheCompany does not expect this 

 

29

----

 

typeof write-off level to continue in 2008. Increases in other expenses of $103,000accounted for the balance of the $7,594,000 change from 2006 to 2007.

 

*                Researchand Development Expenses.* Research and development expenses incurred in the year ended December 31,2007 were $826,000, an increase of $624,000 or 308% from $202,000 in 2006. Theincrease is partly a result of Mobil MaxPure®, which accounted for$326,000, and the balance was related to development work being performed byEntech (see Proposed Acquisition section). The Company continues to develop itsintellectual property, and its increased efforts to market the MobilMax productline.

 

*                Lossfrom Operations.*  In the yearended December 31, 2007 the Company incurred a loss from operations of$14,456,000, an increase of $9,199,000 or 175% from $5,257,000 in 2006.

 

*                DebtSourcing Fees and Commissions.*  There were no fees and commission expensesincurred to raise debt funding in the year ended December 31, 2007 ascompared to $284,000 in 2006.

 

*                BeneficialConversion and Warrant Amortization.*  This expense is a non-cash charge incurred asa result of the market price of the Company’s common stock on the date ofissuance of convertible notes being higher than the effective conversion priceof the convertible notes being issued. In the year ended December 31,2007, the Company incurred $125,000 of beneficial conversion and warrant inducementfees, associated with the issuance of convertible notes in July of 2005.For the year ended December 31, 2006, the Company incurred beneficialconversion and warrant inducement fees of $3,400,000. The increase isattributable to the amortization of the July 2005 convertible notes, usingthe effective interest method.

 

*                WarrantExercise Inducement Expense.*  This expense is a non-cash charge incurred asa result of the Company granting short term inducements to certain warrantholders, whereby the exercise price was lowered for a limited period of time.In the years ended December 31, 2007 and 2006, the Company incurred $0 and$1,588,000, respectively.  At varioustimes during 2006, the Company offered all individuals who were granteddetachable warrants (issued in connection with convertible loans) in 2003 and2004 a short-term inducement to exercise the warrants at a reduced exerciseprice ($0.20).  The offers were short termin nature and expired anywhere from 30-60 days from the initial offer. TheCompany notes that 9,099,698 warrants were exercised as a result of theoffers.  Since the warrants were issuedin connection with convertible loans, the Company recorded an expense relatedto the notes.  The expense for theinducement was recorded by obtaining the difference between the Black-Scholesvalue of the initial fair value of the warrants and that of the short-termmodification multiplied by the number of parties who accepted the inducement.The Company used the current stock price, modified exercise price, currentvolatility, current interest and dividend rate and the 30-60 day term as theirinputs for the Black-Scholes model.  TheCompany notes that the expense incurred as a result of these offers was $1,216,527.  The additional $371,905 of expense related tothe Company issuing 1,447,422 shares of common stock to a debt holder to inducethem to exercise their outstanding warrants (not at a discount).  The company calculated this portion of theexpense by multiplying the market price of the stock the date the inducementwas offered by the number of shares issued.

 

*                Interest(Expense)/Income(net).*  Was $196,000 and ($959,000) in the yearsended December 31, 2007 and 2006, respectively, a decrease of $1,155,000 or120%. This decrease was due to significant decreases in outstanding debt from2007 to 2006, an expense due to an increase in the value of our Series D PreferredStock warrant liability of $439,000 during 2006, along with Capital raises in2007 that resulted in positive interest income.

 

*                IncomeTaxes.*  The Company recognized anincome tax benefit of $0 and $0 for the years ended December 31, 2007 and2006, respectively. The Company participates in the State of New Jersey’sCorporation Business Tax Benefit Certificate Transfer Program (the “Program”),which allows certain high technology and biotechnology companies to sell unusedNew Jersey net operating loss carryovers and research and development taxcredits to other New Jersey corporate taxpayers.

 

                *Accretionof Preferred Stock Dividends*. These dividends are associated with Series CPreferred Stock, and are accrued for at an interest rate of 6%, paid monthly.In 2007 dividend expense was $38,000, as compared to $23,000 in 2006, where thedividend was only accrued over a six month period from the issuance of thepreferred shares.

 

**RESULTS OF OPERATIONS — YEARS ENDED DECEMBER 31, 2006 and 2005 (amountsare rounded to the nearest thousand)**

 

        *Contract Revenue*.    Contract revenuefor 2006 amounts to $17,117,000, and represents 99% of the Company’s revenue. Thisrevenue, was generated by domestic commercial and residential projects. Thesignificant revenue growth can be attributed to the Company moving away fromits entrepreneurial roots in 2006. The expanded revenue base from 2005 to 2006was a mixture of upgrading the sales and marketing staff, along with taking amore aggressive approach to the bid proposal process. Staffing, both at anoffice and crew level, were increased and skills upgraded, which played a bigpart in the Company securing the biggest contract in its existence, a$7.8 million deal with an irrigation farm in California. Overall, theincrease in revenue over 2005 was obtained as follows; In California, theCompany completed two commercial projects with recognized 

 

30

----

 

revenueof $1,820,000 and had six commercial projects in progress as of December 31,2006, with recognized revenue of $9,658,000. The Company also completed nineresidential projects with aggregate revenue of $524,000. In New Jersey, sixcommercial projects were completed in 2006 with recognized revenue of$2,108,000. Three commercial projects, with recognized revenue of $2,128,000 in2006, were in progress as of December 31, 2006. The Company also recordedrevenue of $567,000 from three commercial projects in Delaware and $278,000from one project in Texas.

 

        *Grant Revenue.*    The Company recognizedgrant revenue of $217,000 in 2006. This is composed of $192,000 from the U.S.Trade and Development Agency (USTDA) and $25,000 from the New Jersey Board ofPublic Utilities (NJBPU). The USTDA grant is in connection with a pilot projectfor water supply in Sri Lanka. This project is designed to assess solar technologymethods to provide safe, sustainable water supplies to people in six villagesnear the tsunami-ravaged southern coast of Sri Lanka. The NJBPU grant is forresearch in the development of cost effective, grid-tied motor drives forphotovoltaic applications.

 

        *Cost of Contract Revenue*.    Cost ofcontract revenue consists primarily of third party construction andinstallation expense, materials and supplies required for construction andcomponent equipment, including the solar panels, solar array, inverters,variable speed drives and meters.

 

        *Cost of Grant Revenue.*    Costassociated with grant revenue consists primarily of third party subcontractedcosts incurred for consulting expenses and prototype costs. The Companyexpenses internal research, engineering and development costs, as incurred. SeeResearch and Development expense below.

 

        *Gross Profit (Loss) on Contracts.*    TheCompany generated gross profits on contracts totaling $2,705,000 in 2006. Grossprofits totaling $3,463,000 were attributable to 27 projects. Gross profitswere offset by $99,000 in gross losses generated by four projects. Grossprofits are also offset by warranty reserves and other expenses not allocatedto individual contracts totaling $659,000.

 

        *Gross Profit (Loss) on Grants*.    Grossprofit of $14,000 was earned in connection with the Company’s grant revenue; Agross loss of $9,000 from the USTDA grant, and a gross profit of $25,000 fromthe NJBPU grant.

 

        *Marketing, General and Administrative Expenses*.    Marketing,general and administrative expenses amount to $7,775,000 in 2006, and consistprimarily of salaries and related personnel costs, travel, professional fees,including legal and accounting, rent, insurance, and other sales and marketingexpenses.

 

        *Debt Sourcing Fees and Commissions*.    TheCompany historically has financed its operations through a combination ofconvertible debt, convertible preferred stock, and equity. To date, theincreased working capital required to support the Company’s rapid revenuegrowth have been a net user of cash, and this is expected to continue throughthe end of 2007.

 

        *Research and Development Expense*.    Researchand development expense consists primarily of salary expense for internalpersonnel, and related personnel costs, as well as prototype costs incurred toimprove the design of the Company’s installations, and expand the Company’sproduct line. Research and development are critical to the Company’s strategicobjectives of enhancing its technology to meet the requirements of its targetedcustomers. The Company expects to maintain, if not increase, its current levelof expenditure for research and development on a going-forward basis.

 

**COMPARISON OF YEARS ENDED DECEMBER 31, 2006 AND 2005 (amounts arerounded to the nearest thousand)**

 

        *Contract Revenue*.    Contract revenuefor the year ended December 31, 2006 was $17,117,000, an increase of$15,199,000, or 792%, from $1,918,000 for 2005. The significant revenue growthcan be attributed to the Company moving away from its entrepreneurial roots in2006. The expanded revenue base from 2005 to 2006 was a mixture of upgradingthe sales and marketing staff, along with taking a more aggressive approach tothe bid proposal process. Staffing, both at an office and crew level, wereincreased and skills upgraded, which played a big part in the Company securingthe biggest contract in its existence, a $7.8 million deal with anirrigation farm in California. Overall, the increase in revenue over 2005 wasobtained as follows; In California, the Company completed two commercialprojects with recognized revenue of $1,820,000 and had six commercial projectsin progress as of December 31, 2006, with recognized revenue of$9,658,000. The Company also completed nine residential projects with aggregaterevenue of $524,000. In New Jersey, six commercial projects were completed in2006 with recognized revenue of $2,108,000. Three commercial projects, withrecognized revenue of $2,128,000 in 2006, were in progress as of December 31,2006. The Company also recorded revenue of $567,000 from three commercialprojects in Delaware and $278,000 from one project in Texas.

 

        *Grant Revenue*.    Grant revenue for theyear ended December 31, 2006 was $217,000, an increase of $104,000, or 92%from $113,000 for 2005. The fluctuation is a reflection of the timing of grantawards and completion of associated tasks/milestones called for under thegrants. Grant revenue is expected to be an immaterial portion of the Company’srevenue stream going forward into 2007.

 

31

----

 

        *Cost of Contract Revenue*.    The cost ofcontract revenue for the year ended December 31, 2006 was $14,411,000, anincrease of $11,966,000 or 489% from $2,445,000 in 2005. The increase in costof contract revenue is principally the result of higher volume in 2006 (revenueis up 792%).

 

        *Cost of Grant Revenue*.    The cost ofgrant revenue for the year ended December 31, 2006 was $203,000, an increaseof $132,000 from $71,000 in 2005.

 

        *Gross Profit (Loss) on Contracts.*    TheCompany generated a gross profit on contracts in 2006. The gross profit of$2,705,000 in 2006, represents an increase of $3,232,000, versus the gross lossof $527,000 in 2005. Gross profits totaling $3,463,000 were attributable to 27projects. Gross profits were offset by $99,000 in gross losses generated byfour projects. Gross profits are also offset by warranty reserves and otherexpenses not allocated to individual contracts totaling $659,000. The Companyattributes its significant rise in gross profit partly to its evolution from anentrepreneurial to a fast growth company. Better overall efficiencies, bidprocesses, and trained staff have also supported the increased job margins.

 

        *Gross Profit (Loss) from Grants*.    TheCompany generated gross profit of $14,000 from grants in 2006, versus a grossprofit of $42,000 in 2005. Gross profit is made up of a gross loss of $9,000from the USTDA grant, and a gross profit of $25,000 from the NJBPU grant.

 

        *Marketing, General and Administrative*.    Marketing,general and administrative expenses for the year ended December 31, 2006were $7,775,000, an increase of $3,327,000 or 75%, from $4,448,000 for 2005.The $3,327,000 increase includes increases in salaries and benefits of$1,450,000 and stock option expense of $1,124,000 associated with increasedheadcount in 2006. The number of full-time employees increased from 33 as of December 31,2005 to 45 as of December 31, 2006. The increases were also associatedwith the September 2005 acquisition of Quantum Energy Group. The increaseswere also a result of increases in professional fees totaling $657,000 made upof increased costs for legal, consulting and investor relations.

 

        *Research and Development Expenses.*    Researchand development expenses incurred in the year ended December 31, 2006 were$202,000, an increase of $60,000 or 42% from $142,000 in 2005. The increase isa result of the Mobil Max Product line. The Company has continued to developits intellectual property as evidenced by the filing of two patent applicationsin 2006.

 

        *Loss from Operations*.    In the yearended December 31, 2006 the Company incurred a loss from operations of$5,257,000, an increase of $182,000 or 4% from $5,075,000 in 2005.

 

        *Debt Sourcing Fees and Commissions.*    Feesand commission expenses incurred to raise debt funding in the year ended December 31,2006 were $284,000, a decrease of $158,000 or 64% from $442,000 in 2005.

 

        *Beneficial Conversion and Warrant Amortization. *   Thisexpense is a non-cash charge incurred as a result of the market price of theCompany’s common stock on the date of issuance of convertible notes beinghigher than the conversion price of the convertible notes being issued. In theyear ended December 31, 2006, the Company incurred $3,400,000 ofbeneficial conversion and warrant interest expense, associated with theissuance of convertible notes in July of 2005. For the year ended December 31,2005, the Company incurred beneficial conversion and warrant interest expenseof $6. The increase is attributable to the amortization of the July 2005convertible notes, using the effective interest method.

 

        *Warrant Exercise Inducement Expense. *   Thisexpense is a non-cash charge incurred as a result of the Company granting shortterm inducements to certain warrant holders, whereby the exercise price waslowered for a limited period of time. In the years ended December 31, 2006and 2005, the Company incurred $1,588,000 and $0 of warrant exercise inducementexpenses, respectively. At various times during 2006, the Company offered allindividuals who were granted detachable warrants (issued in connection withconvertible loans) in 2003 and 2004 a short-term inducement to exercise thewarrants at a reduced exercise price ($0.20). The offers were short term innature and expired anywhere from 30-60 days from the initial offer. TheCompany notes that 9,099,698 warrants were exercised as a result of the offers.Since the warrants were issued in connection with convertible loans, theCompany recorded an expense related to the notes. The expense for theinducement was recorded by obtaining the difference between the Black-Scholesvalue of the initial fair value of the warrants and that of the short-termmodification multiplied by the number of parties who accepted the inducement.The Company used the current stock price, modified exercise price, currentvolatility, current interest and dividend rate and the 30-60 day term astheir inputs for the Black-Scholes model. The Company notes that the expenseincurred as a result of these offers was $1,216,527. The additional $371,905 ofexpense related to the Company issuing 1,447,422 shares of common stock to adebt holder to induce them to exercise their outstanding warrants (not at adiscount). The company calculated this portion of the expense by multiplyingthe market price of the stock the date the inducement was offered by the numberof shares issued.

 

        *Interest Expense. *   Interest expensewas $1,079,000 and $1,029,000 in the years ended December 31, 2006 and2005, respectively, an increase of $50,000 or 5%. This increase was due to asignificant decrease in outstanding debt from 2005 to 2006 offset by an expensedue to an increase in the value of our Series D Preferred Stock warrantliability of $439,000 during 2006.

 

32

----

 

        *Income Taxes. *   The Company recognizedan income tax benefit of $0 and $201,000 for the years ended December 31,2006 and 2005, respectively. The Company participates in the State of NewJersey’s Corporation Business Tax Benefit Certificate Transfer Program (the “Program”),which allows certain high technology and biotechnology companies to sell unusedNew Jersey net operating loss carryovers and research and development taxcredits to other New Jersey corporate taxpayers.

 

**HISTORICAL CASH FLOW ANALYSIS**

 

                The “Historical Cash FlowsAnalysis” section discusses consolidated cash flow from operations, investingactivities and financing activities. 

 

*Cash Flows from Operating Activities*

 
| ** **                             | ** ** | **Year  ended December 31,** | ** **  |
|----------------------------------------|------------|-----------------------------------|-------------|
| ** **                             | ** ** | **2007**                          | ** **  | **2006  (restated)** | ** ** |
| Net  Cash Used in Operating Activities |       | $                                 | (16,549,549 | ) | $ | (10,362,259 | ) |
|                                        |            |                                   |             |  |  |  |  |

 

                In 2007, the Company had anincrease in net cash used in operating activities of $6,187,290 in a periodwhen the Company also had an increase in net loss of $2,896,647. An analysis ofthe increased loss is above in the RESULTS OF OPERATIONS and COMPARISON OF YEARSENDED DECEMBER 31, 2007 and 2006. The increase in net cash used inoperating activities in 2007, a period when the Company’s net loss increased,is attributable to changes in non-cash charges and from the timing of cashreceipts and disbursements related to working capital items in 2007. Thesechanges in working capital items relate mainly to the significant increase injob contracts from 2006 to 2007, along with an increase in staffing to coincidewith the growth of the company.

 
| Increases  (decreases) in non-cash charges:                                            |   |       |       |
|----------------------------------------------------------------------------------------|--------|------------|------------|
| Beneficial conversion and Warrant amortization                                         |   | (3,275,034 | )          |
| Warrant exercise inducement expenses                                                   |   | (1,588,432 | )          |
| Issuance of stock for service                                                          |   | 19,018     |       |
| Depreciation and amortization                                                          |   | 89,185     |       |
| Loss on disposal of asset                                                              |   | 160,279    |       |
| Stock-based employee compensation cost                                                 |   | (106,034   | )          |
| Interest expense attributable to increase in value  of warrant liability               |   | (439,000   | )          |
| Amortization of interest expense                                                       |   | (333,823   | )          |
| Issuance of options and warrants for services                                          |   | (10,000    | )          |
| Amortization of intangibles and loan origination  costs                                |   | (290,688   | )          |
| Share-based non-employee compensation cost                                             |   | (44,280    | )          |
| Amortization of deferred compensation                                                  |   | (45,000    | )          |
| Issuance of stock in lieu of interest                                                  |   | (43,237    | )          |
|                                                                                   |   | (5,907,046 | )          |
| Changes in timing of cash receipts and  disbursements related to working capital items |   | 2,616,403  |       |
|                                                                                   |   | (3,290,643 | )          |
| Change in net loss—2007 compared to 2006                                          |   | (2,896,647 | )          |
| Increase in net cash used in operating activities                                      |   | $          | (6,187,290 | ) |
|                                                                                        |        |            |            |  |

 

Referto Warrant Exercise Inducement Expense section on the MD&A for a detaileddescription of the transactions.

 

*Cash Flows from Investing Activities*

 

33

----

 
| ** **                             | ** ** | **Year  ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Net  Cash Used in Investing Activities |       | $                                 | (4,396,035 | ) | $ | (966,234 | ) |
|                                        |            |                                   |            |  |  |  |  |

 

                In 2007 and 2006, investingactivities included the deferred acquisition costs and advances to ENTECHInc.  Investing activities also includedleasehold improvements for the company’s corporate headquarters in Ewing, NJ,and the purchase of office equipment including computers for the increasedworkforce.

 

Aspart of the merger agreement, the Company required to provide to ENTECH$5.0 million of working capital to provide research and developmentengineering related to the implementation of a new manufacturing plant inTexas.  Approximately $2.7 million ofworking capital was provided to ENTECH as of December 31, 2007, of which$500,000 was expensed as research and development expense on WorldWater’sStatement of Operations in the quarter ending September 30, 2007.  The remaining $2.3 million of capital wasprovided to ENTECH subsequent to December 31, 2007 and  prior to the merger which was completed on January 28,2008.

 

*Cash Flows from Financing Activities*

 
| ** **                                 | ** ** | **Year  ended December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2007**                          | ** ** | **2006  (restated)** | ** ** |
| Net  Cash Provided By Financing Activities |       | $                                 | 22,048,437 |   | $ | 16,300,439 |   |
|                                            |            |                                   |            |  |  |  |  |

 

                In 2007, the Company issued1,233,666 shares of 10% convertible debentures maturing in 2007 and 2008generating net proceeds of $185,050. In addition, 18,884,465 shares of commonstock were issued upon the exercise of warrants and stock options, raising$3,621,555.

 

OnSeptember 28, 2007, the Company entered into a Stock and Warrant PurchaseAgreement with the Quercus Trust, whereby the Quercus Trust purchased 7.5 millionshares of WorldWater’s common stock at a price of $1.782 per share, for totalproceeds of $13,365,000. The Agreement also provides for the issuance ofwarrants to the Quercus Trust for the purchase of 9.0 million additional sharesof WorldWater’s common stock at an exercise price of $1.815, subject to certainadjustments. The exercise of warrants into common stock cannot take place untiladditional shares are authorized by the company’s shareholders.  Prior to September 28, 2007, the QuercusTrust and its affiliates owned approximately 21.6 million shares of WorldWatercommon stock, representing approximately 12.2% of the equity ownership in theCompany, or 8.2% on a fully diluted basis. With this Agreement, the QuercusTrust and its affiliates own approximately 16.4% of the equity ownership inWorldWater, or 10.6% on a fully diluted basis as of September 30, 2007.

 

OnApril 12, 2007, the Company initiated a private offering. A summary of theoffering included 10,900,000 Shares of the Company’s Common stock issued at$0.50 per share, with a five-year warrant attached to purchase 3,500,000 Sharesof the Company’s common stock at $0.50. Net proceeds from this offeringamounted to $5,117,000. The net proceeds from this Offering were used by theCompany primarily for working capital.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

                At December 31, 2007, ourcurrent ratio was 2.19 compared to 2.34 at December 31, 2006. As of December 31,2007, we had $14,215,991 of working capital compared to working capital of $9,294,450as of December 31, 2006. Cash and cash equivalents were $6,873,448 as of December 31,2007, as compared to $5,801,852 as of December 31, 2006.

 

                The Company has historicallyfinanced operations and met capital expenditures requirements primarily throughsales of capital stock and solar system equipment sales. Management plans tocontinue to raise funds through the sale of capital and forecasts increasedrevenues.

 

                On September 28, 2007, theCompany raised $13,365,000 through a Stock and Warrant Purchase Agreement withthe Quercus Trust, whereby the Quercus Trust purchased 7.5 million shares ofWorldWater’s common stock at a price of $1.782 per share.

 

34

----

 

On February 13, 2008the Company announced that it has raised $35.64 million from The Quercus Trustin a private placement of 20,000 shares of WorldWater Series F ConvertiblePreferred Stock at a price of $1,782.00 per share.

 

TheCompany has budgeted for $5.5 million of capital expenses in 2008, mainlyconsisting of machinery and equipment for its 71,000 square foot technical andmanufacturing facility, which is leased in the County of Tarrant, TX.

 

InJanuary 2008, QuercusTrust, advanced the Company $6.0 million at a rate of 8%. These funds were usedprimarily to expedite the acquisition of ENTECH on January 28, 2008. Theoutstanding principal amount of the note and all accrued and unpaid interestwas repaid on February 12, 2008.

 

Webelieve that our existing cash balance together with our other existing financialresources, including our capital raise in 2008, and revenues from sales of oursolar systems, will be sufficient to meet our operating and capitalrequirements beyond the first quarter of 2009.

 

                Below is a table showing thepotential issuable shares and available authorized common to be issued as of December 31,2007.

 
| ** **                              | ** ** | **As of December 31,  2007** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| Number  of authorized common shares:    |       | 275,000,000                       |       |
| Less  common shares outstanding:        |       | 189,352,674                       |       |
| Less  potential issuable common shares: |       |                              |       |
| Warrants                                |       | 13,484,226                        |       |
| Debt conversion rights                  |       | 1,454,470                         |       |
| Stock options                           |       | 14,589,417                        |       |
| Preferred stock conversion rights       |       | 55,842,797                        |       |
| Total Potential Issuable Common Shares  |       | 85,370,910                        |       |
| Available  common shares to be issued:  |       | 276,416                           |       |

 

On  October 29,2007, we entered into a merger agreement to acquire ENTECH. The mergeragreement requires, among other things, the payment of $5 million and theissuance of 19,672,131  shares of WorldWater common stock to the ENTECHstockholders. Since we did not have sufficient authorized and unissued sharesof common stock to complete the merger, on January 25, 2008, we enteredinto a Stock Exchange Agreement with The Quercus Trust pursuant to whichagreement the Company issued 19,700 shares of its Series E ConvertiblePreferred Stock in exchange for 19,700,000 shares of the Company’s common stockheld by The Quercus Trust. Each share of the Series E ConvertiblePreferred Stock will automatically convert into 1,000 shares of the Company’scommon stock upon the approval of the holders of WorldWater common stock to theincrease in our authorized common stock discussed in this Proposal. The mergerwas completed on January 28, 2008.   As a result, ourstockholders must approve the amendment of our Certificate of Incorporation toincrease our authorized common stock in order for to convert the Series EConvertible Preferred Stock to common stock. (See “The Acquisition of ENTECH”below.) If the Company’s stockholders approve the proposed increase inauthorized shares, no further action or authorization by the Company’sstockholders will be necessary to convert the Series E ConvertiblePreferred Stock to common stock.

 

               Additionally, the increase in the authorized number of shares is required inorder to accommodate the Company’s anticipated growth and to pursue newbusiness. The increased share authorization will provide the Company with anability to raise capital funds that may be necessary to further develop itscore business, to fund other potential acquisitions, to finance working capitalrequirements, to have shares available for use in connection with its stockoption plans, and to pursue other corporate purposes that may be identified bythe board of directors. The board of directors will determine whether, when andon what terms the issuance of shares of common stock may be warranted inconnection with any future actions. No further action or authorization by theCompany’s stockholders would be necessary prior to issuance of these additionalshares of common stock authorized under the amendment, except as may berequired for a particular transaction by the Company’s Certificate ofIncorporation, by applicable law or regulatory agencies or by the rules ofthe NASDAQ Stock Market or of any stock exchange on which the Company’s commonstock may then be listed.

 

               Although an increase in the authorized shares of common stock could, undercertain circumstances, also be construed as having an anti-takeover effect (forexample, by permitting easier dilution of the stock ownership of a personseeking to effect a change in the composition of the board of directors orcontemplating a tender offer or other transaction resulting in the acquisitionof the Company by another company), the proposed amendment is not in response toany effort by any person or group to accumulate the 

 

35

----

 

Company’s stock or toobtain control of the Company by any means. In addition, the proposal is notpart of any plan by the board of directors to recommend or implement a seriesof anti-takeover measures.

 

**COMMITMENTS AND GUARANTEES**

 

                The Company’s commitments as of December 31,2007, for the years 2008 through 2012 and thereafter as summarized below:

 
| ** **                                    | ** ** | **2008**  | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-tem debt maturities (face amount)        |       | $         | 560,897    |      | $          | —    |       | $        | 38,456     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 599,353 |   |
| Employment obligations                        |       | 1,352,707 |       | 1,440,680 |       | 1,082,347 |       | 316,667  |       | —   |       | —         |       |      | 4,192,401  |   |
| Renewable energy credit guarantee obligations |       | 64,701    |       | 64,701    |       | 64,701    |       | 64,701   |       | 35,509   |       |           |       |      | 294,313    |   |
| Operating lease payments                      |       | 885,743   |       | 829,469   |       | 772,631   |       | 772,631  |       | 772,631  |       | 3,516,555      |       |      | 7,549,660  |   |
| Total                                         |       | $         | 2,864,048  |      | $          | 2,334,850 |       | $        | 1,958,135  |     | $          | 1,153,999      |       | $         | 808,140    |   | $ | 3,516,555 |   | $ | 12,635,731 |   |

 

 

**INCOME TAXES**

 

                As of December 31, 2007,the Company had federal and state net operating loss carryforwards totalingapproximately $44,845,500 and $29,409,800, respectively, available to reducefuture taxable income and tax liabilities which expire at various dates between2007 and 2026. In addition, as of December 31, 2007, the Company hadfederal research and development tax credit carryforwards of approximately$180,600 available to reduce future taxable income and tax liabilities whichexpire at various dates between 2026. Under provisions of the Internal RevenueCode, substantial changes in the Company’s ownership may limit the amount ofnet operating loss carryforwards and research and development creditcarryforwards, which can be used in future years.

 

**ACQUISITION**

 

InJune, 2006, the Company announced that it entered into a letter of intent withENTECH, Inc., based in Keller, Texas, to acquire all the outstanding stockof ENTECH upon completion of the necessary due diligence and after obtainingappropriate financing. ENTECH, a private company formed in 1983, is a developerand manufacturer of advanced concentrating solar photovoltaic and thermaltechnologies for terrestrial and space power applications. ENTECH has developedconcentrator solar power systems, supplied solar power for space missions forNASA, and installed ground-based concentrating solar systems in North America.

 

Toobtain the exclusive opportunity through December 31, 2006 to conduct duediligence, the Company made a $500,000 non-refundable payment to ENTECH in2006. From June 2006 through early 2007, we performed due diligence reviewof business, legal and financial matters relating to the acquisition of ENTECH,and negotiations were ongoing regarding the terms of definitive agreements, however,no agreement was completed as originally anticipated under the original letterof intent.

 

On May 25, 2007, weentered into a second letter of intent to acquire ENTECH. This letter of intentwas subsequently amended on August 1, 2007 to extend the date by which themerger must be completed. On October 29, 2007, the Company and ENTECHentered into an Agreement and Plan of Merger. The merger was completed on January 28,2008. Specifically, ENTECH merged with and into a wholly-owned subsidiary ofthe Company and the subsidiary survived the merger as a wholly-owned subsidiaryof the Company. Under the terms of the merger agreement, WorldWater paid thefollowing consideration to ENTECH stockholders in 2008:

 

·                  $4.5 millionin cash, (in addition to, $500,000 that was paid during 2007), and

 

·                  19,672,131 sharesof the Company’s common stock for an aggregate value of  $42,295,082. This determination of value isbased on a $2.15 per share value of the Company’s common stock, which is itsestimate of the fair market value of its common stock for a reasonable periodbefore and after the date of merger agreement, October 29, 2007.

 

 

36

----

 

Additionally,the ENTECH stockholders are entitled to receive future earn-out considerationcalculated as 5% of Merger Sub’s gross revenues determined in accordance withgenerally accepted accounting principles until the accumulated total of suchearn-out payments paid by WorldWater to the ENTECH stockholders equals $5.0million. WorldWater also was responsible for the payment of $1.3 millionof ENTECH’s liabilities, which was paid at the closing on January 28,2008.

 

Withthe combined technologies of the Company and ENTECH, we believe our solarsystems will be capable of generating and delivering electrical and thermalenergy on site at prices competitive to retail prices without relying ongovernment sponsored rebates. ENTECH’s patented concentrator technology allowsfor the installation of large solar “farms” with greatly reduced requirementsfor solar cell materials (silicon or multi-junction). Due to the advantages ofENTECH’s concentrator, a significantly lesser amount of silicon used in flatplate solar modules is required by current ENTECH modules to generate the sameelectrical power. Consequently, the ENTECH technology greatly lessens theimpact of the silicon material shortage currently constricting flat plate solarpanel supply. ENTECH concentrators utilize a two-axis tracker to follow the sun’sposition throughout the day, maximizing energy production.

 

ENTECH’stechnology can produce photovoltaic electricity, or thermal energy (heat) forcommercial uses such as for heating and/or air conditioning. When applied in acombined fashion for onsite power applications, the cost to the customer can besignificantly less for electricity generated and for BTU’s of heat providedversus separate competing systems currently on the market while beingcompetitive with current retail energy prices.

 

ENTECHwill maintain its identity, location, and business operations in bothterrestrial and space solar energy. The Company anticipates that ENTECH willcontinue to perform its contract work for NASA, the U.S. Department of Defense,and other customers, as well as its internal R&D programs leading toimproved future products.

 

Inaddition to the $500,000 non-refundable standstill payment to ENTECH in 2006,we made another $500,000 standstill payment in the second quarter 2007 whichwas released to the ENTECH stockholders prior to the completion of the mergertransaction. Due diligence fees of $411,442 were recorded on the balance sheetthrough September 30, 2007, and along with the two $500,000 payments toENTECH, resulted in a capitalized amount of $1,411,442 on the balance sheet at September 30,2007, classified as deferred cost on proposed acquisition.   Such amount will be added to the purchaseprice consideration.

 

Inaddition to the consideration to be paid to ENTECH’s stockholders, WorldWaterwas required to provide to ENTECH $5.0 million of working capital toprovide research and development engineering related to the implementation of anew manufacturing plant in Texas. Approximately $2.7 million of working capital was provided to ENTECH asof December 31, 2007, of which $500,000 was expensed as research anddevelopment expense on WorldWater’s Statement of Operations in the quarterending September 31, 2007.   Thebalance of such funds was recorded as tangible assets or was in the bankaccounts of ENTECH as of the acquisition date. The remaining $2.3 million of working capital was provided to ENTECHsubsequent to December 31, 2007 and prior to the merger which was completed on January 28, 2008.

 

As aresult of the ENTECH merger transaction, ENTECH’s current stockholders ownapproximately 10% of the fully-diluted post-transaction common stock ofWorldWater.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“FAS 141R”), which replaces FASB Statement No. 141. FAS 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any non controlling interest in the acquiree, and thegoodwill acquired. FAS 141R also establishes disclosure requirements whichwill enable users to evaluate the nature and financial effects of the businesscombination. FAS 141R is effective as of the beginning of an entity’sfiscal year that begins after December 15, 2008, which will be our fiscalyear beginning January 1, 2009.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of Accounting ResearchBulletin No. 51” (“FAS 160”), which establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest and the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. The Statement also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. FAS 160 is effective as of the beginning of anentity’s fiscal year that begins after December 15, 2008, which will beour fiscal year beginning January 1, 2009. We are currently evaluating thepotential impact, if any, of the adoption of FAS 160 on our consolidatedfinancial position, results of operations and cash flows.

 

37

----

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” This Statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This statement also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.This Statement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and will become effective for usbeginning with the first quarter of 2008. We have not yet determined the impactof the adoption of SFAS No. 159 on our financial statements and footnotedisclosures.

 

**ITEM 7A.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

WorldWater is exposed tocertain market risks arising from transactions it has entered into in thenormal course of business. These risks primarily relate to fluctuations incommodity prices.

 

**ForeignCurrency Transaction Risk**

 

WorldWater does notbelieve it is exposed to foreign currency exchange risk because all of itssales and purchases are denominated in United States dollars.

 

**CommodityPrice Risk**

 

WorldWater is subject tomarket risk from fluctuating market prices of certain raw materials. While suchmaterials are typically available from numerous suppliers, commodity rawmaterials are subject to price fluctuations. WorldWater endeavors to recoupthese price increases from its customers on an individual contract basis toavoid operating margin erosion. WorldWater has historically not entered intoany contracts to hedge its commodity risk although it may do so in the future.Commodity price changes can have a material impact on WorldWater’s prospectiveearnings and cash flows.

 

 

38

----

 

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .**

 

**Report of Independent RegisteredPublic Accounting Firm**

 

We have audited the accompanying consolidated balance sheets ofWorldWater & Solar Technologies Corp. and Subsidiaries (formerly WorldWater& Power Corp. and Subsidiaries) (the “Company”) as of December 31, 2007 and2006 (as restated), and the related consolidated statements of operations,changes in stockholders’ equity (deficiency), and cash flows for each of theyears in the three-year period ended December 31, 2007.  We also have audited WorldWater & SolarTechnologies Corp. and Subsidiaries’ internal control over financial reportingas of December 31, 2007, based on criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Company’s management is responsible forthese financial statements, for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control Over Financial Reporting.  Our responsibility is to express an opinionon these financial statements and an opinion on the Company’s internal controlover financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects.  Our audits of the financial statementsincluded examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made my management, and evaluating the overallfinancial statement presentation.  Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances.  We believe that our audits provide areasonable basis for our opinions.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or combination of deficiencies, ininternal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interimfinancial statements will not be prevented or detected on a timely basis.  A material weakness regarding Management’sfailure to design and maintain adequate and timely controls over financialreporting has been identified and described in Management’s Assessment.  This material weakness was considered indetermining the nature, timing and extent of audit tests applied in our auditof the 2007 financial statements.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of WorldWater & Solar Technologies Corp.and Subsidiaries (formerly WorldWater & Power Corp. and Subsidiaries) as ofDecember 31, 2007 and 2006 (as restated), and the results of their operationsand their cash flows for each of the years in the three-year period endedDecember 31, 2007 in conformity with accounting principles generally acceptedin the United States of America. However, in our opinion, WorldWater & Solar Technologies Corp. andSubsidiaries did not maintain, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007, based on criteriaestablished in *Internal Control-Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

 

As discussed in Note 4 to the consolidated financial statements,effective January 1, 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), Share-Based Payment.  

 

As discussed in Note 3 to the consolidated financial statements, theCompany has restated its consolidated financial statements for the year endedDecember 31, 2006.

 

/s/ Amper, Politziner & Mattia, P.C.

 

March 27, 2008

Edison, New Jersey

 

 

39

----

 

**WORLDWATER & SOLARTECHNOLOGIES CORP. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF**

 
| ** **                                                                                                                 | ** ** | **December 31, 2007** | ** **     | **December 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|----------------|----------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                 | ** **     | **(Restated)**             | ** ** |
| **Assets**                                                                                                                 | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| ** **                                                                                                                 | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| **Current Assets:**                                                                                                        | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| Cash and cash equivalents                                                                                                  |       | $                          | 6,873,448      |                       | $          | 5,770,595 |   |
| Restricted cash                                                                                                            |       | —                     |           | 31,257                     |       |
| Accounts receivable -  trade, (net of allowance of $220,916 and  $29,257 at December 31, 2007 and 2006, respectively) |       | 10,155,589                 |           | 5,288,241                  |       |
| Accounts receivable -  other                                                                                               |       | —                     |           | 22,500                     |       |
| Rebates receivable                                                                                                         |       | 1,153,800                  |           | —                     |       |
| Inventory                                                                                                                  |       | 1,399,168                  |           | 748,470                    |       |
| Costs and estimated  earnings/losses in excess of billings                                                                 |       | 5,548,631                  |           | 2,548,427                  |       |
| Prepaid expenses and  deposits                                                                                             |       | 973,795                    |           | 1,763,293                  |       |
| Travel advances to  employees                                                                                              |       | 43,024                     |           | 33,676                     |       |
| **Total Current Assets**                                                                                                   | ** ** | **26,147,455**             | ** **     | **16,206,459**             | ** ** |
|                                                                                                                       |       |                       |           |                       |       |
| **Equipment and Leasehold  Improvements, Net**                                                                             |       | 1,467,794                  |           | 195,808                    |       |
|                                                                                                                       |       |                       |           |                       |       |
| **Intangible And Other  Assets**                                                                                           | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| Other intangible assets,  net                                                                                              |       | 26,667                     |           | 66,667                     |       |
| Deferred costs on and  advances to acquiree - ENTECH                                                                       |       | 3,795,362                  |           | 790,769                    |       |
| Other deposits                                                                                                             |       | 52,710                     |           | 8,443                      |       |
| **Total Assets**                                                                                                           | ** ** | **$**                      | **31,489,988** | ** **                 | **$**      | **17,268,146** | ** ** |
|                                                                                                                       |       |                       |           |                       |       |
| **Liabilities, Convertible  Redeemable Preferred Stock, and Stockholders’ Equity/(Deficiency)**                       | ** ** | ** **                 | ** **     | ** **                 | ** ** |
|                                                                                                                       |       |                       |           |                       |       |
| **Current Liabilities:**                                                                                                   | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| Accounts payable and  accrued expenses                                                                                     |       | 9,392,944                  |           | 4,862,877                  |       |
| Long-term debt and notes  payable, current portion                                                                         |       | 298,092                    |           | 360,897                    |       |
| Notes payable, related  parties                                                                                            |       | —                     |           | 3,000                      |       |
| Customer deposits                                                                                                          |       | 4,000                      |           | 43,453                     |       |
| Customer deposits -  related party                                                                                         |       | 775,000                    |           | —                     |       |
| REC guarantee liability,  current portion                                                                                  |       | 64,701                     |           | 98,710                     |       |
| Billings in excess of costs  and estimated earnings/losses                                                                 |       | 2,900                      |           | 149,245                    |       |
| Series D preferred  stock warrants                                                                                    |       | 1,393,827                  |           | 1,393,827                  |       |
| **Total Current  Liabilities**                                                                                             | ** ** | **11,931,464**             | ** **     | **6,912,009**              | ** ** |
|                                                                                                                       |       |                       |           |                       |       |
| Long-term  debt and notes payable                                                                                          |       | 38,456                     |           | 38,456                     |       |
| REC guarantee liability,  net of current portion                                                                           |       | 229,618                    |           | 250,844                    |       |
| **Total Liabilities**                                                                                                      | ** ** | **12,199,538**             | ** **     | **7,201,309**              | ** ** |
|                                                                                                                       |       |                       |           |                       |       |
| **Convertible redeemable  preferred stock**                                                                                | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| Series C convertible  redeemable preferred stock                                                                      |       | 500,000                    |           | 750,000                    |       |
| Series D convertible  redeemable preferred stock                                                                      |       | 11,179,561                 |           | 11,179,561                 |       |
| **Total Convertible  Redeemable Preferred Stock**                                                                          | ** ** | **11,679,561**             | ** **     | **11,929,561**             | ** ** |
|                                                                                                                       |       |                       |           |                       |       |
| **Stockholders’ Equity /  (Deficiency):**                                                                             | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| Preferred Stock  Convertible $.01 par value authorized                                                                     |       |                       |           |                       |       |
| 10,000,000; issued and  outstanding:                                                                                       |       |                       |           |                       |       |
| Series B 7%- 611,111  shares liquidation preference $550,000                                                          |       | 6,111                      |           | 6,111                      |       |
| Common Stock, $.001 par  value; authorized 275,000,000;                                                                    |       |                       |           |                       |       |
| 189,352,674 and  149,359,052 issued and outstanding at December 31, 2007 and 2006,  respectively                      |       | 189,353                    |           | 149,359                    |       |
|                                                                                                                       |       |                       |           |                       |       |
| Additional paid-in capital                                                                                                 |       | 71,425,032                 |           | 47,567,963                 |       |
| Accumulated deficit                                                                                                        |       | (64,009,607                | )              | (49,586,157                | )          |
| **Total Stockholders’  Equity / (Deficiency)**                                                                        | ** ** | **7,610,889**              | ** **     | **(1,862,724**             | **)**      |
| ** **                                                                                                                 | ** ** | ** **                 | ** **     | ** **                 | ** ** |
| **Total Liabilities,  Convertible Redeemable Preferred Stock and Stockholders’ Equity/(Deficiency)**                  | ** ** | **$**                      | **31,489,988** | ** **                 | **$**      | **17,268,146** | ** ** |

 

The Notes to Consolidated Financial Statements are an integral part ofthese statements.

 

40

----

 

**WORLDWATER &SOLAR TECHNOLOGIES AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FORTHE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

 
| ** **                                                                                    | ** ** | **Years Ended:** | ** **  |
|-----------------------------------------------------------------------------------------------|------------|------------------|-------------|
| ** **                                                                                    | ** ** | **2007**         | ** **  | **2006** | ** ** | **2005** | ** ** |
|                                                                                          |       | **(Restated)**   |        |
| Revenues:                                                                                     |       |             |        |   |   |   |   |
| Contract                                                                                      |       | $                | 17,530,167  |   | $ | 17,116,789 |   | $ | 1,918,420 |   |
| Contract - Related Party                                                                      |       | 900,000          |        | — |   | — |   |
| Grant                                                                                         |       | 35,853           |        | 216,892 |   | 113,060 |   |
| Total                                                                                         |       | 18,466,020       |        | 17,333,681 |   | 2,031,480 |   |
|                                                                                          |       |             |        |   |   |   |   |
| Cost of Revenues:                                                                             |       |             |        |   |   |   |   |
| Contract                                                                                      |       | 16,041,611       |        | 14,411,406 |   | 2,445,441 |   |
| Contract - Related Party                                                                      |       | 685,571          |        | — |   | — |   |
| Grant                                                                                         |       | —           |        | 202,688 |   | 71,375 |   |
|                                                                                          |       |             |        |   |   |   |   |
| Total                                                                                         |       | 16,727,182       |        | 14,614,094 |   | 2,516,816 |   |
|                                                                                          |       |             |        |   |   |   |   |
| Gross Profit (Loss):                                                                          |       |             |        |   |   |   |   |
| Contract                                                                                      |       | 1,488,556        |        | 2,705,383 |   | (527,021 | ) |
| Contract - Related Party                                                                      |       | 214,429          |        | — |   | — |   |
| Grant                                                                                         |       | 35,853           |        | 14,204 |   | 41,685 |   |
| Total                                                                                         |       | 1,738,838        |        | 2,719,587 |   | (485,336 | ) |
|                                                                                          |       |             |        |   |   |   |   |
| Operating Expenses:                                                                           |       |             |        |   |   |   |   |
| Marketing, general and administrative  expenses                                               |       | 15,369,285       |        | 7,774,871 |   | 4,447,767 |   |
| Research and development  expense                                                             |       | 825,838          |        | 202,014 |   | 142,182 |   |
| Total Operating Expenses                                                                      |       | 16,195,123       |        | 7,976,885 |   | 4,589,949 |   |
| Loss  from Operations                                                                         |       | (14,456,285      | )           | (5,257,298 | ) | (5,075,285 | ) |
|                                                                                          |       |             |        |   |   |   |   |
| Other (Expense) Income                                                                        |       |             |        |   |   |   |   |
| Debt sourcing fees and  commissions                                                           |       | —           |        | (284,138 | ) | (441,956 | ) |
| Beneficial Conversion and  Warrant Amortization                                               |       | (124,964         | )           | (3,399,992 | ) | (6 | ) |
| Warrant exercise  inducement fees                                                             |       | —           |        | (1,588,432 | ) | — |   |
| Interest Income                                                                               |       | 271,587          |        | 120,103 |   | 168,278 |   |
| Interest Expense                                                                              |       | (75,377          | )           | (1,078,635 | ) | (1,028,677 | ) |
| Total Other (Expense)  Income, Net                                                            |       | 71,246           |        | (6,231,094 | ) | (1,302,361 | ) |
| Net  Loss                                                                                     |       | (14,385,039      | )           | (11,488,392 | ) | (6,377,646 | ) |
|                                                                                          |       |             |        |   |   |   |   |
| Accretion of preferred stock dividends                                                        |       | (38,411          | )           | (22,500 | ) | — |   |
|                                                                                          |       |             |        |   |   |   |   |
| Preferred Stock Dividends attributable to Beneficial Conversion and  Warrant Amortization     |       | —           |        | (4,066,796 | ) | — |   |
|                                                                                          |       |             |        |   |   |   |   |
| Net Loss Attributable to  Common Shareholders                                                 |       | $                | (14,423,450 | ) | $ | (15,577,688 | ) | $ | (6,377,646 | ) |
|                                                                                          |       |             |        |   |   |   |   |
| Net Loss applicable per  Common Share (basic and diluted)                                     |       | $                | (0.09       | ) | $ | (0.11 | ) | $ | (0.07 | ) |
|                                                                                          |       |             |        |   |   |   |   |
| Weighted Average Common  Shares Outstanding used in Per Share Calculation (Basic and Diluted) |       | 168,960,895      |        | 135,921,421 |   | 93,767,378 |   |

 

The Notes to the Consolidated Financial Statements are an integral partof these statements.

 

41

----

 

**WORLDWATER & SOLAR TECHNOLOGIES CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED DECEMBER 31,**

 
| ** **                                                                                | ** ** | **2007**        | ** **    | **2006**        | ** ** | **2005**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------|---------------|-----------------|------------|----------------|------------|
| ** **                                                                                | ** ** | **(Restated)**  | ** **    |
|                                                                                      |       |            |          |            |       |           |       |
| **Cash Flows from  Operating Activities:**                                                | ** ** | ** **      | ** **    | ** **      | ** ** | ** **     | ** ** |
| Net loss attributable to  common shareholders                                             |       | $               | (14,423,450   | )               | $          | (15,577,688    | )          | $ | (6,377,646 | ) |
| Preferred stock dividends  attributable to Beneficial Conversion and Warrant amortization |       | —          |          | 4,066,746       |       | —         |       |
| Accretion of preferred  stock dividends                                                   |       | 38,411          |          | 22,500          |       | —         |       |
|                                                                                      |       |            |          |            |       |           |       |
| Adjustments to reconcile  net cash used in operating activities:                          |       |            |          |            |       |           |       |
| Issuance of warrants as  inducement for warrant exercise                                  |       | —          |          | 1,588,432       |       | —         |       |
| Beneficial conversion and  warrant amortization                                           |       | 124,964         |          | 3,399,998       |       | 6              |       |
| Stock based employee  compensation cost                                                   |       | 1,017,721       |          | 1,123,755       |       | —         |       |
| Interest expense  attributable to increase in value of warrant liability                  |       | —          |          | 439,000         |       | —         |       |
| Amortization of interest  expense                                                         |       | —          |          | 333,823         |       | 654,126        |       |
| Amortization of  intangibles and loan origination costs                                   |       | 40,000          |          | 330,688         |       | 498,214        |       |
| Issuance of stock for  service                                                            |       | 246,500         |          | 227,481         |       | 211,272        |       |
| Issuance of options and  warrants for services                                            |       | 60,000          |          | 70,000          |       | —         |       |
| Share based non-employee  compensation cost                                               |       | 8,500           |          | 52,780          |       | —         |       |
| Amortization of deferred  compensation                                                    |       | —          |          | 45,000          |       | 30,000         |       |
| Issuance of stock in lieu  of interest                                                    |       | 25,736          |          | 68,973          |       | 371,087        |       |
| Loss on disposal of fixed  assets                                                         |       | 160,279         |          | —          |       | —         |       |
| Depreciation and  amortization                                                            |       | 119,457         |          | 30,272          |       | 67,015         |       |
|                                                                                      |       |            |          |            |       |           |       |
| Changes in assets and liabilities:                                                        |       |            |          |            |       |           |       |
| Accounts receivable                                                                       |       | (4,867,348      | )             | (4,933,503      | )          | 1,223,339      |       |
| Accounts receivable — related  parties                                               |       | 22,500          |          | 9,926           |       | (32,426        | )          |
| Rebates receivable                                                                        |       | (1,153,800      | )             | —          |       | —         |       |
| Inventory                                                                                 |       | (650,698        | )             | (364,748        | )          | (381,272       | )          |
| Costs and estimated  earnings/losses in excess of billings                                |       | (3,000,204      | )             | (2,081,442      | )          | (466,985       | )          |
| Prepaid expenses and  deposits                                                            |       | 745,232         |          | (1,621,248      | )          | (61,337        | )          |
| Advances to employees                                                                     |       | (9,348          | )             | (16,394         | )          | (3,049         | )          |
|                                                                                      |       |            |          |            |       |           |       |
| Accounts payable and other accrued expenses                                               |       | 4,412,033       |          | 2,574,270       |       | (275,619       | )          |
|                                                                                      |       |            |          |            |       |           |       |
| Accrued losses on construction in progress                                                |       | —          |          | (155,090        | )          | 155,090        |       |
| Billings in excess of  costs and estimated earnings/losses                                |       | (146,345        | )             | 117,443         |       | 31,802         |       |
| Renewable energy credits  guarantee liability                                             |       | (55,236         | )             | (67,017         | )          | 22,954         |       |
| Customer deposits                                                                         |       | (39,453         | )             | (46,266         | )          | 28,920         |       |
| Customer deposits —  related party                                                   |       | 775,000         |          | —          |       | —         |       |
| **Net Cash (Used in)  Operating Activities**                                              | ** ** | **(16,549,549** | **)**         | **(10,362,259** | **)**      | **(4,304,509** | **)**      |
|                                                                                      |       |            |          |            |       |           |       |
| **Cash Flows from  Investing Activities:**                                                | ** ** | ** **      | ** **    | ** **      | ** ** | ** **     | ** ** |
| Purchase of equipment and  leasehold improvements                                         |       | (1,391,442      | )             | (175,465        | )          | (35,872        | )          |
| Deferred costs on and  advances to acquiree — ENTECH                                 |       | (3,004,593      | )             | (790,769        | )          | —         |       |
| **Net Cash (Used in)  Investing Activities**                                              | ** ** | **(4,396,035**  | **)**         | **(966,234**    | **)**      | **(35,872**    | **)**      |
|                                                                                      |       |            |          |            |       |           |       |
| **Cash Flows from  Financing Activities:**                                                | ** ** | ** **      | ** **    | ** **      | ** ** | ** **     | ** ** |
| Proceeds from issuance of  debt, and notes payable with detachable warrants               |       | 185,050         |          | —          |       | 3,780,000      |       |
| Proceeds from exercise of  warrants and stock options                                     |       | 3,621,555       |          | 3,532,085       |       | 1,316,955      |       |
| Proceeds from issuance of  redeemable convertible preferred stock and warrants            |       | (250,000        | )             | 12,884,388      |       | —         |       |
| Proceeds from issuance of  common stock                                                   |       | 18,482,000      |          | —          |       | 1,222,222      |       |
| Increase/(Decrease) in  Restricted Cash and Restricted Cash Equivalents                   |       | 31,257          |          | (19,114         | )          | —         |       |
| Increase in Loan  Origination costs                                                       |       | —          |          | —          |       | (418,832       | )          |
| Payments on long-term debt                                                                |       | (21,425         | )             | (96,920         | )          | (855,402       | )          |
| **Net Cash Provided by  Financing Activities**                                            | ** ** | **22,048,437**  | ** **    | **16,300,439**  | ** ** | **5,044,943**  | ** ** |
|                                                                                      |       |            |          |            |       |           |       |
| Net effect of currency  translation on cash                                               |       | —          |          | —          |       | 55,235         |       |
|                                                                                      |       |            |          |            |       |           |       |
| **Net Increase in cash and  cash equivalents**                                            |       | 1,102,853       |          | 4,971,946       |       | 759,797        |       |
|                                                                                      |       |            |          |            |       |           |       |
| **Cash and cash equivalents,  Beginning of year**                                         | ** ** | **5,770,595**   | ** **    | **798,649**     | ** ** | **38,852**     | ** ** |
|                                                                                      |       |            |          |            |       |           |       |
| **Cash and cash  equivalents, End of year**                                               | ** ** | **$**           | **6,873,448** | ** **      | **$**      | **5,770,595**  | ** ** | **$** | **798,649** | ** ** |
| ** **                                                                                | ** ** | ** **      | ** **    | ** **      | ** ** | ** **     | ** ** |
| **Supplemental Disclosure:**                                                              | ** ** | ** **      | ** **    | ** **      | ** ** | ** **     | ** ** |
| Beneficial Conversion and  Warrants on Preferred Stock Dividend                           | ** ** | **$**           | **—**    |            | $          | 4,066,796      | ** ** | **$** | **—** | ** ** |
| Accretion of preferred  stock dividends                                                   |       | (38,411         | )             | (22,500         | )          | —         |       |

 

The Notes to theConsolidated Financial Statements are an integral part of these statements.

 

42

----

 

**WORLDWATER &SOLAR TECHNOLOGIES CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIENCY)**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 (RESTATED)AND 2005**

 
| ** **                                                      | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** **  | ** **     | ** ** | **Additional**  | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **  | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|-------------|-------------|----------------|------------|-----------------|------------|----------------|------------|-------------|------------|-------------|------------|
| ** **                                                      | ** ** | ** **           | ** ** | ** **        | ** ** | ** **  | ** **  | ** **     | ** ** | **Paid-In**     | ** ** | **Paid-In**    | ** ** | ** **  | ** ** | ** **  | ** ** |
| ** **                                                      | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Capital** | ** **  | **Capital**    | ** ** | **Accumulated** | ** ** | ** **     | ** ** |
| ** **                                                      | ** ** | **Shares**           | ** ** | **Par  Value**    | ** ** | **Shares**  | ** **  | **Par  Value** | ** ** | **(Preferred)** | ** ** | **(Common)**   | ** ** | **Deficit** | ** ** | **Total**   | ** ** |
| Balance,  December 31, 2004                                |       | 611,111              |       | 6,111             |       | 79,834,341  |        | 79,834         |       | 537,331         |       | 22,864,141     |       | (27,761,058 | )          | (4,273,641  | )          |
|                                                            |       |                 |       |              |       |        |        |           |       |            |       |           |       |        |       |        |       |
| Beneficial  conversion feature of convertible notes             |       | —               |       | —            |       | —      |        | —         |       | —          |       | 2,171,444      |       | —      |       | 2,171,444   |       |
|                                                            |       |                 |       |              |       |        |        |           |       |            |       | 94,149         |       | —      |       | 94,149      |       |
| Conversion of  convertible notes                                |       | —               |       | —            |       | 12,530,017  |        | 12,530         |       | —          |       | 2,222,470      |       | —      |       | 2,235,000   |       |
| Issuance of  Common Stock:                                      |       | —               |       | —            |       |        |        |           |       |            |       | —         |       | —      |       | —      |       |
| For Services                                                    |       | —               |       | —            |       | 361,416     |        | 361            |       | —          |       | 111,189        |       | —      |       | 111,550     |       |
| Under SPA  (SBI & CAMOFI)                              |       | —               |       | —            |       | 5,000,001   |        | 5,000          |       | —          |       | 1,217,222      |       | —      |       | 1,222,222   |       |
| Exercise of  Warrants                                           |       | —               |       | —            |       | 6,177,605   |        | 6,179          |       | —          |       | 1,149,996      |       | —      |       | 1,156,175   |       |
| Exercise of  “cash-less” Warrants                     |       | —               |       | —            |       | 1,207,341   |        | 1,207          |       | —          |       | (1,207         | )          | —      |       | —      |       |
| Exercise of  options                                            |       | —               |       | —            |       | 1,430,382   |        | 1,430          |       | —          |       | 320,325        |       | —      |       | 321,755     |       |
| In lieu of  payment of interest                                 |       | —               |       | —            |       | 1,495,837   |        | 1,496          |       | —          |       | 369,590        |       | —      |       | 371,086     |       |
| Purchase of  QuantumEnergy Net Assets                           |       | —               |       | —            |       | 750,000     |        | 750            |       | —          |       | 239,250        |       | —      |       | 240,000     |       |
| Warrants granted  for financing commissions                     |       | —               |       | —            |       | —      |        | —         |       | —          |       | 282,001        |       | —      |       | 282,001     |       |
| Warrants granted  for services                                  |       | —               |       | —            |       | —      |        | —         |       | —          |       | 60,523         |       | —      |       | 60,523      |       |
| Detachable  warrants granted with convertible debt              |       | —               |       | —            |       | —      |        | —         |       | —          |       | 1,447,310      |       | —      |       | 1,447,310   |       |
| Amortization of  deferred compensation                          |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | 30,000      |       | 30,000      |       |
| Comprehensive  loss                                             |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | —      |       | —      |       |
| Net loss                                                        |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | (6,378,491  | )          | (6,378,491  | )          |
| Other  comprehensive expense -                                  |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | —      |       |        |       |
| Currency  translation adjustment                                |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | 56,080      |       | 56,080      |       |
| Total  comprehensive loss                                       |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | —      |       |        |       |
| Balance,  December 31, 2005                                |       | 611,111              |       | 6,111             |       | 108,786,940 |        | 108,787        |       | 537,331         |       | 32,548,403     |       | (34,053,469 | )          | (852,837    | )          |
|                                                            |       |                 |       |              |       |        |        |           |       |            |       |           |       |        |       |        |       |
| Beneficial  Conversion and Warrants on Preferred Stock Dividend |       |                 |       |              |       |        |        |           |       |            |       | 4,066,796      |       | (4,066,796  | )          | —      |       |
| Conversion of  convertible notes                                |       | —               |       | —            |       | 21,422,223  |        | 21,422         |       | —          |       | 3,771,078      |       | —      |       | 3,792,500   |       |
| Issuance of  common stock:                                      |       |                 |       |              |       |        |        |           |       |            |       |           |       | —      |       | —      |       |
| For services and  to induce exercise of warrants                |       | —               |       | —            |       | 425,000     |        | 425            |       | —          |       | 228,171        |       | —      |       | 228,576     |       |
| Exercise of  warrants                                           |       | —               |       | —            |       | 16,620,276  |        | 16,620         |       | —          |       | 3,404,679      |       | —      |       | 3,421,299   |       |
| Exercise of  options                                            |       | —               |       | —            |       | 450,561     |        | 451            |       | —          |       | 109,220        |       | —      |       | 109,671     |       |
| In lieu of  payment of interest                                 |       | —               |       | —            |       | 206,630     |        | 207            |       | —          |       | 68,765         |       | —      |       | 68,972      |       |
| Warrants granted  to induce exercise of warrants                |       | —               |       | —            |       | 1,447,422   |        | 1,447          |       | —          |       | 1,586,985      |       | —      |       | 1,588,432   |       |
| Warrants granted  for services                                  |       | —               |       | —            |       | —      |        | —         |       | —          |       | 70,000         |       | —      |       | 70,000      |       |
| Share-based  employee compensation cost                         |       | —               |       | —            |       | —      |        | —         |       | —          |       | 1,123,755      |       | 45,000      |       | 1,168,755   |       |
| Share-based  non-employee compenstation cost                    |       | —               |       | —            |       | —      |        | —         |       | —          |       | 52,780         |       | —      |       | 52,780      |       |
| Accretion of  Preferred Stock Dividends                         |       |                 |       |              |       |        |        |           |       |            |       | —         |       | (22,500     | )          | (22,500     | )          |
| Net loss                                                        |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | (11,488,392 | )          | (11,488,392 | )          |
| Balance,  December 31, 2006                                |       | 611,111              |       | 6,111             |       | 149,359,052 |        | 149,359        |       | 537,331         |       | 47,030,632     |       | (49,586,157 | )          | (1,862,724  | )          |
|                                                            |       |                 |       |              |       |        |        |           |       |            |       |           |       |        |       |        |       |
| Beneficial  Conversion and Warrants on Preferred Stock Dividend |       |                 |       |              |       |        |        |           |       |            |       | —         |       | —      |       | —      |       |
| Conversion of  convertible notes                                |       | —               |       | —            |       | 1,233,666   |        | 1,234          |       | —          |       | 183,816        |       | —      |       | 185,050     |       |
| Stock issued for  services                                      |       | —               |       | —            |       | 755,000     |        | 755            |       | —          |       | 245,745        |       | —      |       | 246,500     |       |
| Sale of Common  Stock                                           |       |                 |       |              |       | 18,400,000  |        | 18,400         |       |            |       | 18,463,600     |       |        |       | 18,482,000  |       |
| Exercise of  warrants                                           |       | —               |       | —            |       | 12,745,271  |        | 12,745         |       | —          |       | 1,868,439      |       | —      |       | 1,881,184   |       |
| Exercise of  options                                            |       | —               |       | —            |       | 6,139,194   |        | 6,139          |       | —          |       | 1,734,232      |       | —      |       | 1,740,371   |       |
| Conversion of  Preferred C Stock                                |       | —               |       | —            |       | 641,025     |        | 641            |       | —          |       | 249,359        |       | —      |       | 250,000     |       |
| In lieu of  payment of interest                                 |       | —               |       | —            |       | 79,466      |        | 80             |       | —          |       | 25,657         |       |        |       | 25,737      |       |
| Warrants granted  for services                                  |       | —               |       | —            |       | —      |        | —         |       | —          |       | 60,000         |       | —      |       | 60,000      |       |
| Share-based  employee compensation cost                         |       | —               |       | —            |       | —      |        | —         |       | —          |       | 1,017,721      |       | —      |       | 1,017,721   |       |
| Share-based  non-employee compenstation cost                    |       | —               |       | —            |       | —      |        | —         |       | —          |       | 8,500          |       | —      |       | 8,500       |       |
| Accretion of  Preferred Stock Dividends                         |       |                 |       |              |       |        |        |           |       |            |       | —         |       | (38,411     | )          | (38,411     | )          |
| Net loss                                                        |       | —               |       | —            |       | —      |        | —         |       | —          |       | —         |       | (14,385,039 | )          | (14,385,039 | )          |
| Balance,  December 31, 2007                                |       | 611,111              |       | $                 | 6,111      |        | 189,352,674 |           | $          | 189,353         |       | $              | 537,331    |        | $          | 70,887,701  |       | $ | (64,009,607 | ) | $ | 7,610,889 |   |
|                                                                 |            |                      |            |                   |            |             |             |                |            |                 |            |                |            |             |            |             |            |  |  |  |  |  |  |

 

The Notes to ConsolidatedFinancial Statements are an integral part of these statements.

 

43

----

 

**WORLDWATER & SOLAR TECHNOLOGIES CORP. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note (1) Liquidity and Capital Resources**

 

                At December 31, 2007, ourcurrent ratio was 2.19. As of December 31, 2007, we had $14,215,991 ofworking capital.  Cash and cashequivalents were $6,873,448 as of December 31, 2007.

 

                The Company has historicallyfinanced operations and met capital expenditures requirements primarily throughsales of capital stock and solar system equipment sales. Management plans tocontinue to raise funds through the sale of capital and forecasts increasedrevenues.

 

                On September 28, 2007, theCompany raised $13,365,000 through a Stock and Warrant Purchase Agreement withthe Quercus Trust, whereby the Quercus Trust purchased 7.5 million shares ofWorldWater’s common stock at a price of $1.782 per share.

 

On January 28, 2008, the Company announced thatit has closed the merger with ENTECH, Inc. (ENTECH) of Keller, Texas.  For the years ended September 30, 2007 and2006, ENTECH had revenue of $1,102,253 and $1,135,069, respectively and netincome (loss) of $71,228 and $(106,167), respectively.  This transaction was made possible throughagreement with one of WorldWater’s largest investors, the Quercus Trust(Quercus). Quercus exchanged 19.7 million of its common shares of WorldWaterfor 19,700 shares of convertible preferred stock and supplied WWAT with a $6million bridge loan. The 19.7 million common shares and the bridge loan weresubsequently utilized to complete the ENTECH merger. Pursuant to the exchangeagreement, once a shareholders meeting is held and a sufficient amount of additionalcommon shares are authorized, a subsequent exchange with Quercus will beimplemented. As a result, Quercus will receive 19.7 million common shares inexchange for the 19,700 shares of convertible preferred stock previouslyissued.

 

Specifically, ENTECHmerged with and into a wholly-owned subsidiary of the Company. Under the termsof the merger agreement, WorldWater gave the following consideration to ENTECHstockholders in 2008:

 

·                  $4.5 million in cash, and (inaddition, $500,000 was paid during 2007); and

 

·                  19,672,131 shares of theCompany’s common stock for an aggregate value of  $42,295,082. This determination of value isbased on a $2.15 per share value of our common stock, which is our estimate ofthe fair market value of our common stock for a reasonable period before andafter the date of merger agreement, October 29, 2007.

 

On January 28, 2008,and in connection with the merger described above, the Company entered into a$6 million Promissory Note (the “Note”) with The Quercus Trust. The Note bearsinterest at a rate of 8% per annum. The outstanding principal amount of theNote and all accrued and unpaid interest was repaid on February 12, 2008.

 

On February 13, 2008the Company raised $35.64 million from The Quercus Trust in a private placementof 20,000 shares of WorldWater Series F Convertible Preferred Stock at aprice of $1,782 per share.

 

TheCompany has budgeted for $5.5 million of capital expenses in 2008, mainlyconsisting of machinery and equipment for its 71,000 square foot technical andmanufacturing facility leased in the County of Tarrant, TX.

 

TheCompany believes that its existing cash balance together with its otherexisting financial resources, including a capital raise in 2008, and revenuesfrom sales of its solar systems, will be sufficient to meet its operating andcapital requirements beyond the first quarter of 2009.

 

**Note (2)  Nature of the Business**

 

       EffectiveMay 2, 2007 the Company announced that the Board of Directors had approveda change in its corporate name to WorldWater & Solar TechnologiesCorp. (“WorldWater” or the “Company”).  On September 7, 2007, legal confirmationof the name change was confirmed. The Company stock symbol, WWAT.OB, remainsthe same.

 

WorldWater is an international solar engineering andproject management company with unique, high-powered solar electric technologyand expertise, providing alternative energy solutions to a wide variety of customersin both domestic and international markets. Until 2002, WorldWater’s businesswas focused exclusively on providing developing countries with water and power 

 

44

----

 

solutions.Since then, the Company has placed increasing emphasis on domestic markets,principally in California, New Jersey, and their surrounding states, and isaddressing the needs of residential, commercial and industrialcustomers, in both the public and privatesectors. The Company will continue to selectively submit proposals to variousforeign governments in need of solving critical water supply and energyproblems using the Company’s proprietary solar technology.

 

With significantly rising energy prices and relatedshortages, along with significant state and federal incentives, and utilitycompany rebate programs, domestic markets have emerged as the Company’s highestpriority. The Company is uniquely positioned to deliver a wide range of productand service offerings, from solar-powered equipment and installations, bothfixed and mobile, to large-scale, turnkey solar energy and water systemsolutions, specializing in variable frequency drive (VFD) applications thatdeliver high customer value. The foundation and enabler for these offerings isWorldWater’s substantial technical expertise and proprietary solar technology,including its AquaMaxTM System, AquaDriveTM Controller, AquaMeterTM Water Meter,and MobileMaxPureTM.

 

On January 28,2008, the Company completed the acquisition of ENTECH, Inc.   With thecombined technologies of the Company and ENTECH, it is believed the Company’ssolar systems will be capable of generating and delivering electrical andthermal energy on site at prices competitive to retail prices without relyingon government sponsored rebates. ENTECH’s patented concentrator technologyallows for the installation of large solar “farms” with greatly reducedrequirements for solar cell materials (silicon or multi-junction). Due to theadvantages of ENTECH’s concentrator, a significantly lesser amount of siliconused in flat plate solar modules is required by current ENTECH modules togenerate the same electrical power. Consequently, the ENTECH technology greatlylessens the impact of the silicon material shortage currently constricting flatplate solar panel supply. ENTECH concentrators utilize a two-axis tracker tofollow the sun’s position throughout the day, maximizing energy production.

 

ENTECH’stechnology can produce photovoltaic electricity, or thermal energy (heat) forcommercial uses such as for heating and/or air conditioning. When applied in acombined fashion for onsite power applications, the cost to the customer can besignificantly less for electricity generated and for BTU’s of heat providedversus separate competing systems currently on the market while beingcompetitive with current retail energy prices.

 

Informationwith respect to the Company’s geographic segments for the years ended December 31,2007, 2006 and 2005 is presented below:

 
| ** **    | ** ** | **Revenue** | ** ** |
|---------------|------------|-------------|------------|
| ** **    | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States |       | $           | 18,461,272 |   | $ | 17,141,808 |   | $ | 1,998,937 |   |
| Asia          |       | 4,748       |       | 191,873 |   | 32,543 |   |
| Total         |       | 18,466,020  |       | 17,333,681 |   | 2,031,480 |   |
|               |            |             |            |  |  |  |  |  |  |  |

 

Allof the Company’s assets are located in the United States.

 

**Note (3) Restatement of Financial Statements**

** **

The Company hasre-evaluated its classification and valuation of the warrants to purchaseSeries D Preferred Stock.  In accordancewith SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” (“SFAS 150”), more specificallyparagraph 22 which indicates,*“the instruments shall bemeasured subsequently at the amount of cash that would be paid under theconditions specified in the contract if settlement occurred at the reportingdate, recognizing the resulting change in that amount from the previousreporting date as interest cost.”* Based on this guidance, the Company has restated its December 31, 2006Consolidated Balance Sheet and its Consolidated Statement of Operations for theyear then ended with respect to the value and classification of such warrantsto reflect their redemption value as a current liability at December 31,2006.  The net effect of this adjustmentresulted in an increase to current liabilities, a decrease to Series DPreferred Stock Warrants (mezzanine) and an increase in interest expense andnet loss attributable to common shareholders in the amount of $439,000.  There was no impact on net loss applicableper common share.

 

A summary of alladjustments relating to the December 31, 2006 consolidated financial statementsincluded in this Annual Report on Form 10-K is detailed below 

 

The following tablereflects the impact of the restatement on the Consolidated Balance Sheet:

 
| ** **                                   | ** ** | **December 31, 2006**                      | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **(as previously reported and   amended)** | ** ** | **(restated)**        | ** ** |
|                                         |       |                                       |       |                  |       |
| Selected Balance Sheet  Data:                |       |                                       |       |                  |       |
| Series D preferred stock warrants            |       | $                                          | —     |                  | $          | 1,393,827 |   |
| Current liabilities                          |       | 5,518,182                                  |       | 6,912,009             |       |
| Total liabilities                            |       | 5,807,482                                  |       | 7,201,309             |       |
| Series D preferred stock warrants            |       | 954,827                                    |       | —                |       |
| Total convertible redeemable preferred stock |       | 12,884,388                                 |       | 11,929,561            |       |
| Accumulated deficit                          |       | (49,147,157                                | )          | (49,586,157           | )          |
| Total stockholders' deficiency               |       | (1,423,724                                 | )          | (1,862,724            | )          |
|                                              |            |                                            |            |                       |            |  |  |

 

 

45

----

 

The following reflectsthe impact of the restatement on the Consolidated Statement of Operations:

 
| ** **                                   | ** ** | **Fiscal Year Ended**                      | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **December 31, 2006**                      | ** ** | **December 31, 2006** | ** ** |
| ** **                                   | ** ** | **(as previously reported and   amended)** | ** ** | **(restated)** | ** ** |
|                                         |       |                                       |       |   |   |
| Selected Statement of  Operations Data:      |       |                                       |       |   |   |
| Interest expense, net                        |       | $                                          | (662,135   | ) | $ | (1,078,635 | ) |
| Total other (expense) income, net            |       | (5,814,594                                 | )          | (6,231,094 | ) |
| Net loss                                     |       | (11,071,892                                | )          | (11,488,392 | ) |
| Accretion of preferred stock dividends*      |       | —                                     |       | (22,500 | ) |
| Net loss attributable to common shareholders |       | (15,138,688                                | )          | (15,577,688 | ) |
|                                              |            |                                            |            |  |  |  |  |

----

* This amount was included in Interestexpense, net and has been reclassified on the restated financial statements.

 

The following tablereflects the impact of the restatement on the Consolidated Statement of CashFlows:

 
| ** **                                                               | ** ** | **Fiscal Year Ended**                       | ** **  |
|--------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                               | ** ** | **December 31, 2006**                       | ** **  | **December 31, 2006** | ** ** |
| ** **                                                               | ** ** | **(as previously reported  and   amended)** | ** **  | **(restated)** | ** ** |
|                                                                     |       |                                        |        |   |   |
| Selected Cash Flow Data:                                                 |       |                                        |        |   |   |
| Net loss attributable to  common shareholders                            |       | $                                           | (15,138,688 | ) | $ | (15,577,688 | ) |
| Accretion of preferred  stock dividends*                                 |       | —                                      |        | 22,500 |   |
| Interest expense  attributable to increase in value of warrant liability |       | —                                      |        | 439,000 |   |
| Net cash (used in)  operating activities*                                |       | (10,384,759                                 | )           | (10,362,259 | ) |
| Payments on long-term  debt*                                             |       | (74,420                                     | )           | (96,920 | ) |
| Net cash provided by  financing activities*                              |       | 16,322,939                                  |        | 16,300,439 |   |
|                                                                          |            |                                             |             |  |  |  |  |

----

* See note above.

 

The following tablereflects the impact of the restatement on the Consolidated Statement ofStockholders’ Deficiency:

 
| ** **                                            | ** ** | **Fiscal Year Ended**                      | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **December 31, 2006**                      | ** ** | **December 31, 2006** | ** ** |
| ** **                                            | ** ** | **(as previously reported and   amended)** | ** ** | **(restated)** | ** ** |
|                                                  |       |                                       |       |   |   |
| Selected Statement of  Stockholders' Deficiency Data: |       |                                       |       |   |   |
| Accretion of preferred stock dividends*               |       | $                                          | —     |   | $ | (22,500 | ) |
| Net loss                                              |       | (11,071,892                                | )          | (11,488,392 | ) |
| Accumulated deficit                                   |       | (49,147,157                                | )          | (49,586,157 | ) |
|                                                       |            |                                            |            |  |  |  |  |

----

* See note above.

 

See Note 21 QuarterlyFinancial Data (Unaudited) for the Balance Sheet effect of these restatementsfor the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007 andthe effect on the financial data for the quarter ended December 31, 2006.  

 

 

46

----

 

 

**Note (4) Summary of Significant Accounting Policies**

 

                A summary of the majoraccounting policies followed by the Company in the preparation of theaccompanying financial statements is set forth below.

* *

*Principles of Consolidation*

 

                The consolidated financialstatements include the accounts of the Company’s subsidiaries WorldWater(Phils) Inc. and WorldWater Holdings Inc., a Delaware Corporation, andcertain other inactive subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation. Effective April 17,2006, the Company divested its Phillipines subsidiary.

 

                The Company’s wholly-ownedinactive subsidiaries include:

 

                WorldWater, Inc., aDelaware Corporation

 

                WorldWater EastAfrica Ltd., a Tanzanian Corporation

 

                WorldWater Pakistan(PVT.), LTD., a Pakistan Company

 

*Use of Estimates*

 

                The preparation of financialstatements in conformity with generally accepted accounting principles in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenue and expenses during the reporting period.Estimates are used for, but not limited to, costs to complete contracts,warranty expense, depreciation, taxes, the guaranty liability for the value ofRenewable Energy Credits, losses on uncompleted contracts and the value ofshares issued. Although these estimates are based on management’s bestknowledge of current events and actions that the Company may undertake in thefuture, actual results may be different from the estimates.

 

*Fair Value of Financial Instruments*

 

                The carrying value of accountsreceivable, accounts payable, and accrued expenses approximate their respectivefair values due to their short-term nature. The fair value of the Company’snotes payable and debt are estimated based on the current rates offered to theCompany for debt of the same remaining maturities and similar terms. See “GuarantorAgreements” below for disclosures regarding the fair value of the Company’sexposure for Renewable Energy Credits (“RECs”) which have been accrued on theBalance Sheet as of December 31, 2007 and 2006.

 

*Concentration of Credit Risk and Significant Customers*

 

                Financial instruments thatpotentially subject the Company to significant concentrations of credit riskconsist principally of cash and cash equivalents and accounts receivable. TheCompany places its cash and cash equivalents with a high quality financialinstitution. With respect to accounts receivable as of December 31, 2007,90% of the receivables, including related party receivables, were from onecommercial customer, and were paid in 2008.  The Company does not require collateral or other security againstaccounts receivable; however, it maintains reserves for potential credit lossesand such losses have historically been within management’s expectations. TheCompany had one major customer accounting for 72% of revenue for the year endedDecember 31, 2007, one customer accounting for 45% of revenue for the yearended December 31, 2006, and two customers accounting for 64% of revenuefor the year ended December 31, 2005.

 

*Guarantor Arrangements*

 

                In November 2002, the FASBissued FIN No. 45 “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others, aninterpretation of FASB Statements No. 5, 57, and 107 and rescission ofFASB Interpretation No. 34.” The Interpretation requires that a guarantorrecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken by issuing the guarantee. The Interpretation alsorequires additional disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees ithas issued. The following is a summary of the Company’s agreements that havebeen determined to fall within the scope of FIN No. 45.

 

*Renewable Energy Credit Guarantee (RECs)*

 

                Under the equipment sales contract for a267,840 kW (DC) solar-driven irrigation and energy system built in 2004 and a42.7 kW solar-pumping and energy system currently in construction, the Companyhas guaranteed the price of certain Renewable Energy Certificates (RECs) to begenerated by the installation during the first seven years of operation. Basedon current market indications, the Company estimates its guarantee obligationmay result in a potential loss of $452,907 which is tied to the future marketand trading value of RECs traded in California. The liability was recorded inaccordance with FIN 45, paragraph 8, whereby the Company determined the maximumnumber of kwh to be generated over the seven year span to be 3,148,936 (449,848x 7), 

 

47

----

 

multipliedby the guaranteed amount of $0.125, resulting in a liability of $393,617. Withoutthe knowledge of the future value of these RECs, the Company recorded asreductions of Contract Revenue: estimated losses of $0 in the year ended December 31,2007, and $0, $59,290 and $393,617 in the years ended December 31, 2006,2005, and 2004, respectively. Adjustments to the estimated guarantee obligationwill be recognized as an adjustment of revenue over the seven year term of therespective guarantee obligations. As of December 31, 2007 the Company hasmade payments on this guarantee in the amount of $55,236.

 

Theoffering of renewable energy credit guarantee was an isolated incident, and theCompany does not expect to continue this in the future. Further, the maximumliability described is fixed and accrued for and not subject to change over thelife of the agreement.

 

*Product Warranty*

 

                The Company provides for theestimated cost of product warranties at the time revenue is recognized. Sincethe Company has a limited operating history, adjustments in future periods maybe required as its installations mature. The following table summarizes theactivity regarding the Company’s warranty accrual:

 
| Balance, December 31,  2005             |   | $        | 109,387 |   |
|----------------------------------------------|--------|----------|---------|--------|
| Accruals for warranties  issued during 2006  |   | 272,086  |    |
| Utilization of warranty  reserve during 2006 |   | (3,511   | )       |
| Balance, December 31,  2006             |   | 377,962  |    |
| Accruals for warranties  issued during 2007  |   | 276,990  |    |
| Utilization of warranty  reserve during 2007 |   | (240,456 | )       |
| Balance, December 31,  2007             |   | $        | 414,496 |   |

 

Theproduct warranty accrual is included in Accounts Payable and Accrued Expensesin the Company’s Consolidated Balance Sheet.

 

*Comprehensive Loss*

 

                Statement of FinancialAccounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”establishes standards for reporting and presentation of comprehensive loss andits components in a full set of financial statements. Comprehensive lossconsists of net loss and foreign currency translation and is presented in theconsolidated statements of stockholders’ equity (deficiency) SFAS No. 130requires only additional disclosures in the financial statements; it does notaffect the Company’s financial position or results of operations.

 

*Revenue Recognition*

 

                The Company derives revenueprimarily from fixed-price contracts through which the Company providesengineering, design, and procurement services, materials and equipment, andconstruction / installation services. Revenue is also generated through thesale of solar-related equipment and, to a lesser extent, from consultingprojects and government-funded grants.

 

                Contract revenues are recordedwhen there is persuasive evidence that a binding contractual arrangementexists, the price is fixed and determinable, the Company has commenced work onthe project, and collectibility is reasonably assured.

 

                Contract revenues are recognizedusing the percentage of completion method. The percentage of completion iscalculated by dividing the direct labor and other direct costs incurred by thetotal estimated direct cost of the project. Contract value is defined as thetotal value of the contract, plus the value of approved change orders.Estimates of costs to complete are reviewed periodically and modified asrequired. Provisions are made for the full amount of anticipated losses, on acontract-by-contract basis. These loss provisions are established in the periodin which the losses are first determined. Changes in estimates are alsoreflected in the period they become known. The Company maintains all the risksand rewards, in regard to billing and collection.

 

                Revenues from equipment sales containingacceptance provisions are recognized upon customer acceptance. Cash paymentsreceived in advance of product or service revenue are recorded as customerdeposits.

 

                Revenues from consultingprojects are recognized as services are rendered. Grant revenues are recognizedwhen received, or if based on entitlement periods, when entitlement occurs.

 

48

----

 

*Allowance for Doubtful Accounts*

 

                The Company maintains allowancesfor doubtful accounts for estimated losses resulting from the inability of itscustomers to make required payments. If the data we used to calculate theallowance provided for doubtful accounts does not reflect the future ability tocollect outstanding receivables, additional provisions for doubtful accountsmay be needed and the future results of operations could be materiallyaffected. In recording any additional allowances, a respective charge againstincome is reflected in the general and administrative expenses, and wouldreduce the operating results in the period in which the increase is recorded.

 

*Accounting for Income Taxes*

 

                Deferred tax assets andliabilities are determined based on the temporary differences between thefinancial reporting and the tax basis of assets and liabilities, applyingenacted statutory tax rates in effect for the year in which the differences areexpected to reverse. Future tax benefits, such as net operating losscarryforwards, are recognized to the extent that realization of these benefitsis considered more likely than not.

 

*Cash and Cash Equivalents*

 

                The Company considers all highlyliquid investments with an original maturity of three months or less to be cashequivalents. The carrying amount of cash and cash equivalents approximates itsfair value due to its short-term nature.

 

*Inventory*

 

                Inventory is stated at the lowerof cost or market determined by the First-In, First-Out (FIFO) method.Historically inventory has consisted mainly of purchased system components.

 

*Equipment and Leasehold Improvements*

 

                Equipment and leaseholdimprovements are carried at cost, less accumulated depreciation andamortization, and are depreciated and amortized for financial reportingpurposes using the straight-line method. Depreciation for income tax purposesis computed using accelerated methods. The estimated useful lives are:computers and information equipment, 5 years; office furniture, vehicles,and test and assembly fixtures, 5 to 7 years; and leasehold improvements,the shorter of the useful life or the life of the lease. Upon retirement ordisposal, the asset cost and related accumulated depreciation are removed fromthe accounts and the net amounts, less any proceeds, are charged or credited toincome.

 

                Expenditures for maintenance andrepairs are expensed as incurred. Expenditures, which significantly increaseasset value or extend useful lives, are capitalized.

 

*Loan Origination Costs*

 

                The Company finances part of itsoperations through the issuance of debt and incurs a substantial amount ofcosts associated with the acquisition of such debt. The Loan Origination Costsare capitalized and amortized over the life of the debt using the effectiveinterest method. Upon early termination of the debt, any remaining costs arecharged to Debt Sourcing Fees.

 

*Research and Development*

 

                Research and development costsare expensed as incurred.

 

*Advertising Costs*

 

                Advertising costs are expensedas incurred and were approximately $157,093, $56,949, and $42,472 for the yearsending December 31, 2007, 2006 and 2005 respectively.

 

*Share-Based Compensation*

 

                On January 1, 2006, TheCompany adopted SFAS No. 123R, “Share-Based Payment,” which requires allcompanies to measure and recognize compensation expense at fair value for allstock-based payments to employees and directors. SFAS No. 123R is beingapplied on the modified prospective basis. Prior to the adoption of SFAS No. 123R,the Company accounted for its stock-based compensation plans for employees anddirectors under the recognition and measurement principles of Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”,and related interpretations, and accordingly, the 

 

49

----

 

Companyrecognized no compensation expense related to the stock-based plans for grantsto employees or directors. Grants to consultants under the plans were recordedunder SFAS No. 123.

 

                Under the modified prospectiveapproach, SFAS No. 123R applies to new grants of options and awards ofstock as well as to grants of options that were outstanding on January 1,2006 and that may subsequently be repurchased, cancelled or materiallymodified. Under the modified prospective approach, compensation cost recognizedfor the years ended December 31, 2007 and 2006 includes compensation costfor all share-based payments granted prior to, but not yet vested on, January 1,2006, based on fair value as of the prior grant-date and estimated inaccordance with the provisions of SFAS No. 123R. Prior periods were notrequired to be restated to reflect the impact of adopting the new standard.

 

                SFAS No. 123R also requirescompanies to calculate an initial “pool” of excess tax benefits available atthe adoption date to absorb any tax deficiencies that may be recognized underSFAS No. 123R. The pool includes the net excess tax benefits that wouldhave been recognized if the Company had adopted SFAS No. 123 forrecognition purposes on its effective date. The Company has elected tocalculate the pool of excess tax benefits under the alternative transitionmethod described in FASB Staff Position (“FSP”) No. FAS 123(R)-3, “TransitionElection Related to Accounting for Tax Effects of Share-Based Payment Awards,”which also specifies the method to calculate excess tax benefits reported onthe statement of cash flows. The Company is in a net operating loss position;therefore, no excess tax benefits from share-based payment arrangements havebeen recognized for the years ended December 31, 2007 and 2006.

 

Thepro-forma information presented in the following table illustrates the effecton net income and net income per share if the Company had applied the fairvalue recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” as amended SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure,” to stock-based employee compensationfor the year ended December 31, 2005:

 
| ** **                                                                                                                             | ** ** | **Year Ended**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                             | ** ** | **December 31, 2005** | ** ** |
| Net loss:                                                                                                                              |       |                       |       |
| As reported                                                                                                                            |       | $                          | (6,377,646 | ) |
| Add: Stock based employee  compensation expense included in reported net loss, net of related tax  effects                             |       | 30,000                     |       |
| Deduct: Stock based employee compensation expense determined under  fair value based method for all awards, net of related tax effects |       | (840,210                   | )          |
| Pro-forma                                                                                                                              |       | $                          | (7,187,856 | ) |
| Net loss per share:                                                                                                                    |       |                       |       |
| As reported                                                                                                                            |       | $                          | (0.07      | ) |
| Pro-forma                                                                                                                              |       | $                          | (0.08      | ) |

 

                The Company uses theBlack-Scholes option-pricing model to estimate fair value of grants of employeeand director stock options, with the following weighted average assumptions:

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **Assumptions for Option Grants** | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free interest rate           |       | 5                                | %          | 5 | % | 4 | % |
| Volatility                        |       | 89                               | %          | 34 | % | 49 | % |
| Expected dividend yield           |       | 0                                | %          | 0 | % | 0 | % |
| Expected term                     |       | 4-5  years                       |       | 10  years |   | 10  years |   |
| Estimated forfeiture rate         |       | 3                                | %          | 1 | % | N/A |   |

 

 

50

----

 

                The Company calculates expectedvolatility for a share-based grant based on historic daily stock priceobservations of our common stock during the period immediately preceding thegrant that is equal in length to the expected term of the grant.  SFAS No. 123R also requires thatestimated forfeitures be included as a part of the estimate of expense as ofthe grant date. The Company has used historical data to estimate expectedemployee behaviors related to option term, exercises and forfeitures. Prior toour adoption of SFAS No. 123R, the Company reduced pro-forma share-basedcompensation expense, presented in the notes to its financial statements, foractual forfeitures as they occurred.

 

                With respect to both grants ofoptions and awards of restricted stock, the risk free rate of interest is basedon the U.S. Treasury rates appropriate for the expected term of the grant oraward.

 

                The Company adoptedStatement 123(R) on January 1, 2006. This statement applies toall awards granted after the date of adoption and to awards modified,repurchased, or cancelled after that date. The value of the unvested stockoptions at December 31, 2006 and 2005was approximately $240,720, which wasexpensed in 2007 under General & Administrative Expense on the ConsolidatedStatement of Operations.

 

*Net Loss Per Common Share*

 

                Basic loss per share includes nodilution and is computed by dividing net loss attributable to commonstockholders by the weighted average number of common shares outstanding forthe period. As presented, the Company’s basic and diluted net loss per shareattributable to common stockholders is based on the weighted average number ofcommon shares outstanding during the period. The calculation of diluted netloss per common share for the years ended December 31, 2007, 2006 and 2005does not include other potential common shares, including shares issuable uponexercise of options, warrants and conversion rights, since their effect wouldbe antidilutive due to the Company’s losses. Below is a table of the potentialissuable shares as of December 31, 2007, 2006 and 2005, respectively:

 
| ** **                         | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Warrants                           |       | 13,484,226                  |       | 24,792,873                  |       | 36,789,366                  |       |
| Debt conversion rights             |       | 1,454,470                   |       | 2,688,137                   |       | 24,332,581                  |       |
| Stock options                      |       | 14,589,417                  |       | 20,270,623                  |       | 11,810,392                  |       |
| Stock Purchase Agreement  Rights   |       | —                      |       | 1,542,000                   |       | —                      |       |
| Preferred stock conversion  rights |       | 55,842,797                  |       | 51,462,759                  |       | 611,111                     |       |
| Total                              |       | 85,370,910                  |       | 100,756,392                 |       | 73,543,450                  |       |

 

*Recent Accounting Pronouncements*

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“FAS 141R”), which replaces FASB Statement No. 141. FAS 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any non controlling interest in the acquiree, and thegoodwill acquired. FAS 141R also establishes disclosure requirements whichwill enable users to evaluate the nature and financial effects of the businesscombination. FAS 141R is effective as of the beginning of an entity’sfiscal year that begins after December 15, 

 

51

----

 

2008, which will be ourfiscal year beginning January 1, 2009.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements — an amendment of Accounting ResearchBulletin No. 51” (“FAS 160”), which establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest and the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. The Statement also establishes reportingrequirements that provide sufficient disclosures that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. FAS 160 is effective as of the beginning of anentity’s fiscal year that begins after December 15, 2008, which will beour fiscal year beginning January 1, 2009. We are currently evaluating thepotential impact, if any, of the adoption of FAS 160 on our consolidatedfinancial position, results of operations and cash flows.

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” This Statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This statement also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choosedifferent measurement attributes for similar types of assets and liabilities.This Statement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and will become effective for usbeginning with the first quarter of 2008. We have not yet determined the impactof the adoption of SFAS No. 159 on our financial statements and footnotedisclosures.

 

*Reclassifications*

 

                Certain prior year balances havebeen reclassified to conform to current year presentation.

 

**Note (5)  Acquisition**

 

       In June, 2006, the Company announced thatit entered into a letter of intent with ENTECH, Inc., based in Keller,Texas, to acquire all the outstanding stock of ENTECH upon completion of thenecessary due diligence and after obtaining appropriate financing. ENTECH, aprivate company formed in 1983, is a developer and manufacturer of advancedconcentrating solar photovoltaic and thermal technologies for terrestrial andspace power applications. ENTECH has developed concentrator solar powersystems, supplied solar power for space missions for NASA, and installedground-based concentrating solar systems in North America.

 

Toobtain the exclusive opportunity through December 31, 2006 to conduct duediligence, the Company made a $500,000 non-refundable payment to ENTECH in2006. From June 2006 through early 2007, we performed due diligence reviewsof business, legal and financial matters relating to the acquisition of ENTECH,and negotiations were ongoing regarding the terms of definitive agreements,however, no agreement was completed as originally anticipated under theoriginal letter of intent.

 

On May 25, 2007, theCompany entered into a second letter of intent to acquire ENTECH. This letterof intent was subsequently amended on August 1, 2007 to extend the date bywhich the merger must be completed. On October 29, 2007, the Company andENTECH entered into an Agreement and Plan of Merger. The merger was completedon January 28, 2008. Specifically, ENTECH merged with and into awholly-owned subsidiary of the Company and the subsidiary survived the mergeras a wholly-owned subsidiary of the Company. Under the terms of the mergeragreement, WorldWater paid the following consideration to ENTECH stockholdersin 2008:

 

·                  $4.5 million in cash, (inaddition, $500,000 was paid during 2007).

 

52

----

 

·                  19,672,131 shares of theCompany’s common stock for an aggregate value of  $42,295,082. This determination of value isbased on a $2.15 per share value of the Company’s common stock, which was itsestimate of the fair market value of its common stock for a reasonable periodbefore and after the date of merger agreement, October 29, 2007.

 

Additionally,the ENTECH stockholders are entitled to receive future earn-out considerationcalculated as 5% of Merger Sub’s gross revenues determined in accordance withgenerally accepted accounting principles until the accumulated total of suchearn-out payments paid by the Company to the ENTECH stockholders equals $5.0million. The Company also was responsible for the payment of $1.3 millionof ENTECH’s liabilities, which was paid at the closing on January 28,2008.

 

Inaddition to the $500,000 non-refundable standstill payment to ENTECH in 2006, theCompany made another $500,000 standstill payment in the second quarter 2007which was released to the ENTECH stockholders prior to the Completion of themerger transaction. Due diligence fees of $411,442 were recorded on the balancesheet through September 30, 2007, and along with the two $500,000 paymentsto ENTECH, resulted in a capitalized amount of $1,411,442 on the balance sheetat September 30, 2007, classified as deferred cost on proposedacquisition.   Such amount will be addedto the total purchase price consideration.

 

Inaddition to the consideration to be paid to ENTECH’s stockholders, the Companywas required to provide to ENTECH $5.0 million of working capital toprovide research and development engineering related to the implementation of anew manufacturing plant in Texas. Approximately $2.7 million of working capital was provided to ENTECH asof December 31, 2007, of which $500,000 was expensed as research anddevelopment expense on the Company’s Consolidated Statement of Operations inthe quarter ending September 30, 2007.  The balance of such funds was recorded as tangible assets or was in thebank accounts of ENTECH as of the acquisition date.  The remaining $2.3 million of working capitalwas provided to ENTECH subsequent to December 31, 2007 and  prior to the merger which was completed on January 28,2008.

 

**Note (6) Contracts**

 
| ** **                                                                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Costs incurred on contracts                                                                                |       | $                           | 16,727,182 |   | $ | 14,411,406 |   |
| Estimated earnings, less foreseeable losses                                                                |       | 1,738,838                   |       | 2,705,383 |   |
|                                                                                                       |       | 18,466,020                  |       | 17,116,789 |   |
| Billings to date                                                                                           |       | (12,920,289                 | )          | (14,717,607 | ) |
| Net costs and estimate earnings/losses in excess of billings                                               |       | $                           | 5,545,731  |   | $ | 2,399,182 |   |
| These  amounts are included in the accompanying consolidated balance sheets under  the following captions: |       |                        |       |   |   |
| Costs and estimated earnings/losses in excess of billings                                                  |       | 5,548,631                   |       | 2,548,427 |   |
| Billings in excess of costs and estimated earnings/losses                                                  |       | (2,900                      | )          | (149,245 | ) |
|                                                                                                       |       | $                           | 5,545,731  |   | $ | 2,399,182 |   |

 

53

----

 

                The Company generates billingsbased on the fulfillment of milestones, which are set forth in the signedcontract for each project. Milestones may include, but are not limited to,initial permits being satisfied, delivery of materials, and installation whensubstantially complete.

 

**Note (7) Equipment and Leasehold Improvements**

 

                Equipment and leaseholdimprovements consist of the following at December 31, 2007 and 2006:

 
| ** **                                     | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Office furniture and equipment                 |       | $                           | 284,820    |   | $ | 130,551 |   |
| Vehicles                                       |       | 216,425                     |       | 78,143 |   |
| Computers                                      |       | 341,710                     |       | 16,568 |   |
| Leasehold improvements                         |       | $                           | 779,202    |   | $ | 5,453 |   |
|                                           |       | 1,622,157                   |       | 230,715 |   |
| Less accumulated depreciation and amortization |       | (154,363                    | )          | (34,907 | ) |
| Equipment and leasehold improvements, net      |       | $                           | 1,467,794  |   | $ | 195,808 |   |

 

                Depreciation and amortizationexpense in 2007, 2006, and 2005 were $133,051, $30,271, and $25,991respectively. During 2007, the Company abandoned equipment and leaseholdimprovements totaling $210,037 of which $43,758 was previously depreciated andamortized.

 

**Note (8) Intangible Assets**

 

                Intangible assets are listedbelow as of December 31, 2007 and 2006 and the associated amortization.

 
| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Loan origination costs                               |       | $                           | —     |   | $ | 287,688 |   |
| Accumulated amortization                             |       | —                      |       | (287,688 | ) |
| Loan origination costs, net                          |       | $                           | —     |   | $ | — |   |
|                                                 |       |                        |       |   |   |
| Non-compete agreement,  customer list and trade name |       | $                           | 123,000    |   | $ | 123,000 |   |
| Accumulated amortization                             |       | (96,333                     | )          | (56,333 | ) |
| Non-compete agreement, net                           |       | $                           | 26,667     |   | $ | 66,667 |   |

 

                Amortization expenses for 2007and 2006 were $40,000 and $330,688 respectively.

 

 

54

----

** **

**Note (9) Accounts Payable and Accrued Expenses**

 

                Accounts payable and accruedexpenses consist of the following at December 31, 2007 and 2006:

 
| ** **                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| Accounts payable—contracts   |       | $                           | 4,944,525  |   | $ | 2,328,963 |   |
| Accounts payable—other       |       | 1,449,708                   |       | 760,702 |   |
| Accrued salaries                  |       | 307,424                     |       | 271,039 |   |
| Accrued interest                  |       | 240,734                     |       | 268,501 |   |
| Accrued warranty reserve          |       | 414,496                     |       | 377,962 |   |
| Accrued sales commission          |       | 165,513                     |       | 190,140 |   |
| Accrued sales and use  taxes |       | 1,004,408                   |       | 302,000 |   |
| Accrued project costs             |       | 665,855                     |       | 143,890 |   |
| Accrued project  contingency      |       | —                      |       | 45,000 |   |
| Preferred dividend payable        |       | 5,895                       |       | 22,500 |   |
| Accrued legal expenses            |       | 31,560                      |       | 73,708 |   |
| Other accrued expenses            |       | 162,826                     |       | 78,472 |   |
| Total                             |       | $                           | 9,392,944  |   | $ | 4,862,877 |   |

 

55

----

 

**Note (10) Long-Term Debt and Notes Payable**

 

Long-term debt(including convertible debt) and notes payable consist of the followinguncollateralized loans outstanding at December 31, 2007 and 2006:

 
| ** **                 | ** ** | ** **                                        | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **                                     | ** ** | ** **                                               | ** ** | ** **                              | ** ** | ** **                                                      | ** ** | **December 31,  2007** | ** ** | **December 31,  2006**  | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|------------------|------------|------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **Maturity  Date**         | ** ** | **Loans  Holder**                                 | ** ** | **Stated  Rate** | ** ** | **Effective  Interest Rate** | ** ** | **Interest  Period**                           | ** ** | **Option  to  Pay  Interest in  either  Stock or  Cash** | ** ** | **Conversion  Price  of Common  Stock** | ** ** | **Potential  Number of  Shares Upon  Conversion @  12/31/2007** | ** ** | **Face  Amount**            | ** ** | **Net  Amount  Outstanding** | ** ** | **Face  Amount** | ** ** | **Net  Amount  Outstanding** | ** ** |
| ** **                 | ** ** | ** **                                        | ** ** | ** **       | ** ** | ** **                   | ** ** | ** **                                     | ** ** | ** **                                               | ** ** | ** **                              | ** ** | ** **                                                      | ** ** | ** **                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2007                       |       | Funds &  Qualified  individual investors |       | 10               | %          | 19 - 30                      | %          | Semi-Annual                                    |       | Yes                                                      |       | $                                       | 0.15       |                                                            | —     |                        | $          | 185,050                      |       | $ | — |   | $ | 185,050 | (a) | $ | 165,050 |   |
| 2008                       |       | Funds &  Qualified individual investors  |       | 10               | %          | 625                          | %          | Majority Monthly                               |       | Yes                                                      |       | $                                       | 0.18       |                                                            | 1,111,111  |                        | 200,000    |                         | 122,245    |   | 200,000 | (b) | 20,000 |   |
| On Demand                  |       | Qualified  individuals                            |       | 0 - 10           | %          | 0 - 15                       | %          | Majority  Monthly & Semi- annually    |       | No                                                       |       | N/A                                     |       | N/A                                                             |       | 30,347                      |       | 30,347                       |       | 30,347 | (c) | 30,347 |   |
| On Demand                  |       | Qualified  individual investors                   |       | 10               | %          | 10                           | %          | Maturity                                       |       | No                                                       |       | $                                       | 0.40       |                                                            | 132,500    |                        | 53,000     |                         | 53,000     |   | 53,000 | (d) | 53,000 |   |
| Stated Maturity Date  1997 |       | Qualified  individual investors                   |       | 8                | %          | 8                            | %          | Maturity                                       |       | No                                                       |       | $                                       | 0.40       |                                                            | 125,000    |                        | 50,000     |                         | 50,000     |   | 50,000 | (e) | 50,000 |   |
| Not Stated                 |       | Qualified individual  investors                   |       | 4.5              | %          | 4.5                          | %          | Not stated                                     |       | N/A                                                      |       | $                                       | 0.50       |                                                            | 85,859     |                        | 42,500     |                         | 42,500     |   | 42,500 | (f) | 42,500 |   |
| 2010                       |       | Financial  Institution                            |       | 8                | %          |                         |       | Monthly  principal & interet payments |       | No                                                       |       |                                    |       | N/A                                                             |       | 38,456                      |       | 38,456                       |       | 38,456 | (g) | 38,456 |   |
|                       |       |                                              |       |             |       |                         |       |                                           |       |                                                     |       |                                    |       | 1,454,470                                                       |       | $                           | 599,353    |                         | $          | 336,548 |   | $ | 599,353 |   | $ | 399,353 |   |
|                       |       |                                              |       |             |       |                         |       |                                           |       |                                                     | ** ** | ** **                              |       | **Less current portion**                                        |       |                        | 298,092    |                         |       |   | 360,897 |   |
|                       |       |                                              |       |             |       |                         |       |                                           |       |                                                     | ** ** | ** **                              |       | **Long-term portion**                                           |       |                        | $          | 38,456                       |       |   |   | $ | 38,456 |   |

 

----

(a)           In 2004, the Companyentered into loan agreements with individual investors totaling $912,550. Theseloan agreements bear a stated interest rate of 10%, an effective interest rateof between 19-30%, with a conversion price of $0.15.  These loans were paid off in  the quarter ending March 31, 2007.

 

(b)           In July 2005, theCompany entered into a $3,250,000 10% convertible note due July 21, 2008,for total proceeds of $3,000,000, which was convertible into 18,055,556 sharesof the Company’s common stock. The note was convertible into the Company’scommon stock at a price equal to the lesser of $0.18 or the average of the preceding 10 trading days prior to closingof the transaction.  The preceding 10-dayaverage was $0.28, therefore the $0.18 price was used.  The shares were fixed and determinable as ofthe date of the closing of the loan.  Inaddition, the Company also issued 9,611,112 of detachable warrants inconnection with the aforementioned convertible debt.  The warrants are exercisable immediately toshares of the Company’s common stock. The value of the stock purchase warrants (“warrants”) were determined byusing the Black-Scholes Method.  Theassumptions used were the following: Stock price: $0.28, Exercise Price: $0.18, Term: 4 years, Volatility:41%, Dividend Rate:  0.0% and Risk FreeInterest Rate:  3.99%.  The result was a fair value of approximately$0.1486 for each of the warrants issued. The number of warrants issued was 9,611,112, resulting in a total valueof $1,428,641.

 

The warrants issued are not treated as a derivative in accordance withFAS 133, as they do not meet all the criteria in paragraph 6.  As a result, in accordance with EITF 00-19,as the warrants do not require a cash settlement or company repurchaseoption,  the warrants are classified aspermanent equity in accordance with consensus reached in paragraph 9 of EITF00-19.

 

The warrants were accounted for as equity and the allocation of theproceeds were based upon the relative fair values of the debt and warrants inaccordance with paragraph 15 of APB 14.

 

As of December 31, 2007 there was $122,245 of the July 2005convertible note outstanding.

 

 

56

----

 

In July 2005, the Company entered into two convertible notestotaling $350,000: $250,000 with an investment fund and $100,000 with a privateinvestor. The notes bear 10% interest which at the option of the Company can bepaid in cash or in shares of the common stock of the Company, or a combinationof both. The note holders have the option to convert all or any part of theoutstanding principal into common stock of the Company at a conversion price of$0.18 per share. Through the third quarter of 2006, the investment fund holderconverted $125,000, respectively, of their outstanding principal into 694,444common shares of the Company.

 

The Company determined that the fair market value of the stock on thedate of issuance was lower than the conversion price of $0.18 (effectiveconversion price of $0.13). The Company noted a debt discount attributable tothe fair value of the warrants and the Beneficial Conversion Feature (“BCF”) inthe amount of $1,428,547 and $2,171,452, respectively.  The Company determined that the total debtdiscount attributable to the debt would have exceeded the cash proceedsallocated to the debt, however EITF 98-5, paragraph 6 indicates thatthe amount of the discount assigned to the debt is limited to the amount of theproceeds allocated to the convertible instrument, therefore the amountsattributed to the BCF is limited to $2,171,452. As a result, the face value ofthe debt upon issuance is essentially $1.

 

The Company will be amortizing the debt discount over the term of thedebt using the effective interest method (EITF 00-27, Issue #6). If andwhen a conversion (or partial conversion) occurs, any unamortized debt discountwill be accelerated (proportionately) and recognized in that periods statementof operations.

 

The aggregate fair value of the common stock that the holder received(assuming all $3,600,000 of debt was converted to 20,000,000 shares of commonstock) was $5,600,000.  This amountexceeded the proceeds of $3,600,000 by $2,000,000.

 

For the years ended December 31, 2007, 2006, and 2005, the Companyrecognized interest expense related to the July 2005 convertible notes inthe amount of $124,964 and $3,399,992,and $6 respectively.

 

(c)           Loans payable toindividual investors totaling $518,600. These loans were entered into in 1997.The notes bear 10% interest and are payable on demand.  The loan balance as of December 31, 2007was $30,347.

 

(d)           Loans payable toindividual investors totaling $53,000. These loans were entered into in 2000.The notes bear 10% interest and are payable on demand.

 

(e)           Loans payable toindividual investors totaling $50,000. These loans were entered into in 1992.The notes bear 8% interest and had an original maturity date of October 14,1997.

 

(f)            Loans payable toindividuals, with no stated interest rate or maturity date. Imputed interest iscalculated at a rate of 4.50% and is included in accrued interest.  Accrued interest as of December 31, 2007was $44,556.

 

(g)           Loans payable toindividual investors totaling $110,747. These loans were entered into in 2005.The notes bear 8% interest and had an original maturity date in 2010.  The loan balance as of December 31, 2007was $38,456.

 

                Thematurities of long-term debt (face amount) are:

 
| 2008  |   | 560,897 |    |
|-------|--------|---------|---------|
| 2009  |   | —  |    |
| 2010  |   | 38,456  |    |
| Total |   | $       | 599,353 |   |
|       |        |         |         |  |

 

57

----

 

**Note (11) Related Party Transactions**

 

*Notes Payable*

 

The Companyhad outstanding notes payable owed to directors, officers and employees of theCompany as of December 31, 2007 and 2006 as follows:

 
| ** **                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directos                                     |       | $        | —     |     | $          | 3,000 |   |
| Officers and  employees                      |       | —   |       | 32,748   |       |
| Total                                        |       | —   |       | 35,748   |       |
| Less current  maturities                     |       | —   |       | (35,748  | )          |
| Total long  term note payable, related party |       | $        | —     |     | $          | — |   |

 

Notes payableto directors, officers and employees are due on demand and accrue interest at10% per annum.

 

*Other Related Party Transactions*

 

The Companyrecorded a related party sale to a principal shareholder of twelve Mobil MaxPure®units, recognizing revenue of $900,000 in 2007. The principal shareholder inturn, donated such units to a charitable foundation. The Company also recordeda related party deposit, from the same principal shareholder of $775,000 on thebalance sheet at December 31, 2007, in relation to 10 additional units, tobe donated to a charity and shipped in 2008.

 

The Company leased office and laboratory facilities from the Chairmanof the Company. Lease payments to the Chairman were $0, $18,000 and $36,000 in2007, 2006 and 2005, respectively, plus utilities and maintenance. This leasewas terminated as of June 30, 2006.

 

**Note (12) Convertible Preferred Stock**

 

In 2001, theCompany issued a total of 66,667 shares of Series A 7% three-yearConvertible Preferred Stock in exchange for financial public relationsservices. The shares were issued at $0.90 per share and the services werevalued at $60,000 and recorded in the financial statements. In October 2004,the shares of Series A Preferred Stock were converted into 66,667 sharesof common stock issued at $0.90 per share.

 

In 2000, theCompany issued 611,111 shares of Series B 7% three-year ConvertiblePreferred Stock at $0.90 per share. The Series B Preferred Stock proceedswere intended to be used by the Company for the initial operating requirementsof WorldWater (Phils) Inc., the Company’s Philippine subsidiary. Theconversion privileges, which expired September 2003, were convertibleeither into 10% of WorldWater (Phils) Inc. or into 611,111 common sharesof the Company.

 

It is theCompany’s position that the holder of these preferred shares failed to convertto shares of the Company’s common stock in accordance with the terms ofissuance, and that the preferred shares expired on September 8, 2003. Itis the Company’s position that the obligations for the payment of dividends onsuch shares also terminated on that date. The Company is engaged innegotiations with the holder of the Series B preferred shares to resolvethe disputed terms of conversion.

 

Dividends onthe Series B were accrued through September 30, 2004 at the rate of7% and shown as “Accretion of preferred stock dividends’ in the ConsolidatedStatements of Operations.

 

*Series C Convertible Preferred Stock*

 

The Companyissued 750,000 shares of Series C 6% Convertible Preferred Stock at $1.00per share. The Series C Convertible Preferred Stock proceeds were used tofund: (i) a $500,000 payment made to the ENTECH, Inc. (“ENTECH”) tosecure a binding letter of intent allowing the Company the opportunity toconduct due diligence for the proposed acquisition of all of the common sharesof ENTECH by the Company or an affiliate; and (ii) due diligence expensesdirectly incurred in connection with the proposed acquisition transaction.

 

The Series CConvertible Preferred Stock held by each subscriber is convertible on an all ornone basis, into either: (i) common stock of the Company; or (ii) eachholder’s proportionate share of a 6.5% interest in the entity formed for thepurpose of purchasing the common shares of ENTECH. Each holder of the Series CConvertible Preferred Stock may elect to convert into his or her proportionateshare of a 6.5% interest in the entity formed to purchase the common stock ofENTECH during the 120 day period following the closing of the ENTECHtransaction or, alternatively, may convert into the common stock of the Companyat any time prior to January 1, 2009. The conversion price to be used forconversions into common stock of the Company will be equal to the closing bidprice of the common stock on December 31, 2006, equal to $0.39 per shareof our common stock.

 

 

58

----

 

Dividends on the Series C Convertible Preferred Stock accrue atthe annual rate of 6%, payable the first day of each month, except that duringthe period July 1, 2006 through June 30, 2007 dividends will beaccrued but not paid. As of December 31, 2007, the Series CConvertible Preferred Stock had accrued and unpaid dividends in the aggregateamount of $5,895, which will be payable upon conversion.

 

*Series D Convertible Preferred Stock*

 

On November 30, 2006, the Company issued a press releaseannouncing its entry into three agreements with EMCORE Corporation (“EMCORE”),involving EMCORE’s agreement to purchase up to 26.5% of the Company on afully-diluted basis in exchange for $18 million. The three agreementsentered into on November 29, 2006, are an Investment Agreement (the “InvestmentAgreement”), a Registration Rights Agreement (the “Registration Right Agreement”)and a Letter Agreement (the “Letter Agreement”, and together with theInvestment Agreement and Registration Rights Agreement, the “Agreements”). TheBoards of Directors of EMCORE and the Company approved the Agreements.

 

Pursuant to the Investment Agreement, EMCORE agreed to invest up to$18.0 million (the “Investment”) in return for (i) six million, fivehundred and twenty-three thousand, eight hundred and ten (6,523,810) shares of Series DConvertible Preferred Stock of the Company, par value $0.01 per share (the “Series DStock”) and (ii) six hundred and sixty-eight thousand, one hundred andthirty-nine (668,139) warrants to purchase six hundred and sixty-eightthousand, one hundred and thirty-nine (668,139) shares of Series D Stock(the “Warrants”). The Series D Stock and Warrants to be received by EMCOREare equivalent to an approximately thirty-one percent (31%) equity ownership inthe Company, or approximately twenty-six and half percent (26.5%) on a fullydiluted basis.

 

On November 29, 2006, EMCORE invested $13.5 million in theCompany, representing the first tranche of its $18 million investment, inreturn for which the Company issued to EMCORE (i) four million, eighthundred and ninety two thousand, eight hundred and fifty seven (4,892,857)shares of Series D Convertible Preferred Stock and (ii) five hundredand five thousand and forty-four (505,044) warrants (the “Tranche AWarrants”) to purchase five hundred and five thousand and forty-four (505,044)shares of Series D Stock.

 

The investment of the remaining $4.5 million second tranche (the “Tranche BClosing”) will be consummated subject to the execution of a definitivestrategic agreement between the Parties and certain other conditions set forthin the Investment Agreement. At the Tranche B Closing, the Company willissue to EMCORE (i) an additional one million, six hundred and thirtythousand, nine hundred and fifty-three (1,630,953) shares of Series DConvertible Preferred Stock and (ii) one hundred and sixty-three thousandand ninety-five (163,095) warrants to purchase one hundred and sixty-threethousand and ninety-five (163,095) shares of Series D Stock.

 

In the Investment Agreement, the Company and EMCORE made customaryrepresentations, warranties and covenants and the Company agreed to indemnifyEMCORE and its affiliates, successors and assigns against certain potentiallosses incurred in connection with its investment in the Company, including anyand all costs and expenses actually incurred by them resulting from the breachof any representation or warranty made by the Company in connection withEMCORE’s investment; the breach of or failure to perform any covenant oragreement by the Company contained in the Investment Agreement or relateddocuments; or any action instituted against EMCORE or any of its affiliates, byany stockholder of the Company who is not an affiliate of EMCORE, with respectto any of the transactions contemplated by the Investment Agreement or relateddocuments. Pursuant to the terms of the Investment Agreement, EMCORE has beengranted the following rights, among others: (i) the right to participatepro-rata in future financings and equity issuances by the Company; (ii) certainrights to obtain information regarding the financial results, financialperformance, business and operations of the Company; and (iii) the rightto nominate and appoint two individuals to the Company’s Board of Directors.

 

The Series D Stock has the designations,preferences and rights set forth in the certificate of designation filed withthe Secretary of State for the State of Delaware on November 29, 2006 (the“Certificate of Designation”). Pursuant to the Certificate of Designation,holders of Series D Stock have the following rights, among others: (i) thesole right and discretion to convert their shares of Series D Stock at anytime and from time to time into such number of fully paid and non-assessableshares of common stock, par value $0.001, of the Company (the “Common Stock”)initially equal to such number of shares of Series D Stock multiplied byten, subject to certain adjustments as more fully set forth in the Certificateof Designation including weighted average anti-dilution rights, (ii) theright to vote together with the holders of Common Stock as a single class onall matters submitted for a vote of holders of Common Stock, (iii) for solong as the beneficial ownership by the holders of Series D Stock (on afully-diluted basis) does not fall below ten percent (10%) of the thenoutstanding shares of Common Stock, the exclusive right to elect two members ofthe Board of Directors of the Company, (iv) for so long as the beneficialownership by the holders of Series D Stock (on a fully-diluted basis) isbetween five percent (5%) and ten percent (10%) of the then outstanding sharesof Common Stock, the exclusive right to elect one member of the Board ofDirectors of the Company, (v) certain liquidation preferences as detailedin the Certificate of Designation and (vi) the right to receive dividendsin an amount equal to the amount of dividends that such holder would havereceived had the holder converted its shares of Series D Stock into sharesof Common Stock as of the date immediately prior to the record date for suchdividend. The liquidity event is any change in control whereby the new personor entity has 50% or more beneficial ownership in the existing company. Sincethe potential change in ownership is outside the control of the Company, theexisting preferred shareholders would have the right to demand cash paymentequal to the liquidation value of the preferred stock plus accrueddividends.   Closure of the secondtranche cannot take place until a sufficient amount of additional common sharesare authorized by the Company’s shareholders.

 

59

----

 

Series C and D Preferred Stock Classification

 

The Series C and D Preferred Stock were classified out ofpermanent equity since it fit certain criteria in paragraph #2 of EITF TopicD-98), however it was not classified as a liability since it did not meet therequirements of a liability. The warrants on the Series D Preferred Stockwere classified as a current liability under the guidance established in SFASNo. 150.

 

On November 29, 2006, the Company recorded preferred stockdividends related to a Beneficial Conversion Feature of the Series D PreferredStock and the value associated with the Series D Preferred Stock Warrants,which needed to be recognized on the preferred shares of 4,892,857 and warrantsof 505,044, respectively. After calculating the intrinsic value, based on therelative fair values of the warrants and preferred stock , an adjustment of$4,066,796 was recorded as a preferred stock dividend. EITF 98-5 paragraph 8,indicates the following “*For convertiblepreferred securities, any recorded discount resulting from allocation of proceedsto the beneficial conversion feature is analogous to a dividend and should berecognized as a return to the preferred shareholders over the minimum periodfrom the date of issuance to the date at which the preferred shareholders canrealize that return (that is, through the date of earliest conversion) usingthe effective yield method*.” In the Company’s case, the discount wasrecognized as a Preferred Stock Dividend on the day of issuance since theearliest conversion date was immediately. The Company recorded a debit toPreferred Stock Dividend and a Credit to Additional Paid in Capital, which isin accordance with Case 1(a) of EITF 98-5.

 

The warrants to purchase Series D preferred stock were calculatedby converting them to their common share equivalent, then utilizing theBlack-Scholes Method to arrive at a fair value. The amounts allocated to the preferred stock and warrants wereequivalent to their relative fair values. At December 31, 2006, in accordancewith SFAS No. 150, the warrants were re-valued from $954,827 to theirredemption amount of $1,393,827, resulting in interest expense of $439,000during the fourth quarter of 2006. 

 

*Liquidation Preference*

 

Upon liquidation, holders of the Series C and D ConvertibleRedeemable Preferred Stock will be entitled to the greater of (1) a pershare amount equal to the original purchase price plus any dividends accruedbut not paid and (2) the amount that the holder would receive in respectof a share of Series C and D, preferred if immediately prior to dissolutionand liquidation, all shares of Series C and D Convertible RedeemablePreferred Stock were converted into shares of common stock. The liquidationpreference of Series C and D is $772,500 and $13,500,000, respectively.

 

**Note (13) Common Stock Transactions**

 

               Common stock transactions during the twelve months ended December 31, 2007consisted of the following:

 
| ** **                                                                   | ** ** | ** **  | ** ** | **Price Per** | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                                                   | ** ** | **Shares**  | ** ** | **Share**     | ** ** |
| Shares  Issued and Outstanding December 31, 2006                        |       | 149,359,052 |       |          |       |
| Conversion  of Convertible Notes                                             |       | 1,233,666   |       | $             | 0.15-0.18  |   |
| Warrants  exercised                                                          |       | 12,745,271  |       | $             | 0.15-0.50  |   |
| Conversion  of Series C Preferred Stock                                 |       | 641,025     |       | $             | 0.39       |   |
| Shares sold  under Stock Purchase Agreements                                 |       | 18,400,000  |       | $             | 0.50-1.78  |   |
| Shares  issued in lieu of payment of cash for interest                       |       | 79,466      |       | $             | 0.19       |   |
| Stock  options exercised                                                     |       | 6,139,194   |       | $             | 0.15-0.70  |   |
| Shares  issued as compensation for public relations and business development |       | 755,000     |       | $             | 0.19       |   |
| Shares  issued during the year ended December 31, 2007                  |       | 39,993,622  |       | $             | 0.15-1.78  |   |
| Shares  issued and Outstanding December 31, 2007                        |       | 189,352,674 |       |          |       |

 

Thecommon stock issued in connection with the goods and services were issued forpast services. The Company and the service provider agreed on a number ofshares to be issued based on the fair value of the stock in relation to thevalue of the services rendered. The Company expensed the fair value of thestock multiplied by the number of shares issued in accordance with FAS 123R,paragraph 7. The Company notes that the amount expensed in the Company’s ConsolidatedStatement of Operations approximates the fair value of the services renderedhad the Company paid cash for the services. 

 

On April 12, 2007, the Companyinitiated a private offering. The offering was consummated with 10,800,000Shares of the Company’s Common stock issued at $0.50 per share, with aFive-Year Warrant attached to purchase 2,700,000 Shares of the Company’s Commonstock at $0.50. Net proceeds from this offering amounted to $5,400,000.

 

OnSeptember 28, 2007, the Company entered into a Stock and Warrant PurchaseAgreement with the Quercus Trust, whereby the Quercus Trust purchased 7.5million shares of WorldWater’s common stock at a price of $1.782 per share, fortotal proceeds of $13,365,000. The Agreement also provides for the issuance ofwarrants to the Quercus Trust for the purchase of 9.0 million additional sharesof WorldWater’s common stock at an exercise price of $1.815, subject to certainadjustments. The exercise of warrants into common stock cannot take place untiladditional shares are authorized by a vote of the Company’s shareholders. Untilsuch time as authorized shares are made available, the Company will not berequired to record any warrant related expense. If sufficient additional sharesof common stock have not been authorized by September 28, 2008, the QuercusTrust may require the Company to exchange the warrants for a new class ofpreferred stock with the following rights, preferences and privileges: eachshare of preferred stock will have rights, preferences and privilegesequivalent to 1,000 shares of common stock, and shall in addition beautomatically convertible into common stock at such time as the Company hassufficient authorized shares of common stock to allow such conversion. As ofDecember 31, 2007, the warrants and the new class of preferred stock have nocash redemption features and are not considered to be liquid securities.

 

60

----

 

**Note (14) Warrant Transactions**

 

TheCompany uses the fair value method to account for transactions withnon-employees in which unregistered common stock shares are issued inconsideration for extensions of short-term loans, commissions for debt andequity financing, and the provision of goods or services. The fair value of allwarrants are calculated using the Black-Scholes pricing model with thefollowing assumptions: dividend yield of zero percent; expected volatility(calculated on a case by case situation), utilizing the current risk freeinterest rate, and an average term of 10 years. The relative fair value ofthe warrants resulted in non-cash expense charges of $0, $528,000, and$1,985,000 for the years ended December 31, 2007, 2006, and 2005,respectively. All warrants below are exercisable immediately. All warrants areexercisable into common stock only and do not include Series D PreferredStock warrants and the common stock warrants issued to the Quercus Trustdiscussed in Note 13.

 

Warranttransactions consisted of the following during the year ended December 31,2007:

 
| ** **                                         | ** ** | **Exercisable** | ** ** | ** **      | ** **    |
|----------------------------------------------------|------------|-----------------|------------|-----------------|---------------|
| ** **                                         | ** ** | **Warrants**    | ** ** | **Stock Price** | ** **    |
| Warrants  Outstanding As of December 31, 2006 |       | 24,792,873      |       | $               | 0.15 to $0.50 |   |
| a) Warrants issued                                 |       | 3,500,000       |       | 0.50            |          |
| Exercise of  warrants                              |       | (12,745,271     | )          | 0.19            |          |
| Expiration  of outstanding warrants                |       | (2,063,376      | )          | $               | 0.15 to $0.50 |   |
|                                               |       | (11,308,647     | )          |            |          |
| Warrants  Outstanding As of December 31, 2007 |       | 13,484,226      |       | $               | 0.15 to $0.50 |   |

 

Terms and conditions of the above warrant transactions are listedbelow:

 

a) On April 12, 2007, the Company initiateda private offering. A summary of the offering included 10,900,000 Shares of theCompany’s Common stock issued at $0.50 per share, with a five-year warrant attachedto purchase 3,500,000 Shares of the Company’s common stock at $0.50. Netproceeds from this offering amounted to $5,117,000. The net proceeds from thisOffering were used by the Company primarily for working capital. Utilizing theBlack-Scholes method, the warrants issued in 2007 had a term of 5 years. TheCompany used the then current stock price of $0.50, modified exercise price,volatility of 70%, and interest rate of 6%.

 

                Warrantsoutstanding expire as follows:

 
| **Year** | ** ** | **Warrants  Expiring** | ** ** | **Strike  Price** | ** ** |
|----------|------------|------------------------|------------|-------------------|------------|
| 2008     |       | 700,696                |       | $                 | 0.15-0.30  |   |
| 2009     |       | 5,064,670              |       | 0.15-0.41         |       |
| 2010     |       | —                 |       | —            |       |
| 2011     |       | 4,318,860              |       | 0.22-0.38         |       |
| 2012     |       | 3,400,000              |       | 0.50              |       |
|     |       | 13,484,226             |       |              |       |
|          |            |                        |            |                   |            |  |

 

61

----

 

**Note (15) IncomeTaxes**

 

Deferred tax assets andliabilities are determined based on the temporary differences between thefinancial reporting and the tax basis of assets and liabilities, applyingenacted statutory tax rates in effect for the year in which the differences areexpected to reverse. Future tax benefits, such as net operating losscarryforwards, are recognized to the extent that realization of these benefitsis considered more likely than not.

 

Income tax benefit for theyears ended December 31, 2007, 2006 and 2005 were as follows:

 
| ** **                                                      | ** ** | **2007** | ** **   | **2006** | ** ** | **2005**     | ** ** |
|-----------------------------------------------------------------|------------|----------|--------------|----------|------------|--------------|------------|
| Federal:                                                        |       |     |         |     |       |         |       |
| Current                                                         |       | $        |  — |     | $          |  — |       | $ | — |   |
| Deferred                                                        |       | —   |         | —   |       | —       |       |
|                                                            |       | —   |         | —   |       | —       |       |
| State:                                                          |       |     |         |     |       |         |       |
| Current                                                         |       | —   |         | —   |       | —       |       |
| Deferred                                                        |       | —   |         | —   |       | —       |       |
| Benefit  from sale of net operating losses and research credits |       | —   |         | —   |       | (200,953     | )          |
|                                                            |       | $        |  — |     | $          |  — |       | $ | (200,953 | ) |
|                                                            |       |     |         |     |       |         |       |

 

Income taxes computed using thefederal statutory income tax rate differs from the Company’s effective tax rateprimarily due to the following for the years ended December 31, 2007,2006, and 2005:

 
| ** **                                                                   | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Income tax  benefit at US federal statutory tax rate                         |       | $         | (4,891,000 | )         | $          | (3,906,000 | )          | $ | (2,168,400 | ) |
| State income  taxes, net of federal tax effect                               |       | (781,300  | )          | (211,200  | )          | (426,800   | )          |
| Permanent  items                                                             |       | 405,900   |       | 1,362,300 |       | (274,400   | )          |
| Change in  deferred tax asset valuation allowance                            |       | 5,266,400 |       | 2,754,900 |       | 2,869,600  |       |
| Benefit from sale of New Jersey net  operating losses and research   credits |       | —    |       | —    |       | (200,953   | )          |
|                                                                         |       | $         | —     |      | $          | —     |       | $ | (200,953 | ) |

 

As of December 31, 2007,the Company had Federal and State net operating loss carryforwards totalingapproximately $44,845,500 and $29,409,800, respectively, available to reducefuture taxable income and tax liabilities which expire at various dates between2008 and 2027. In addition, as of December 31, 2007, the Company hadfederal research and development tax credit carryforwards of approximately$180,600 available to reduce future taxable income and tax liabilities whichexpire at various dates between 2009 and 2024. Under provisions of the InternalRevenue Code, substantial changes in the Company’s ownership may limit theamount of net operating loss carryforwards and research and development creditcarryforwards, which can be used in future years. 

 

The Company participates in theState of New Jersey’s corporation business tax benefit certificate transferprogram (the “Program”), which allows certain high technology and biotechnologycompanies to transfer unused New Jersey net operating loss carryovers andresearch and development tax credits to other New Jersey corporation businesstaxpayers. In 2005, the Company submitted applications to the New JerseyEconomic Development Authority (the “EDA”) to participate in the Program forthe years 2004 and 2003, and the applications were approved. The EDA thenissued certificates certifying the Company’s eligibility to participate in theProgram for these years.

 

During 2005, the Company soldapproximately $2,207,000 and $210,000 of its 2004 and 2003 New Jersey State netoperating loss carryforwards, respectively, and $10,800 of its 2004 researchand development tax credits, resulting in the recognition of a $200,953 taxbenefit.

 

Deferred Taxes at December 31,2007 and 2006 are summarized as follows:

 
| ** **                                 | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|
| Gross  deferred tax assets                 |       |        |       |        |       |
| Net operating loss carryforwards           |       | $           | 17,807,000 |        | $          | 12,327,100 |   |
| Warranty reserve                           |       | 165,600     |       | 169,000     |       |
| Accrued expenses and deferred compensation |       | 323,900     |       | 534,000     |       |
| Gross  deferred tax liabilities            |       | 18,296,500  |       | 13,030,100  |       |
|                                       |       |        |       |        |       |
| Deferred tax  valuation allowance          |       | (18,296,500 | )          | (13,030,100 | )          |
|                                       |       | $           | —     |        | $          | — |   |
|                                            |            |             |            |             |            |  |  |  |  |

 

 

62

----

 

The Company is required toestimate its income taxes in each of the jurisdictions in which it operates aspart of its consolidated financial statements. This involves estimating theactual current tax in addition to assessing temporary differences resultingfrom differing treatments for tax and financial accounting purposes. Thesedifferences together with net operating loss carryforwards and tax credits maybe recorded as deferred tax assets or liabilities on the balance sheet. Ajudgment must then be made of the likelihood that any deferred tax assets willbe recovered from future taxable income. To the extent that the Companydetermines that it is more likely than not that deferred tax assets will not beutilized, a valuation allowance is established. Taxable income in futureperiods significantly different from that projected may cause adjustments tothe valuation allowance that could materially increase or decrease futureincome tax expense. As of December 31, 2007 and 2006 an allowance equal to100% of the deferred tax asset was recorded.

 

EffectiveJanuary 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting forUncertainty in Income Taxes” (“FIN No.48”), which clarifies the accounting foruncertainty in Income taxes recognized in the financial statement in accordancewith FASB Statement No. 109 Accounting for Income Taxes. This interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken, or expected tobe taken, in a tax return. There were no significant matters determined to beunrecognized tax benefits taken or expected to be taken in a tax return thathave been recorded on the Company’s consolidated financial statements for theyear ended December 31, 2007.

 

Additionally,FIN No. 48 provides guidance on the recognition of interest and penaltiesrelated to income taxes. There were no interest or penalties related to incometaxes that have been accrued or recognized as of and for the years endedDecember 31, 2007, 2006 and 2005.

 

The Companyfiles corporate income tax returns to the United States, both in the FederalJurisdiction and in various state jurisdictions. The Company is subject toFederal income tax examination for calendar tax years 2005 through 2007 and isalso subject to various state income tax examinations for calendar years 2002through 2007.

 

63

----

 

**Note (16)Stock-Based Compensation Plans**

 

*Incentive Stock Option Plan*

 

In 1999, the Board of Directorsand stockholders approved the Company’s 1999 Incentive Stock Option Plan (the “1999Plan”), which was amended in 2006 with the approval of the Board of Directorsand stockholders to increase the amount of available shares under the plan to amaximum of 25,000,000 shares. The 1999 Plan authorizes the issuance ofincentive stock options and nonqualified stock options. The CompensationCommittee determines the type, amount and terms, including vesting, of anyaward made under the incentive plan. Incentive stock options granted generallyvest as follows: grants to officers—generally over a defined term up to threeyears; and grants to employees—over the succeeding twelve months and expirebetween three and ten years from the date of the grant. Nonqualified stockoption grants to directors and consultants generally vest immediately upongrant and expire three years from the date of grant.

 

The following is a summary ofstock option activity:

 
| ** **                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Balance,  December 31, 2004             |       | 10,015,325 |       | $                                      | 0.25       |   |
| Granted                                      |       | 3,430,988  |       | 0.31                                   |       |
| Forfeited or expired                         |       | (205,539   | )          | 0.27                                   |       |
| Exercised                                    |       | (1,430,382 | )          | 0.23                                   |       |
| Balance,  December 31, 2005             |       | 11,810,392 |       | 0.27                                   |       |
| Granted                                      |       | 2,996,000  |       | 0.30                                   |       |
| Forfeited or expired                         |       | (997,600   | )          | 0.32                                   |       |
| Exercised                                    |       | (450,561   | )          | 0.24                                   |       |
| Balance,  December 31, 2006             |       | 13,358,231 |       | 0.27                                   |       |
| Granted                                      |       | 7,539,000  |       | 0.42                                   |       |
| Forfeited or expired                         |       | (218,620   | )          | 0.32                                   |       |
| Exercised                                    |       | (6,089,194 | )          | 0.28                                   |       |
| Balance,  December 31, 2007             |       | 14,589,417 |       | 0.27                                   |       |
| Options  Exercisable, December 31, 2007 |       | 9,006,956  |       | 0.26                                   |       |
|                                              |            |            |            |                                        |            |  |

 

The Company adoptedStatement 123(R) on January 1, 2006. This statement applies toall awards granted after the date of adoption and to awards modified,repurchased, or cancelled after that date. The value of the unvested stockoptions at December 31, 2007 is approximately $1,330,865, of which$473,365 will be expensed in 2008, with the remaining $857,500 to be expensedin 2009 and beyond, under General & Administrative Expense on the ConsolidatedStatement of Operations.

 

Summarized information aboutstock options outstanding is as follows:

 
| **Range**       | ** ** | **Number of  Options Outstanding at December 31, 2007** | ** ** | **Average  Remaining   Life** | ** ** | **Average Exercise Price** | ** ** | **Options  Exercisable, As of  December 31,  2007** | ** ** | **Average Exercise Price of Exercisable Options** | ** ** |
|-----------------|------------|---------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| $0.02-0.15      |       | 2,163,846                                               |       | 4.13                          |       | $                          | 0.14       |                                                | 2,163,846  |                                              | $          | 0.14 |   |
|  0.19-0.30 |       | 3,589,175                                               |       | 6.36                          |       | 0.27                       |       | 3,148,770                                           |       | 0.27                                              |       |
|  0.31-0.40 |       | 7,700,396                                               |       | 8.64                          |       | 0.38                       |       | 2,881,788                                           |       | 0.36                                              |       |
|  0.41-0.50 |       | 654,000                                                 |       | 8.51                          |       | 0.44                       |       | 654,000                                             |       | 0.44                                              |       |
|  0.51-0.74 |       | 482,000                                                 |       | 8.13                          |       | 0.70                       |       | 158,552                                             |       | 0.64                                              |       |
|            |       | 14,589,417                                              |       |                          |       |                       |       | 9,006,956                                           |       |                                              |       |
|                 |            |                                                         |            |                               |            |                            |            |                                                     |            |                                                   |            |  |  |

 

The aggregate intrinsic valueof options outstanding and exercisable at December 31, 2007 was $15,067,603.

 

In regard to Paragraph A240(c) ofSFAS 123R, for each year for which an income statement is provided:

 

64

----

 

(1) The weighted-averagegrant-date fair value (or calculated value for a nonpublic entity that usesthat method or intrinsic value for awards measured at that value pursuant toparagraphs 24 and 25 of this Statement) of equity options or other equityinstruments granted during the year ended December 31, 2007 was $0.29, and$0.18 for those granted during the year ended December 31, 2006.

 

(2) The total intrinsicvalue of options exercised (or share units converted), share-based liabilitiespaid, and the total fair value of shares vested during the year was $7,723,186as of December 31, 2007 and $1,432,228 as of December 31, 2006.

 

*Restricted Stock Agreement*

 

In 2002, the Company granted1,000,000 shares of restricted common stock for the benefit of its Chairman.Compensation expense for the grant was based on the market price ($0.15) forthe common stock and is being amortized on a straight-line basis over the fiveyear vesting period based on continuous service. The recipient has the right tovote all shares subject to the grant, whether or not the shares have vested.These shares were issued in January, 2007.

 

The balance of unearnedcompensation related to the restricted shares as of December 31, 2007 was$0. Compensation expense recognized in each of the years ended December 31,2007, 2006, and 2005 was $0, $45,000, and $30,000 respectively.

 

**Note (17) Employees’Savings Plan**

 

The Company established a 401(k) planin 2000 for eligible employees. Under the provisions of the plan, eligibleemployees may voluntarily contribute a portion of their compensation up to thestatutory limit. In addition, the Company can make a matching contribution atits discretion. As of December 31, 2007, the Company has never made anycontributions to the plan.

 

65

----

 

**Note (18)Commitments and Guarantees**

 

The Company’s commitments as ofDecember 31, 2007*, for the years 2008 through 2012 and thereafter areestimated below:

 
| ** **                                     | ** ** | **2008**  | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-tem debt maturities (face amount)         |       | $         | 560,897    |      | $          | —    |       | $        | 38,456     |     | $          | —         |       | $         | —     |   | $ | — |   | $ | 599,353 |   |
| Employment obligations                         |       | 1,352,707 |       | 1,440,680 |       | 1,082,347 |       | 316,667  |       | —   |       | —         |       |      | 4,192,401  |   |
| Renewable energy credit guarantee  obligations |       | 64,701    |       | 64,701    |       | 64,701    |       | 64,701   |       | 35,509   |       |           |       |      | 294,313    |   |
| Operating lease payments                       |       | 885,743   |       | 829,469   |       | 772,631   |       | 772,631  |       | 772,631  |       | 3,516,555      |       |      | 7,549,660  |   |
| Total                                          |       | $         | 2,864,048  |      | $          | 2,334,850 |       | $        | 1,958,135  |     | $          | 1,153,999      |       | $         | 808,140    |   | $ | 3,516,555 |   | $ | 12,635,731 |   |

** **

** **

*Operating Leases*

 

***New Jersey***

 

The Company’s executive office,research and development facility is housed in a 30,000 square foot sitelocated at 200 Ludlow Drive, Ewing, New Jersey 08638. The facility is leasedunder an operating lease commencing July 1, 2007, and expiring June 30,2015. The Company also occupies 13,270 square feet at 55 Route 31South, Pennington, NJ 08534. This facility is leased under an operating leaseexpiring on June 30, 2008.

 

***Colorado***

 

In September 2007, theCompany opened a sales and technical support office in Greenwood Village, COunder a six month lease expiring February 29, 2008.  The Company nowleases the facilities on a month to month basis.

 

***California***

 

In September 2005, theCompany acquired Quantum Energy Group in Applegate, California which includedthe transfer of their five year lease expiring April 30, 2009, with twofive-year options to extend the lease.

 

In December 2007, theCompany opened a sales office in Poway, CA under a two year lease expiring December 24,2009.  This office serves as the sales center for Southern California.

 

In March 2007, the Companyopened a technical support office in Fresno, CA under a month to month lease.

 

***Texas****

 

In January 2008, theCompany acquired Entech, Inc. in Keller, TX which included the transfer oftheir lease expiring June 1, 2009.

 

On March 7, 2008, the Company enteredinto a lease for a 71,000 square foot manufacturing facility in Fortworth,TX.  The lease is for a period of ten(10) years and provides for monthly payments that include rental expense, realestate taxes & common area maintenance of $42,061 per month for the firstfive (5) years of the lease and payments of $46,395 in the final five (5) years.

 

Both of these Texas Leases areincluded in the above table.

 

66

----

 

*Employment Agreements*

 

On December 18, 2006, theCompany entered into a five-year employment agreement with Mr. Kelly, ourformer Chief Executive Officer (see Note 22 as to subsequent events),effective January 1, 2007. Adjusted compensation under the agreement is$250,000 annual salary and $1,200 per month auto allowance. Mr. Kellyparticipates in the Company’s “fringe benefits” including health coverage andthe maintenance of a whole life policy. The benefits continue if employment isterminated without cause or by reason of death or disability to Mr. Kellyor his estate for the remaining term of the agreement or a period of24 months, whichever is longer. Effective January 19, 2007, Mr. Kellywas granted 5,000,000 stock options at an exercise price of $0.40, fair marketvalue at the date of the grant. These shares will vest twenty percent (20%) peryear, with the first twenty percent (20%) vesting immediately upon the grant ofthe options and the remaining options vesting twenty percent (20%) per year onthe annual anniversary of the initial grant.

 

In July 2002, Mr. Kellywas granted 1,000,000 shares of restricted stock, all of which are vested as ofDecember 31, 2006. Compensation expense recognized in each of the yearsended December 31, 2007, 2006, and 2005 was $0, $45,000, and $30,000respectively.

 

Included in accrued salescommissions as of December 31, 2006 is $58,622 owed to Mr. Kellyunder a Management Services Fee Agreement expired on December 31, 2006,calling for a management services/sales incentive fee equal to one-half percent(0.5%) of the Company’s gross product revenues less any related productreturns, rebates, allowances, freight charges, tariffs and sales taxes, not toexceed $250,000 per annum.

 

On July 10, 2006, theCompany entered into an employment agreement with Mr. Larry L.Crawford, Executive Vice President and Chief Financial Officer with a termwhich expires July 9, 2009. Annual compensation under the agreement is$150,000 and included an initial grant of 600,000 stock options vesting overthe term of the employment agreement. On March 8, 2007, the Companyentered into a new three-year employment agreement with Mr. Crawford. Thecontract was effective January 1, 2007 and includes his appointment asExecutive Vice President. Adjusted compensation under this contract is $175,000annual salary and $750 monthly auto allowance.

 

On December 18, 2006, theCompany entered into an employment agreement with Douglas L. Washington,Executive Vice President, Marketing, effective January 1, 2007 for aperiod of three years. Annual compensation under the agreement is $160,000 andincludes an initial grant of 600,000 stock options vesting over the term of theemployment agreement.

 

On May 24, 2004, theCompany entered into an employment agreement with James S. Brown.Executive Vice President, Project Finance with a term which expiredDecember 31, 2006. Annual compensation under the agreement is $150,000 andincluded an initial grant of 250,000 stock options vesting over the term of theemployment agreement.

 

On March 18, 2008, the Company entered intoan Executive Employment Agreement (the “Agreement”) with Robert A. Gunther, theCompany's Senior Vice President and General Counsel. The Agreement provides fora three term and an annual base salary of $200,000. Mr. Gunther will receiveoptions to purchase 300,000 shares of the Company's common stock under theterms of the Company's 1999 Incentive Stock Option Plan (the “Plan”), subjectto the approval of the Company's stockholders to an increase in the number ofauthorized shares of common stock in the Plan. Options to purchase 50,000shares of common stock will vest on July 7, 2008 and the balance will vest in30 equal monthly installments commencing August 2008 and continuing in each ofthe next 29 months.

 

**Note (19)Contingencies**

 

The Company is subject tovarious claims and suits from time to time in the ordinary course of itsbusiness. The Company is not aware of any pending or threatened litigation thatcould have a material adverse effect on the Company’s business, financialcondition or results of operations.

 

**Note (20)Supplemental Disclosure of Cash Flow Information**

 
| ** **                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Issuance of  stock lieu of Interest (non-cash)            |       | $        | 25,736     |     | $          | 68,973   |       | $ | 371,087 |   |
| Issuance of stock  for services (non-cash)                |       | $        | 246,500    |     | $          | 227,481  |       | $ | 211,272 |   |
| Issuance of  options and warrants for services (non-cash) |       | $        | 60,000     |     | $          | 70,000   |       | — |   |
| Cash paid  during the year for interest                   |       | $        | 23,467     |     | $          | 80,597   |       | $ | 242,154 |   |

 

**Note (21)Quarterly Financial Data (Unaudited)**

** **

Summarized quarterly financial data for theyears ended December 31, 2007, and 2006 is as follows (in thousands exceptper share data):

 
| **2007**                                                | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|---------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| Total revenues                                          |       | $         | 949        |       | $          | 2,238     |       | $          | 4,369      |   | $ | 10,910 |   |
| Gross profit                                            |       | 199       |       | 337        |       | 564       |       | 639        |       |
| Net loss                                                |       | (2,160    | )          | (2,807     | )          | (3,753    | )          | (5,665     | )          |
| Net loss applicable to common shareholders              |       | (2,172    | )          | (2,818     | )          | (3,761    | )          | (5,672     | )          |
| Basic & diluted net loss per  common share (1) |       | (0.01     | )          | (0.02      | )          | (0.02     | )          | (0.03      | )          |
|                                                         |            |           |            |            |            |           |            |            |            |  |  |  |  |

 
| **2006**                                                | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth  (Restated)** | ** ** |
|---------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------------------|------------|
| Total revenues                                          |       | $         | 1,957      |       | $          | 1,787     |       | $                      | 6,532      |   | $ | 7,058 |   |
| Gross profit                                            |       | 131       |       | 277        |       | 1,452     |       | 860                    |       |
| Net loss                                                |       | (5,728    | )          | (1,999     | )          | (869      | )          | (2,892                 | )          |
| Net loss applicable to common shareholders              |       | (5,728    | )          | (1,999     | )          | (869      | )          | (6,892                 | )          |
| Basic & diluted net loss per  common share (1) |       | (0.05     | )          | (0.01      | )          | (0.01     | )          | (0.05                  | )          |
|                                                         |            |           |            |            |            |           |            |                        |            |  |  |  |  |

 

----

(1) Basicand diluted net income (loss) per common share is computed independently foreach quarter. Therefore, the sum of the quarters will not necessarily equal thebasic and diluted net income (loss) per common share for the full year.

 

 

67

----

 

The Company has restated its December 31,2006 Consolidated Balance Sheet and Consolidated Statement of Operations forthe year then ended to correct the classification and valuation of the Series DPreferred Warrants (see Note 3).    

 

The followingpresents the summarized unaudited quarterly financial data for the quarterended December 31, 2006, restated for the classification and valuation of theSeries D Preferred Warrants:

 
| **Quarter  Ended:**                         | ** ** | **December 31, 2006** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **(historic)****      | ** ** | **(restated)**        | ** ** |
|                                        |       |                  |       |                  |       |
| Selected Statement of Operations Data:      |       |                  |       |                  |       |
| Interest expense, net                       |       | $                     | (343,560   | )                     | $          | (760,060 | ) |
| Total other (expense) income,  net          |       | (1,023,216            | )          | (1,439,716            | )          |
| Net loss                                    |       | (2,476,681            | )          | (2,893,181            | )          |
| Accretion of preferred stock  dividends*    |       | —                |       | (22,500               | )          |
| Net loss applicable to common  shareholders |       | (6,543,477            | )          | (6,982,477            | )          |
|                                             |            |                       |            |                       |            |  |  |

----

* This amount was included in Interestexpense, net and has been reclassified on the restated financial statements.

** This quarterly financial data wasnot previously presented, in as much as the Company was a 10-KSB filer for theyear ended December 31, 2006.

 

The followingpresents the summarized unaudited quarterly balance sheet data for 2007,restated for the classification of the Series D Preferred Warrants:

 
| **Quarter Ended:**                            | ** ** | **March 31, 2007** | ** ** | **June 30, 2007** | ** ** | **September 30, 2007** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **(restated)**     | ** ** | **(restated)**    | ** ** | **(restated)**         | ** ** |
|                                          |       |               |       |              |       |                   |       |
| Selected  Balance Sheet Data:                 |       |               |       |              |       |                   |       |
| Series D preferred stock warrants             |       | $                  | 1,393,827  |              | $          | 1,393,827              |       | $ | 1,393,827 |   |
| Current liabilities                           |       | 4,692,743          |       | 4,736,047         |       | 7,717,192              |       |
| Total liabilities                             |       | 5,009,592          |       | 5,080,909         |       | 8,069,337              |       |
| Series D preferred stock warrants             |       | —             |       | —            |       | —                 |       |
| Total convertible redeemable preferred  stock |       | 11,929,561         |       | 11,929,561        |       | 11,679,561             |       |
| Accumulated deficit                           |       | (51,757,866        | )          | (54,576,027       | )          | (58,337,343            | )          |
| Total stockholders' equity (deficiency)       |       | (3,272,237         | )          | 759,859           |       | 12,625,362             |       |
|                                               |            |                    |            |                   |            |                        |            |  |  |  |

 
| **Quarter  Ended:**                           | ** ** | **March 31, 2007**                        | ** ** | **June 30, 2007**                         | ** ** | **September 30, 2007**                    | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **(as previously reported and  amended)** | ** ** | **(as previously reported and  amended)** | ** ** | **(as previously reported and  amended)** | ** ** |
|                                          |       |                                      |       |                                      |       |                                      |       |
| Selected Balance Sheet Data:                  |       |                                      |       |                                      |       |                                      |       |
| Series D preferred stock  warrants            |       | $                                         | —     |                                      | $          | —                                    |       | $ | — |   |
| Current liabilities                           |       | 3,298,916                                 |       | 3,342,220                                 |       | 6,323,365                                 |       |
| Total liabilities                             |       | 3,615,765                                 |       | 3,687,082                                 |       | 6,675,510                                 |       |
| Series D preferred stock  warrants            |       | 954,827                                   |       | 954,827                                   |       | 954,827                                   |       |
| Total convertible redeemable  preferred stock |       | 12,884,388                                |       | 12,884,388                                |       | 12,634,388                                |       |
| Accumulated deficit                           |       | (51,318,866                               | )          | (54,137,027                               | )          | (57,898,343                               | )          |
| Total stockholders' equity  (deficiency)      |       | (2,833,237                                | )          | 1,198,859                                 |       | 13,064,362                                |       |
|                                               |            |                                           |            |                                           |            |                                           |            |  |  |  |

 

 

**Note (22)Subsequent Events**

 

OnMarch 18, 2008, the Company entered into an Executive Employment Agreement(the “Agreement”) with Robert A. Gunther, the Company's Senior VicePresident and General Counsel. The Agreement provides for a three term and anannual base salary of $200,000. Mr. Gunther will receive options to purchase300,000 shares of the Company's common stock under the terms of the Company's1999 Incentive Stock Option Plan (the “Plan”), subject to the approval of theCompany's stockholders to an increase in the number of authorized shares ofcommon stock in the Plan. Options to purchase 50,000 shares of common stock willvest on July 7, 2008 and the balance will vest in 30 equal monthly installmentscommencing August 2008 and continuing in each of the next 29 months.

 

On March 14, 2008 the Companyannounced that its Chief Executive Officer, Quentin T. Kelly was resigning hisposition as CEO effective March 20, 2008; Mr. Kelly will remain as anon-executive Chairman. Mr. Kelly’s contract compensation package and stockoptions will not be affected as he will continue to provide services to the Company.

 

Asof March 7, 2008, Entech, Inc. entered into a lease for a 71,000 square footmanufacturing facility in Fortworth, TX. The lease is for a period of ten (10) yearsand provides for monthly payments that include rental expense, real estatetaxes & common area maintenance of $42,061 per month for the firstfive (5) years of the lease and payments of $46,395 in the final five (5) years.Entech’s obligations under the terms of the lease are guaranteed by theCompany.

 

68

----

 

On March 11, 2008, theCompany announced that the City Council of Ocean City, NJ has awarded theCompany a contract to build a $4 million solar system for the City which isexpected to produce nearly 550,000 kilowatt hours of energy in its first year.The project is expected to be completed in 2008.

 

On March 5, 2008, theCompany announced that it has broken ground on the 2-Megawatt solar system forDenver International Airport (DIA). The solar installation will supply 3.5million kilowatt-hours of clean energy annually for the airport and is valuedat over $13 million. The project is scheduled for completion by August 2008.

 

On February 21, 2008, theCompany announced three additions to its Board of Directors. David Gelbaum,Trustee of The Quercus Trust; David Anthony, Managing Partner of 21Ventures,and Dr. Walter Hesse, founder and leader of ENTECH, were appointed todayand joined the Board effective immediately, increasing the Board’s size from 7members to 10. Mssrs. Gelbaum and Anthony come as representatives of The QuercusTrust, which owns approximately 24.1% of the equity ownership in the Company ona fully diluted basis, following its recent investment of $35.6 million andearlier open market purchases and private stock placements with the Company. Dr. Hessejoins the Board following the successful completion of the ENTECH merger. Allare Board interim appointments to be confirmed by shareholder votes at upcomingAnnual Meetings.

 

On February 12, 2008, theCompany entered into a Stock and Warrant Purchase Agreement with The QuercusTrust pursuant to which the Company issued 20,000 shares of its Series FConvertible Preferred Stock at a price of $1,782 per share, and warrants topurchase 29 million shares of the Company’s common stock, at an exercise priceof $1.815 per share. The Series F Convertible Preferred Stock has thedesignations, preferences and rights set forth in the Certificate ofDesignation filed with the Secretary of State for the State of Delaware on February 19,2008 (the “CERTIFICATE OF DESIGNATION”). Pursuant to the Certificate ofDesignation, The Quercus Trust has the right to one vote for each share of theCompany’s common stock into which the Series F Convertible Preferred Stockis convertible. These Preferred Shares are not convertible into the Company’s commonstock until such time as additional common shares are authorized and available.

 

69

----

 

On January 28, 2008, andin connection with the merger described in Item 2.01 above, the Company enteredinto a $6 million Promissory Note (the “Note”) with The Quercus Trust. The Notebears interest at a rate of 8% per annum. The outstanding principal amount ofthe Note and all accrued and unpaid interest was repaid on February 12,2008.

 

On January 25, 2008, the Companyentered into a Stock Exchange Agreement with The Quercus Trust pursuant towhich agreement the Company issued 19,700 shares of its Series EConvertible Preferred Stock in exchange for 19,700,000 shares of the Company’scommon stock held by The Quercus Trust. The Series E Convertible PreferredStock has the designations, preferences and rights set forth in the certificateof designation filed with the Secretary of State for the State of Delaware on January 28,2008 (the “Certificate of Designation”). Pursuant to the Certificate ofDesignation, The Quercus Trust has the right to one vote for each share of theCompany’s common stock into which the Series E Convertible Preferred Stockis convertible. Each share of the Series E Convertible Preferred Stock willautomatically convert into 1,000 shares of the Company’s common stock upon theauthorization of a sufficient number of shares of common stock to allow forsuch conversion.

** **

On March 21, 2008, theCompany promoted Dr. Frank Smith from COO to Chief Executive Officer andelected him to the Board of Directors. 

 

On March 18, 2008, the Companyentered into an Executive Employment Agreement (the “Agreement”) with Robert A.Gunther, the Company's Senior Vice President and General Counsel. The Agreementprovides for a three term and an annual base salary of $200,000. Mr. Guntherwill receive options to purchase 300,000 shares of the Company's common stockunder the terms of the Company's 1999 Incentive Stock Option Plan (the"Plan"), subject to the approval of the Company's stockholders to anincrease in the number of authorized shares of common stock in the Plan.Options to purchase 50,000 shares of common stock will vest on July 7, 2008 andthe balance will vest in 30 equal monthly installments commencing August 2008and continuing in each of the next 29 months.

** **

**ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

None.

 

**ITEM 9A.CONTROLS AND PROCEDURES.**

 

**Evaluationof disclosure controls and procedures**

Under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and the Chief Financial Officer, the Company conducted an evaluation ofthe effectiveness of the design and operation of its disclosure controls andprocedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of1934), as of December 31, 2007 to ensure that information required to bedisclosed in reports filed or submitted by the Company under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms and that informationrequired to be disclosed by the Company is accumulated and communicated to theCompany’s management to allow timely decisions regarding the requireddisclosures.Based onthat evaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the Company’s disclosure controls and procedures were noteffective as of December 31, 2007 because of a material weakness in internalcontrols over financial reporting discussed below.

 

**Change ininternal controls over financial reporting**

As of March 17, 2008, therewas one change in the Company’s internal control over financial reporting (asdefined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting. The Company implemented anew general ledger system effective January 1, 2008.

 

70

----

 

**Management’s Report on InternalControl Over Financial Reporting**

Management is responsible for establishing and maintaining adequateinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934).

 

Management, including the Chief Executive Officer and Chief FinancialOfficer, assessed the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2007. In making this assessment,management applied the criteria based on the “Internal Control — IntegratedFramework” set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Company’s assessment included documenting,evaluating, and testing the design and operating effectiveness of the Company’sinternal control over financial reporting. Based upon this evaluation,management concluded that the Company’s internal controls over financialreporting were deficient.

 

A material weakness is a control deficiency, orcombination of deficiencies, in internal controls over financial reporting suchthat there is a reasonable possibility that a material misstatement of theannual or interim financial statements will not be prevented or detected on atimely basis. In connection with the preparation of our consolidated financialstatements for the year ended December 31, 2007, the Company noted thefollowing material weakness that became evident to management: 

 

·      TheCompany has insufficient resources in place to ensure timely and accuratefinancial reporting.

 

The Company intends to take a number of corrective actions to addressthe above mentioned material weakness as promptly as practicable.  These actions areexpected to include the hiring of additional internal and/or externalaccounting and financial reporting professionals. 

 

 

Amper, Politziner & Mattia, P.C. the Company’s independentregistered public accounting firm, has issued an audit report on the Company’sinternal control over financial reporting as of December 31, 2007, whichappears in the “Report of Independent Registered Public Accounting Firm”included elsewhere in this Annual Report on Form 10-K.

 

**PART III.**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT**

 

                The following table sets forththe names, ages and positions of the current executive officers and directorsof the Company. Their respective backgrounds are described following the table:

 
| **NAME**                     | ** ** | **AGE** | ** ** | **POSITION WITH THE COMPANY**                       |
|------------------------------|------------|---------|------------|-----------------------------------------------------|
| Quentin T. Kelly             |       | 73      |       | Chairman                                            |
| Dr. Frank W. Smith      |       | 49      |       | CEO                                                 |
| Larry L. Crawford            |       | 59      |       | Executive  Vice President, Chief Financial Officer  |
| Dr. Anand Rangarajan    |       | 58      |       | Executive  Vice President, Chief Technology Officer |
| Douglas L. Washington        |       | 60      |       | Executive  Vice President, Sales                    |
| James S. Brown               |       | 52      |       | Executive  Vice President, Project Finance          |
| Joseph Cygler                |       | 72      |       | Director                                            |
| Dr. Hong Hou            |       | 43      |       | Director                                            |
| Reuben F. Richards, Jr. |       | 52      |       | Director                                            |
| Lange Schermerhorn           |       | 68      |       | Director                                            |
| Dr. Davinder Sethi      |       | 60      |       | Director                                            |
| Harrison Wellford            |       | 67      |       | Director                                            |
| David Gelbaum                |       | 59      |       | Director                                            |
| David Anthony                |       | 47      |       | Director                                            |
| Dr. Walter Hesse        |       | 84      |       | Director                                            |

 

                Quentin T. Kelly foundedWorldWater, Inc. in 1984 as a consulting and R&D company and has beenChairman since that time. Mr. Kelly also served as CEO from 1984 to January 2006,and resumed his role as CEO in January 2007. Mr. Kelly was previouslyDirector of Information Services and Assistant to the President of WestinghouseElectric Corporation from 1965 to 1971, and subsequently became President ofKelly-Jordan Enterprises, Inc., a leisure products company from 1971 to1975, and then President of Pressurized Products, Inc., manufacturers andinternational marketers of specialized water systems and products, from 1976 to1984. Mr. Kelly is an alumnus of Kenyon College and holds three U.S.patents relating to water systems. He has many years of experience in businessrelating to water and power needs in the U.S. and the developing world. He hasworked on water supply and solar power projects in the U.S. and with more thana dozen governments and private contractors throughout the world. Mr. Kelly’sterm as director expires in 2009. On March 14, 2008 the Company announcedthat its Chief Executive Officer, Quentin T. Kelly was resigning his positionas CEO effective March 20, 2008; Mr. Kelly will remain as anon-executive Chairman. Mr. Kelly’s contract compensation package andstock options will not be affected as he will continue to provide services tothe Company.

 

                Dr. Frank W. Smith joinedthe Company as Chief Operating Officer in February 2007. On March 18,2008, the Company promoted Dr. Smith to Chief Executive Officer and elected himto the Board of Directors. He previously served as Vice President of Strategyand Business Development at EMCORE Corporation in 2006, where he identifiedtarget acquisitions, managed the due diligence process, and provided strategicdirection for the company. From 2004 to 2005, he was an Operations Director atJDS Uniphase, where he managed several business units between 1999 and 2004,before which he was a Program Manager at Lockheed Martin. He was also a Managerat MIT’s Lincoln Labs and has accumulated five patents under his name as wellas having published nearly two dozen articles. Dr. Smith graduated with aB.S. in Engineering & Applied Science from Yale University andcompleted a Masters and Ph.D. in Electrical Engineering & ComputerScience from MIT, with a minor in Business Administration from MIT’s SloanSchool of Business.

 

 

 

71

----

 

                Larry Crawford, Executive VicePresident and Chief Financial Officer, joined the Company in July 2006.Prior to joining the Company, Mr. Crawford served as Chief FinancialOfficer and Executive Vice President of Escala Group, Inc. from 2001 to2006. Mr. Crawford served as Chief Financial Officer of Arzee Holdings, Inc.from 1996 to 2001 and as Vice President of Finance and Chief Financial Officerof Talon, Inc., a subsidiary of Coats Viyella plc from 1987 to 1996. Mr. Crawfordis a certified public accountant and received his B.A. from Pennsylvania StateUniversity and his M.B.A. from the Lubin School of Business of Pace University.

 

                Dr. Anand Rangarajan,Executive Vice President and Chief Technology Officer, has been employed by theCompany since 1998. He is a solar and water pump specialist with over20 years experience in all aspects of the solar electric business and haspioneered the development of several proprietary solar water pumping systems,products and markets. His systems have been installed in over 20 countries. Heholds a Ph.D. in Engineering from the University of Wisconsin.

 

                Douglas L. Washington, ExecutiveVice President, Marketing and International Operations, has been employed bythe Company since 2004. He has worked at Johnson & Johnson for18 years, where he served as Worldwide Director of New BusinessDevelopment, Consumer Sector, and Director of Business Development, AdvancedMaterials Company, developing business opportunities with a variety ofgovernmental, educational and other research institutions in the United Statesand in countries in Asia, Africa and elsewhere. He attended the University ofTexas, and has had professional training at the Kellogg School of Business andthe Wharton School of Business, and has been a private consultant, specializingin biotechnology and consumer water programs.

 

                James S. Brown, Executive VicePresident, Project Finance, joined the Company in May 2004. Mr. Brownhas extensive financial experience in the energy industry. From August 2002until May 2004, Mr. Brown served as an independent financialconsultant. From October 1999 until August 2002, he was Director ofStructured Finance, Americas, for Energy Wholesale Operations in Houston,Texas. Prior to that, Mr. Brown served as a Project Finance Director forEl Paso Energy International. Mr. Brown has also held executive financepositions with Westmoreland Energy Inc. and AMVEST Corporation. Mr. Browngraduated from Georgetown University with a degree in Accounting and holds anMBA from Texas A&M University.

 

                Joseph Cygler has been aDirector of the Company since January 1997, and a former Vice President ofMarketing and Executive Vice-President. He has been Chief Executive Officer ofthe CE&O Group, an organization assisting companies in operationsmanagement, since 1986. Previously he was an executive at Kepner-Tregoe, Inc.,an international business consulting firm, from 1976 to 1986, an executive withHoneywell Information Systems from 1964 to 1976, and a marketing representativewith International Business Machines from 1961 to 1964. Mr. Cygler has aBS in Engineering from the U.S. Military Academy at West Point. Mr. Cygler’sterm as director expires in 2009.

 

                Dr. Hong Hou has been aDirector of the Company since January 2007. Dr. Hou is also a memberof the board of directors of EMCORE where he has served in a variety ofleadership roles since 1998. He currently is President, Chief Operating Officerof EMCORE Corp. He co-started EMCORE’s Photovoltaics Division, and subsequentlymanaged the Fiber Optics Division. He was Executive Vice President of BusinessDevelopment and Product Strategy before becoming Vice President and GeneralManager of EMCORE’s Ortel Division. From 1995 to 1998 he was a Principal Memberof the Technical Staff at Sandia National Laboratories, a Department of Energyweapons research laboratory managed by Lockheed Martin. Prior to that, heserved with AT&T Bell Laboratories, engaging in research on high-speedoptoelectronic devices. He holds a Ph.D. in electrical engineering from theUniversity of California at San Diego. He has published over 150 journalarticles and holds seven U.S. patents. Pursuant to the terms of the InvestmentAgreement between the Company and EMCORE (see “Certain Relationships andRelated Transactions—EMCORE Investment in the Company” below), EMCORE isentitled to nominate two directors to the Board. Mr. Hou is one suchdirector. Mr. Hou’s term as director expires in 2008.

 

                Reuben F. Richards, Jr. hasbeen a Director of the Company since January 2007. Mr. Richards, whojoined EMCORE Corporation in October 1995 as its President and ChiefOperating Officer, and has been Chief Executive Officer since December 1996.Mr. Richards has been a director of EMCORE since May 1995. From December 1993to December 1995, he has been a member and President of Jesup &Lamont Merchant Partners. From 1991-1993, Mr. Richards was a principalwith Hauser, Richards & Co., a firm engaged in corporate restructuringand management turnarounds. From 1986 to 1991, Mr. Richards was a Directorat Prudential-Bache Capital Funding in its Investment Banking Division. Mr. Richardshas served on the Boards of the University of New Mexico School of Engineering,Sandia National Laboratories External Review Panel and was a member of theboard of directors of GELcore, EMCORE’s joint venture with General Electric.Pursuant to the terms of the Investment Agreement between the Company andEMCORE (see “Certain Relationships and Related Transactions—EMCORE Investmentin the Company” below), EMCORE is entitled to nominate two directors to theBoard. Mr. Richards is one such director.

 

                Lange Schermerhorn has served asa Director of the Company since 2001. She is a retired U.S. Ambassador toDjibouti, is an economist who has spent 30 years in the Foreign Serviceand has covered the globe as a senior foreign officer in such places asBrussels, where she was Deputy Chief of Mission, with specific emphasis oneconomics relating to NATO and EU. Ms. Schermerhorn 

 

 

72

----

 

 

hasalso had significant Foreign Service experience in Sri Lanka, Vietnam, Tehran,London and Washington D.C. Ms. Schermerhorn’s education and relatedexperience include Mt. Holyoke College (B.A. 1961), Harvard Business School,and National War College.

 

                Dr. Davinder Sethi hasserved as a Director of the Company since 2000. He has been an independentadvisor in the fields of information technology and finance for more than fifteenyears. He has served as Chairman and Chief Executive Officer of iPing, Inc.,and was a Director and Senior Advisor to Barclays de Zoete Wedd in mergers andIn addition, Dr. Sethi spent seven years at Bell Laboratories inoperations research and communications network planning and seven years incorporate finance at AT&T. Dr. Sethi holds a Ph.D. and M.S. inOperations Research, Economics and Statistics from the University ofCalifornia, Berkeley, and is a graduate of the Executive Management Program atPenn State. Dr. Sethi’s term as director expires in 2008.

 

                W. Harrison Wellford, Esq.became a Director of the Company in January 2007 and has served as theCompany’s legal counsel for energy matters. He is a recently retired partnerfrom the firm of Latham & Watkins LLP, where he practiced in the areasof energy, mergers and acquisitions, and project finance law from 1991 to 2006.He currently serves as either a board member or advisor to several privatecompanies in the energy field. Mr. Wellford served as the ExecutiveAssociate Director of the President’s Office of Management and Budget from 1977to 1981. He also has held several senior management positions in Presidentialtransitions since 1976. In the 1980’s Mr. Wellford was a leading advocatefor the creation of the competitive power industry and a founder of the largesttrade association for independent power companies. Mr. Wellford earned hisB.A. from Davidson College, his M.A. from Cambridge University, his Ph.D. inGovernment from Harvard University and his J.D. from Georgetown University.

 

                David Gelbaumgraduated from the University of California, Irvine, in 1972 and worked for anumber of years doing quantitative modeling of stock price returns andderivative securities from 1972 until 2002. As Trustee of The Quercus Trust, Mr. Gelbaum is currently investedalmost exclusively in alternative energy companies, both public and private.

 

                David Anthony,Managing Partner of 21Ventures, is an experienced entrepreneur, venturecapitalist, and educator.  Mr. Anthonysits on the board of portfolio companies: Agent Video Intelligence, OrionSolar, BioPetroClean, Cell2Bet, Juice Wireless, Visioneered Image Systems, andVOIP Logic.  David is an AdjunctProfessor at the New York Academy of Sciences (NYAS) and also serves as entrepreneur-in-residenceat the University of Alabama Birmingham School of Business.  In 1995, David launched NotoriousEntertainment, a developer of multimedia brands which he later sold in 1988 toentertainment mogul Sean "Puff Daddy" Combs, and ran the company fortwo subsequent years.  David received hisMBA from The Tuck School of Business at Dartmouth College in 1989 and a BA ineconomics from George Washington University in 1982.  

 

                Dr. Hesse isformer CEO and Board Chairman of ENTECH, Inc. A wholly owned subsidiary of WorldWater & Solar Technologies Corp.,ENTECH is a high technology solar energy company with products of concentratingphotovoltaic systems.  Dr. Hesse has beeninvolved in high technology research and development work for more than 60 yearsand was a twelve year Board Member and served as Chairman and President of theSolar Energy Industry Association (SEIA). He served on the Advisory Board of the Electrical Engineering Departmentof the University of Texas at Arlington and the advisory board of the U.S.Solar Energy Research Institute.  He wasa member of the Scientific Panel to the Congressional House Committee onScience and Astronautics, a member of the Advisory Board for Joint Task ForceTwo of the Joint Chiefs of Staff, a member of the Texas Commission on AtomicEnergy, and was Chairman of the Board of the Aerospace Education Foundation ofthe Air Force Association.  Dr. Hesseholds a PhD (1951), MSME (1948), BSME (1944), all from Purdue University; pluscourses at the U.S. Naval Academy where he was Commissioned Ensign (1944),USNR;  U.S.N. Submarine OfficersSchool;  University of California,Nuclear Engineering;  and Sandia NationalLaboratories, Nuclear Weapons.

 

**MEETING ATTENDANCE**

 

Thebusiness of the Company is managed under the direction of the board. The boardmeets during the Company’s fiscal year to review significant developmentsaffecting the Company and to act on matters requiring board approval. The boardheld seven meetings and acted by unanimous written consent numerous timesduring the fiscal year ended December 31, 2007. All of the directorsattended the meetings held during the year. While the Company has no policywith regard to board members’ attendance at our annual meetings ofstockholders, all of our incumbent directors attended the 2007 annual meeting.

 

                The Board has determined that,except for Mr. Kelly, who serves as the Chairman and Chief ExecutiveOfficer, and Mr. Reuben F. Richards Jr. and Dr. Hong Hou who areofficers of EMCORE Corp., the holder of our Series D Preferred Stock, eachof our current directors is independent.

 

**COMMITTEES OF THE BOARD OF DIRECTORS**

 

                The board of directors has astanding Audit Committee and a standing Compensation Committee. The AuditCommittee and Compensation Committee met following the end of each of thefiscal quarters in 2007 and 2006.

 

                The Audit Committee of theCompany’s Board is comprised of Mr. Joseph Cygler, Dr. Davinder Sethiand Ms. Lange Schermerhorn, all of whom are independent as defined by thelisting standards of NASDAQ. The board has determined that Dr. Sethi is anaudit committee financial expert within the meaning of regulations adopted bythe SEC as a result of his accounting and related financial managementexpertise and experience. The main function of the Audit Committee is to ensurethat effective accounting policies are implemented and that internal controlsare in place to deter fraud, anticipate financial risks and promote accurateand timely disclosure of financial and other material information to the publicmarkets, the board and stockholders. The Audit Committee also reviews andrecommends to the board approval of the annual financial statements andprovides a forum, independent of management, where the Company’s auditors cancommunicate any issues of concern. In performing all of these functions, theAudit Committee acts only in an oversight capacity and necessarily relies onthe work and assurances of the Company’s management and independent auditors,which, in their report, express an opinion on the conformity of the Company’sannual financial statements to generally accepted accounting principles.

 

                The Audit Committee has adopteda formal, written charter, which has been approved by the full board and whichspecifies the scope of the Audit Committee’s responsibilities, and how it shouldcarry them out.

 

                Mr. Cygler, Dr. Sethiand Ms. Schermerhorn comprise the Compensation Committee. The CompensationCommittee makes recommendations to the board regarding the executive andemployee compensation programs of our company. Committee makes recommendationsto the board regarding the executive and employee compensation programs of ourcompany.

 

                The Compensation Committee doesnot have a written charter.

 

 

73

----

 

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

                The following table summarizesthe compensation paid to the persons who held the position of Chief ExecutiveOfficer and Chief Financial Officer during fiscal years 2006 and 2007 and ourother three most highly compensated executive officers at the end of fiscalyears 2006 and 2007. The determination of our most highly compensated executiveofficers is based on total compensation for fiscal years 2006 and 2007 ascalculated in the “Summary Compensation Table” shown below.

 

**SUMMARY COMPENSATION TABLE**

 

| **Name &  Principal Position**    | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in   Pension Value   and   Nonqualified   Deferred   Compensation   Earnings ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|--------------------------------------------|------------|----------|------------|-----------------|------------|----------------|------------|------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|
| Quentin  T. Kelly  Chairman & CEO |       | 2006     |       | 160,000         |       | 50,000         |       | —                 |       | —                  |       | —                                            |       | —                                                                                      |       | 58,000                           | (1)        | 268,000        |       |
|                                       | 2007       |     | 250,000    |            | 59,750     |           | —     |                   | 270,000    | (2)                     | —     |                                              | 110,072    | (5)                                                                                         | 58,000     | (1)                              | 727,822    |           |
| Larry Crawford   EVP, CFO                  |       | 2006     |       | 71,423          |       | 11,093         |       | —                 |       | 51,000                  | (3)        | —                                            |       | —                                                                                      |       | —                           |       | 184,516        |       |
|                                       | 2007       |     | 175,000    |            | 29,093     |           | —     |                   | —     |                    | —     |                                              | —     |                                                                                        | 9,000      | (4)                              | 213,093    |           |
| Dr. Frank W. Smith   EVP, COO         |       | 2006     |       | —          |       | —         |       | —                 |       | —                  |       | —                                            |       | —                                                                                      |       | —                           |       | —         |       |
|                                       | 2007       |     | 178,030    |            | 27,865     |           | —     |                   | 52,000     | (6)                     | —     |                                              | —     |                                                                                        | —     |                             | 349,895    |           |
| Dr. Anand Rangarajan   EVP, CTO       |       | 2006     |       | 123,738         |       | 17,748         |       | —                 |       | —                  |       | —                                            |       | —                                                                                      |       | 9,000                            | (4)        | 150,486        |       |
|                                       | 2007       |     | 175,000    |            | 24,498     |           | —     |                   | —     |                    | —     |                                              | —     |                                                                                        | 9,000      | (4)                              | 208,498    |           |
| James S. Brown   EVP, Project Finance      |       | 2006     |       | 131,625         |       | 16,269         |       | —                 |       | —                  |       | —                                            |       | —                                                                                      |       | —                           |       | 147,894        |       |
|                                       | 2007       |     | 136,250    |            | 21,399     |           | —     |                   | —     |                    | —     |                                              | —     |                                                                                        | —     |                             | 157,649    |           |

 

----

(1)                                  Represents the premium paidfor a life insurance policy, the beneficiary of which is Mr. Kelly’s wife($46,000) plus use of the Company vehicle ($12,000).

 

(2)                                  120,000 optionsgranted 12/31/2005 at exercise price at date of grant; options vest overone-year.  5,000,000 options granted at1/1/07 at exercise price at date of grant; options vest over 5 years. FASB 123Rexpense for 2006 and 2007 was $37,200 and $270,000, respectively.

 

(3)                                  600,000 options granted 7/10/2006in connection with employment contract; options were granted at the marketprice at date of grant. No options vested during the year ended December 31,2006. 100,000 options vested on 1/10/2007; the remainder vest monthly through7/10/2009. FASB 123R expense for 2006 was $0.00; FASB 123R expense for 2007 was$34,000.

 

(4)                                  Represents $9,000 forCompany provided vehicle.

 

(5)                                  Representsdeferred compensation of $110,072 earned in prior years and paid in 2007.

 

(6)                                  600,000 optionsgranted 2/11/07 in connection with employment contract; options were granted atthe market price at date of grant. 151,723 options vested through the year ended December 31, 2007;FASB 123R expense for 2007 was $44,000.

 
| ** ** | ** ** | ** **     | ** ** | **Estimated future payouts under non-equity incentive****plan  awards** | ** ** | **Estimated future payouts under equity incentive plan****awards** | ** ** | **All other stock awards: Number of  shares of stock or units (#)  ** | ** ** | **All other option awards: Number of securities underlying options (#) ** | ** ** | **Exercise or base price of option awards ($/Sh) ** | ** ** | **Grant****date****fair****value****of****stock  and option awards ** | ** ** |
|------------|------------|----------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** ** | ** ** |
| ** ** | ** ** |
| **Name**   | ** ** | **Grant date** | ** ** | **Threshold ($)**                                                       | ** ** | **Target($)**                                                      | ** ** | **Maximum ($)**                                                            | ** ** | **Threshold (#)**                                                              | ** ** | **Target(#)**                                            | ** ** | **Maximum (#)**                                                            |       |   |   |   |   |
|       |       |           |       |                                                                    |       |                                                               |       |                                                                       |       |                                                                           |       |                                                     |       |                                                                       |       |   |   |   |   |   |   |   |   |

 

 

 

The Company does not issue grants of plan-basedawards.

 

 

74

----

 

 

**EQUITY COMPENSATION PLAN INFORMATION**

 

                The following table containsinformation regarding the Company’s Equity Compensation Plans as of December 31,2007:

 
| **Plan Category**                                          | ** ** | **(A)  Number of Securities to be  Issued Upon Exercise of  Outstanding Warrants,  Options and Rights** | ** ** | **(B)  Weighted Average  Exercise Price of  Outstanding Warrants,  Options and Rights** | ** ** | **(C)  Number of Securities Remaining  Available for Future Issuance  Under Equity Compensation Plans  (excluding Securities Reflected in  Column (A))** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security holders(1)  |       | 14,589,417                                                                                              |       | $                                                                                       | 0.33       |                                                                                                                                                          | 0          |   |
| Equity compensation plans not approved by security holders |       | —                                                                                                  |       | —                                                                                  |       |                                                                                                                                                          |       |
| Total                                                      |       | 14,589,417                                                                                              |       | $                                                                                       | 0.33       |                                                                                                                                                          | 0          |   |

 

----

(1)           The approved plan is the Amended 1999WorldWater Corp. Incentive Stock Option Plan.

 

**OPTION GRANTS FOR YEAR ENDED DECEMBER 31, 2007**

**(INDIVIDUAL GRANTS IN FISCAL YEAR)**

 
| **Name**                      | ** ** | **Number of  Securities  Underlying Options** | ** ** | **Percent of Total  Options Granted  to Employees** | ** ** | **Exercise Price  Per Share(1)** | ** ** | **Expiration  Date** | ** ** |
|-------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|----------------------|------------|
| Joseph Cygler                 |       | 100,000                                       |       | 1                                                   | %          | $                                | 0.44       |                 | 1/16/2017  |   |
| Dr. Hong Hou             |       | 100,000                                       |       | 1                                                   | %          | 0.44                             |       | 1/16/2017            |       |
| Quentin T. Kelly              |       | 5,000,000                                     |       | 66                                                  | %          | 0.39                             |       | 1/18/2017            |       |
| Reuben F.  Richards, Jr. |       | 100,000                                       |       | 1                                                   | %          | 0.44                             |       | 1/16/2017            |       |
| Lange Schermerhorn            |       | 100,000                                       |       | 1                                                   | %          | 0.44                             |       | 1/16/2017            |       |
| Dr. Davinder Sethi       |       | 100,000                                       |       | 1                                                   | %          | 0.44                             |       | 1/16/2017            |       |
| Dr. Frank W. Smith       |       | 600,000                                       |       | 8                                                   | %          | 0.39                             |       | 2/11/2017            |       |
| Harrison  Wellford, Esq. |       | 100,000                                       |       | 1                                                   | %          | 0.44                             |       | 1/16/2017            |       |
|                               |            |                                               |            |                                                     |            |                                  |            |                      |            |  |

 

----

(1)                                  All grants of options havebeen made with exercise prices equal to fair value at date of grant. Theamounts shown represent an average share price for the shares indicated.

 

 
| **Name**                                    | ** **                                                             | **Option awards** | ** **                                                                  | **Stock awards** | ** **                                                                                            |
|---------------------------------------------|------------------------------------------------------------------------|-------------------|-----------------------------------------------------------------------------|------------------|-------------------------------------------------------------------------------------------------------|
| ** **                                  | **Number of securities underlying unexercised options(#) exercisable** | ** **        | **Number of****securities underlying unexercised options(#) unexercisable** | ** **       | **Equity****incentive plan awards: number of securities underlying unexercised unearned options (#)** | ** ** | **Option****exercise price($)** | ** ** | **Option****expiration date** | ** ** | **Number of shares  or units of stock    that have not vested (#)** | ** ** | **Market****value of shares or units of stock that have not vested (#)** | ** ** | **Equity****incentive plan awards: number of unearned shares, units or other rights that   have not vested (#)** | ** ** | **Equityincentive planawards: market or payout value of unearned shares, units or other rights that have not vested ($)** | ** ** |
| Quentin T. Kelly,  Chairman & CEO: |                                                                   |
|                                        |                                                                   | 120,000           |                                                                        |             |                                                                                                  |   |   | 0.34 |   | 6/29/08 |   |   |   |   |   |   |   |   |   |

 

 

75

----

 

 
|                                    |   | 300,000   |   |      |   |   |   | 0.30   |   | 8/24/09  |   |   |   |   |   |   |   |   |   |
|-----------------------------------------|--------|-----------|--------|-----------|--------|--------|--------|--------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                    |   | 1,250,000 |   |      |   |   |   | 0.15   |   | 12/30/11 |   |   |   |   |   |   |   |   |   |
|                                    |   | 60,000    |   |      |   |   |   | 0.34   |   | 12/30/11 |   |   |   |   |   |   |   |   |   |
|                                    |   | 60,000    |   |      |   |   |   | 0.15   |   | 12/30/12 |   |   |   |   |   |   |   |   |   |
|                                    |   | 30,000    |   |      |   |   |   | 0.15   |   | 6/30/13  |   |   |   |   |   |   |   |   |   |
|                                    |   | 30,000    |   |      |   |   |   | 0.15   |   | 9/30/13  |   |   |   |   |   |   |   |   |   |
|                                    |   | 60,000    |   |      |   |   |   | 0.15   |   | 12/30/12 |   |   |   |   |   |   |   |   |   |
|                                    |   | 30,000    |   |      |   |   |   | 0.15   |   | 6/30/14  |   |   |   |   |   |   |   |   |   |
|                                    |   | 150,000   |   |      |   |   |   | 0.28   |   | 12/30/14 |   |   |   |   |   |   |   |   |   |
|                                    |   | 120,000   |   |      |   |   |   | 0.31   |   | 12/30/15 |   |   |   |   |   |   |   |   |   |
|                                    |   | 1,000,000 |   | 4,000,000 |   |   |   | 0.39   |   | 12/31/16 |   |   |   |   |   |   |   |   |   |
|                                    |   |      |   |      |   |   |   |   |   |     |   |   |   |   |   |   |   |   |   |
| Larry L. Crawford,  EVP & CFO: |   |
|                                    |   | 258,333   |   | 316,667   |   |   |   | 0.27   |   | 7/9/16   |   |   |   |   |   |   |   |   |   |
|                                    |   |      |   |      |   |   |   |   |   |     |   |   |   |   |   |   |   |   |   |
| Frank Smith,  EVP & COO:       |   |
|                                    |   | 151,723   |   | 448,277   |   |   |   | 0.39   |   | 2/11/17  |   |   |   |   |   |   |   |   |   |
|                                    |   |      |   |      |   |   |   |   |   |     |   |   |   |   |   |   |   |   |   |
| Anand Rangarajan,  EVP & CTO:  |   |
|                                    |   | 175,000   |   |      |   |   |   | 0.28   |   | 12/30/14 |   |   |   |   |   |   |   |   |   |
|                                    |   |      |   |      |   |   |   |   |   |     |   |   |   |   |   |   |   |   |   |
| James S. Brown, EVP,  Project Finance:  |   |
|                                    |   | 50,000    |   |      |   |   |   | 0.38   |   | 6/18/14  |   |   |   |   |   |   |   |   |   |
|                                    |   | 571,430   |   |      |   |   |   | 0.28   |   | 12/30/14 |   |   |   |   |   |   |   |   |   |

 

 

**Aggregated Option Exercises**

**For Fiscal Year Ended December 31, 2007**

**And Year-End Option Values(1)**

** **
| **Name**                                    | ** **                                    | **Option awards** | ** **                            | **Stock awards** | ** **                                      |
|---------------------------------------------|-----------------------------------------------|-------------------|---------------------------------------|------------------|-------------------------------------------------|
| ** **                                  | **Number of shares acquired on exercise (#)** | ** **        | **Value****realized on exercise ($)** | ** **       | **Number of shares****acquired on vesting (#)** | ** ** | **Value****realized on vesting ($)** | ** ** |
| Quentin T. Kelly,  Chairman & CEO: |                                          |
|                                        |                                          | 37,975            |                                  | 20,886           |                                            |   |   |   |   |
| Larry L. Crawford,  EVP & CFO:     |                                          |
|                                        |                                          | 25,000            |                                  | 25,000           |                                            |   |   |   |   |
| Anand Rangarajan,  EVP & CTO:      |                                          |
|                                        |                                          | 939,000           |                                  | 888,340          |                                            |   |   |   |   |
| James S. Brown, EVP,  Project Finance:      |                                          |
|                                        |                                          | 325,000           |                                  | 487,200          |                                            |   |   |   |   |

 

 

76

----

 

 
| ** **                    | ** ** | **Shares  Acquired on** | ** ** | **Value**        | ** ** | **Number of Securities  Underlying Unexercised  Options at Fiscal Year-End  (#)(2)** | ** ** | **Value of Unexercised  In-the-Money Options at  Fiscal Year-End  ($)(3)** | ** ** |
|-------------------------------|------------|-------------------------|------------|------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Name**                      | ** ** | **Exercise**            | ** ** | **Realized ($)** | ** ** | **Exercisable**                                                                      | ** ** | **Unexercisable**                                                          | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Quentin T. Kelly              |       | 37,975                  |       | 20,886           |       | 3,210,000                                                                            |       | 4,000,000                                                                  |       | 5,452,200 |   | 6,280,000 |   |
| James S. Farrin               |       | 1,000,000               |       | 1,315,000        |       | —                                                                               |       | —                                                                     |       | — |   | — |   |
| Larry L. Crawford             |       | 25,000                  |       | 25,000           |       | 266,667                                                                              |       | 308,333                                                                    |       | 436,583 |   | 535,167 |   |
| Dr. Anand Rangarajan     |       | 939,000                 |       | 883,340          |       | 175,000                                                                              |       | —                                                                     |       | 294,000 |   | — |   |
| James S. Brown                |       | 325,000                 |       | 487,200          |       | 621,430                                                                              |       | —                                                                     |       | 1,039,002 |   | — |   |
| Joseph Cygler                 |       | 4,300                   |       | 5,891            |       | 750,000                                                                              |       | —                                                                     |       | 1,266,000 |   | — |   |
| Dr. Hong Hou             |       | —                  |       | 0                |       | 100,000                                                                              |       | —                                                                     |       | 152,000 |   | — |   |
| Reuben F. Richards            |       | —                  |       | 0                |       | 100,000                                                                              |       | —                                                                     |       | 152,000 |   | — |   |
| Lange Schermerhorn            |       | —                  |       | 0                |       | 400,000                                                                              |       | —                                                                     |       | 668,000 |   | — |   |
| Dr. Davinder Sethi       |       | 262,600                 |       | 354,474          |       | 450,000                                                                              |       | —                                                                     |       | 768,000 |   | — |   |
| Dr. Frank W. Smith       |       | 0                       |       | 0                |       | 151,723                                                                              |       | 448,277                                                                    |       | 238,205 |   | 703,795 |   |
| Harrison  Wellford, Esq. |       | 0                       |       | 0                |       | 100,000                                                                              |       | —                                                                     |       | 152,000 |   | — |   |

 

----

(1)                                  No stock appreciation rightsare held by the named Executive Officer.

 

(2)                                  The total number ofunexercised options held as of December 31, 2007, separated between thoseoptions that were exercisable and those options that were not exercisable onthat date.

 

(3)                                  For all unexercised optionsheld as of December 31, 2007, the aggregate dollar value of the excess ofthe market value of the stock underlying those options over the exercise priceof those unexercised options. As required, the price used to calculate thesefigures was the closing sale price of the common stock at year’s end, which was$1.96 per share on December 31, 2007.

 

**Pension Benefits**

 
| **Name** | ** ** | **Plan name** | ** ** | **Number of years****credited service (#)** | ** ** | **Present value of accumulated benefit ($)** | ** ** | **Payments during****last   fiscal year ($)** | ** ** |
|----------|------------|---------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|
|     |       |          |       |                                        |       |                                         |       |                                          |       |

 

 

 

TheCompany does not have a Pension Plan.

 

**Nonqualified Deferred Compensation**

 
| **Name** | ** ** | **Executive****contributionsin last FY ($)** | ** ** | **Registrant****contributions in  last FY ($)** | ** ** | **Aggregate earnings in   last FY ($)** | ** ** | **Aggregate****withdrawals/distributions ($)** | ** ** | **Aggregate   balance at last FYE ($)** | ** ** |
|----------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------|------------|
|     |       |                                         |       |                                            |       |                                    |       |                                           |       |                                    |       |

 

 

 

TheCompany does not have a Nonqualified Deferred Compensation Plan.

 

77

----

 

**DIRECTOR COMPENSATION**

 

                During fiscal year 2007, eachnon-employee director received $1,000 for each committee meeting held otherthan in conjunction with a board meeting, other than the Chairs of the Auditand Compensation committees who each received $2,000 and $1,500 per meeting.Each non-employee director also received option grants to purchase 100,000shares of the Company’s common stock in fiscal year 2007. Directors who areemployees of WorldWater do not receive any compensation for their service asdirectors.

 

                The following table sets forthinformation regarding compensation paid to current and former non-employeedirectors of the Company for fiscal year 2007.

 
| **Name**                | ** ** | **Fees earned  or paid incash ($) (1)** | ** ** | **Stock****awards($)** | ** ** | **Optionawards($) (2)  (3) (5)** | ** ** | **Non-equity  incentive  plancompensation($)** | ** ** | **Change in****pension valueand nonqualifieddeferredcompensationearnings** | ** ** | **All other  compensation ($)** | ** ** | **Total ($)** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|------------------------|------------|---------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------|------------|---------------|------------|
| Joseph Cygler           |       | 22,000                                  |       |                   |       | 32,000                                |       |                                           |       |                                                                       |       |                            |       | 54,000        |       |
| Dr. Hong Hou (4)   |       | 12,000                                  |       |                   |       | 32,000                                |       |                                           |       |                                                                       |       |                            |       | 44,000        |       |
| Reuben Richards (4)     |       | 12,000                                  |       |                   |       | 32,000                                |       |                                           |       |                                                                       |       |                            |       | 44,000        |       |
| Lange Schermerhorn      |       | 20,000                                  |       |                   |       | 32,000                                |       |                                           |       |                                                                       |       |                            |       | 52,000        |       |
| Dr. Davinder Sethi |       | 24,000                                  |       |                   |       | 32,000                                |       |                                           |       |                                                                       |       |                            |       | 56,000        |       |
| Harrison Wellford (4)   |       | 12,000                                  |       |                   |       | 32,000                                |       |                                           |       |                                                                       |       |                            |       | 44,000        |       |

 

 
| **Name**                         | ** ** | **Fees Earned or  Paid in Cash ($)(1)** | ** ** | **Option  Awards ($)(2)(3)(5)** | ** ** | **Total ($)** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|---------------|------------|
| Joseph Cygler                    |       | $                                            | 22,000     |                                 | $          | 32,000        |       | $ | 54,000 |   |
| Dr. Hong Hou(4)             |       | $                                            | 12,000     |                                 | $          | 32,000        |       | $ | 44,000 |   |
| Reuben F.  Richards, Jr.(4) |       | $                                            | 12,000     |                                 | $          | 32,000        |       | $ | 44,000 |   |
| Lange Schermerhorn               |       | $                                            | 20,000     |                                 | $          | 32,000        |       | $ | 52,000 |   |
| Dr. Davinder Sethi          |       | $                                            | 24,000     |                                 | $          | 32,000        |       | $ | 56,000 |   |
| W. Harrison Wellford(4)          |       | $                                            | 12,000     |                                 | $          | 32,000        |       | $ | 44,000 |   |

 

----

 

(1)                                  Includes fees earned infiscal year 2007.

 

(2)                                  The options vest and becomeexercisable on the date of the grant. The amounts shown do not reflectcompensation actually received by each director. The amounts shown representexpense recognized in the Company’s fiscal year 2007 consolidated financialstatements in accordance with FAS 123(R), excluding any impact of assumedforfeiture rates.

 

(3)                                  As of December 31,2007, each director then in office or former director had the following numberof options outstanding: Joseph Cygler, 750,000; Dr. Hong Hou, 100,000;Reuben F. Richards, Jr., 100,000; Lange Schermerhorn, 400,000; Dr. DavinderSethi, 450,000; and W. Harrison Wellford, 100,000.

 

(4)                                  Messers. Hou, Richards, andWellford were approved as directors of the Company on January 17, 2007.

 

(5)                                  A 100,000 shares optiongrant for services, at a price of $0.44 per share, was issued on January 17,2007 to each of the directors. The Black-Scholes method was utilized todetermine the Company expense.

 

 

 

78

----

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

**SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table setsforth the number and percentage of the shares of the registrant’sCommon stock owned as of December 31, 2007 by all persons known tothe registrant who own more than 5% of the outstanding number of such shares,by all directors of the registrant, and by all officers and directors of theregistrant as a group. Unless otherwise indicated, each of the stockholders hassole voting and investment power with respect to the shares beneficially owned.

 
| **Name and Address  of Beneficial Owner(1)**  | ** ** | **Number of Shares  Beneficially  Owned(1)** | ** ** | **Percent  of Class** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------|------------|
| EMCORE Corporation  145 Belmont Drive  Somerset, New Jersey 08873 |       | 53,979,008                                             | (2)        | 22.2                       | %          |
| Quercus Trust  2309 Santiago Drive  Newport Beach CA 92660        |       | 38,092,500                                             | (3)        | 19.2                       | %          |
| Quentin T. Kelly                                                  |       | 7,207,000                                              | (4)        | 3.7                        | %          |
| Dr. Frank Smith                                              |       | 186,208                                                | (5)        | 0.1                        | %          |
| Dr. Anand Rangarajan                                         |       | 175,000                                                | (6)        | *                          | %          |
| Larry L. Crawford                                                 |       | 316,666                                                | (7)        | 0.2                        | %          |
| James S. Brown                                                    |       | 621,430                                                | (8)        | 0.3                        | %          |
| Joseph Cygler                                                     |       | 1,034,300                                              | (9)        | 0.5                        | %          |
| Dr. Davinder Sethi                                           |       | 457,500                                                | (10)       | 0.2                        | %          |
| Lange Schermerhorn                                                |       | 610,000                                                | (11)       | 0.3                        | %          |
| Dr. Hong Hou                                                 |       | 100,000                                                | (12)       | *                          | %          |
| Reuben Richards                                                   |       | 100,000                                                | (13)       | *                          | %          |
| Harrison Wellford                                                 |       | 1,194,999                                              | (14)       | 0.6                        | %          |
| All Directors and Officers as a group (11 persons)                |       | 12,003,100                                             |       | 6.1                        | %          |

 

----

                * Percent of ownership is less than 0.1%

 

(1) For purposes ofthis table, a person or group of persons is deemed to have “beneficialownership” of any shares of common stock that such person has the right toacquire within sixty days of December 31, 2007. For purposes of computingthe percentage of outstanding shares of common stock held by each person orgroup of persons named above, any security which such person or persons has orhave the right to acquire within such a date is deemed to be outstanding but isnot deemed to be outstanding for the purpose of computing the percentageownership of any other person. Except community property laws, the Companybelieves, based on information supplied by such persons, that the persons namedin this table have sole voting and investment power with respect to all sharesof common stock which they beneficially own.

 

79

----

 

(2) This amountincludes preferred stock convertible into 48,928,571 shares of common stock andwarrants to purchase 5,050,437 shares of common stock as of December 31,2007 representing the securities obtained under the first of two tranchescontemplated under the terms of an Investment Agreement, dated November 29,2006, between the Company and EMCORE Corporation.

 

(3) This amountincludes 29,092,500 shares of common stock owned as of December 31, 2007and warrants to purchase 9,000,000 shares of the Company’s common stock.

 

(4) This amountincludes 2,363,940 shares of common stock owned as of December 31, 2007;606,060 shares owned by CFK Limited Partnership and QTK Limited Partnershipwhich were formed for the benefit of Mr. Kelly’s children; 27,000 warrantsto purchase common stock; and options vesting within 60 days of December 31,2007 to purchase 4,210,000 shares of the Company’s common stock as of December 31,2007.

 

(5) This amountincludes options vesting within sixty days of December 31, 2007 topurchase 186,205 shares of the Company’s common stock as of December 31,2007.

 

(6) This amountrepresents options vesting within sixty days of December 31, 2007 topurchase 175,000 shares of the Company’s common stock.

 

(7) This amountrepresents 25,000 shares of common stock and options vesting within sixty daysof December 31, 2007 to purchase 291,666 shares of the Company’s commonstock.

 

(8) This amountincludes options vesting within sixty days of December 31, 2007 topurchase 621,430 shares of the Company’s common stock.

 

(9) This amountincludes 284,300 shares of common stock and options vesting within sixty daysof December 31, 2007 to purchase 750,000 shares of the Company’s commonstock.

 

(10) This amountrepresents options vesting within sixty days of December 31, 2007 topurchase 450,000 shares of common stock and warrants to purchase 7,500 sharesof the Company’s common stock.

 

(11) This amountincludes 210,000 shares of common stock and options vesting within sixty daysof December 31, 2007 to purchase 400,000 shares of the Company’s commonstock.

 

(12) This amountincludes options vesting within sixty days of December 31, 2007 topurchase 100,000 shares of the Company’s common stock as of December 31,2007.

 

(13) This amountincludes options vesting within sixty days of December 31, 2007 topurchase 100,000 shares of the Company’s common stock as of December 31,2007.

 

(14) This amountincludes 83,333 shares of common stock, 1,011,666 warrants to purchase commonstock, and options vesting within sixty days of December 31, 2007 topurchase 100,000 shares of the Company’s common stock as of December 31,2007.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

                The Company had outstandingnotes payable owed to directors, officers and employees of the Company as of December 31,2007 and 2006 as follows:

 
| ** **                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                   |       | $        | —     |     | $          | 3,000 |   |
| Officers and employees                      |       | —   |       | 32,748   |       |
| Total                                       |       | —   |       | 35,748   |       |
| Less current maturities                     |       | —   |       | (35,748  | )          |
| Total long term note payable, related party |       | $        | —     |     | $          | — |   |

 

                Notes payable to directors,officers and employees are due on demand and accrue interest at 10% per annum.The interest paid by the Company on such notes was $300 in 2006.

 

*Other Related Party Transactions*

 

                The Company recorded a relatedparty sale to a principal shareholder of twelve Mobil MaxPune®units, recognizing revenue of $900,000 in 2007. The Company also recorded arelated party deposit of $775,000 on the balance sheet at December 31,2007, in relation to 10 additional units, to be shipped in 2008, from the sameprincipal shareholder.

 

                The Company leases office and laboratory facilitiesfrom the Chairman of the Company. Lease payments to the Chairman were $0 and$18,000 in 2007 and 2006, respectively, plus utilities and maintenance; seeCommitments note.

 

On January 25, 2008, we entered into a StockExchange Agreement with The Quercus Trust pursuant to which agreement theCompany issued 19,700 shares of its Series E Convertible Preferred Stock inexchange for 19,700,000 shares of the Company'scommon stock held by The Quercus Trust. Each share of the Series E ConvertiblePreferred Stock will automatically convert into 1,000 shares of the Company'scommon stock upon the approval of the holders of WorldWater common stock to the increase in our authorized common stock. 

 

Also on January 25,2008, we borrowed $6million from The Quercus Trust as evidenced by a PromissoryNote (the "Note") dated as of that date. The Note bears interest at arate of 8% per annum. The outstanding principal amountof the Note and all accrued and unpaid interest are due and payable on July 28,2008.

 

On February 12,2008, we entered into a Stock and Warrant Purchase Agreement with The QuercusTrust pursuant to which the Company issued 20,000 shares of its Series FConvertible Preferred Stock at a price of $1,782 per share, and warrants topurchase twenty nine million shares of the Company’s common stock, at anexercise price of $1.815 per share. The Quercus Trust has the right to one votefor each share of the Company’s common stock into which the Series F ConvertiblePreferred Stock is convertible.

 

Transactions between the Company and TheQuercus Trust or its trustee, David Gelbaum, may be considered related party transactions. Under the terms of our Related Party Transaction Policyand Procedures, transactions with related parties requiring disclosure under United States securities laws require prior approval of(a) the Board of Directors and the Audit Committee (acting in each case by amajority of the directors then in office who have no interest in a proposedrelated party transaction) or (b) the Board of Directors and a committee of notless than two independent directors appointed by the Board of Directors whohave no interest in the proposed related party transaction being considered (a"Special Committee").

 

The Board of Directors and either the AuditCommittee or a Special Committee will review the material facts of all related party transactions that require approval in accordance with theCompany's policy and either approve or disapprove of the entry into the relatedparty transaction. In determining whether to approve a related partytransaction, the Board of Directors, the Audit Committeeand the Special Committee, as applicable, will take into account, among otherfactors each deems appropriate, whether the relatedparty transaction is on terms no less favorable than terms generally availableto an unaffiliated third-party under the same or similar circumstances and theextent of the related party's interest in the transaction.

 

The issuance of the SeriesE Convertible Preferred Stock, the loan evidenced by the Note and the issuanceof the Series F Convertible Preferred Stock occurred prior to the adoption of our Related Party Transaction Policy and Procedures and, althoughapproved by the board of directors, were not considered by the Audit Committee or a Special Committee.

 

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

 

TheCompany’s Board of Directors reviews and approves audit and permissiblenon-audit services performed by its independent accountants, as well as thefees charged for such services. In its review of non-audit service fees and itsappointment of Amper, Politziner & Mattia, P.C. as the Company’sindependent accountants, the Board of Directors considered whether the provisionof such services is compatible with maintaining independence. All of theservices provided and fees charged by Amper, Politziner & Mattia, P.C. in2007 were approved by the Audit Committee of the Board of Directors..

 

**AUDIT FEES**

 

Theaggregate fees billed to us by the independent auditors, Amper, Politziner& Mattia P.C., for professional services rendered in connection with ourQuarterly Reports on Forms 10Q & 10QSB and for the audits of our financialstatements included in this Annual Report on Form 10-K and 10-KSB for the yearsended December 31, 2007 and 2006 were $293,500 and $110,000, respectively.

 

**AUDIT RELATED FEES**

 

Theaggregate fees billed to us by Amper, Politziner & Mattia, P.C. forassurance and related services that are reasonably related to the performanceof the audit and review of our financial statements that are not alreadyreported in the paragraph immediately above totaled approximately $187,125 and$64,700 for the years ended December 31, 2007 and 2006, respectively. The 2007costs are primarily related to services provided in connection with the auditsand due diligence target in 2006 of Entech Corporation.

 

**TAX FEES**

 

Therewere no tax fees billed by our independent auditors during 2007 and 2006.

 

**ALL OTHER FEES**

 

Therewere no other fees billed by ourindependent auditors during the last two fiscal years for products and orservices.

 

80

----

**PART IV**

 

**ITEM 15.  *Exhibits and FinancialStatement Schedule**s***

 

(a)   *Financial Statements.* The following documents are filed as Appendix A hereto and are includedas part of this annual report on Form 10-K.

 

Report of IndependentRegistered Public Accounting Firm—Amper, Politziner & Mattia, P.C.

Consolidated Balance Sheets—December31, 2007 and 2006 

Consolidated Statements of Operations—Yearsended December 31, 2007, 2006 and 2005

Consolidated Statements ofCash Flows—Years ended December 31, 2007, 2006 and 2005

Consolidated Statements ofChanges in Stockholders’ Equity (Deficiency)—Years ended December 31, 2007,2006 and 2005

Notes to ConsolidatedFinancial Statements 

 

All other schedules forwhich provision is made in the applicable accounting regulation of the SEC arenot required under the related instructions or are inapplicable and, therefore,have been omitted. 

 

(b)   *Exhibits.*

 
| **Exhibit********Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                            |
|---------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                       |       | Plan  of Merger of WorldWater, a Nevada corporation with and into WorldWater, a  Delaware corporation, filed with the State of Delaware April 30, 2001.  Incorporated by reference to Exhibit 2.1 to the Company’s Form SB-2  filed with the Securities and Exchange Commission on January 3, 2003  (File No. 333-102348).   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 2.2                       |       | State  of Nevada Articles of Merger, filed with the State of Nevada May 9,  2001. Incorporated by reference to Exhibit 2.2 to the Company’s Form SB-2  filed with the Securities and Exchange Commission on January 3, 2003  (File No. 333-102348).                                                                          |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 2.3                       |       | Certificate  of Merger of Domestic Corporation and Foreign Corporation filed with State of  Delaware April 30, 2001. Incorporated by reference to Exhibit 2.3  to the Company’s Form SB-2 filed with the Securities and Exchange  Commission on January 3, 2003 (File No. 333-102348).                                       |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                       |       | Certificate  of Incorporation. Incorporated by reference to Exhibit 4.1 to the  Company’s Form S-8 dated July 23, 2001 filed with the Securities  and Exchange Commission on August 1, 2001 (File No. 333-66484).                                                                                                            |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.2                       |       | Certificate  of Amendment of Certificate of Incorporation. Incorporated by reference to Exhibit 3.2  to the Company’s Form SB-2 filed with the Securities and Exchange  Commission on January 3, 2003 (File No. 333-102348).                                                                                                      |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.3                       |       | Amended  and Restated By-laws of WorldWater Incorporated by reference to Exhibit 4.2  to the Company’s Form S-8 dated July 23, 2001 filed with the  Securities and Exchange Commission on August 1, 2001 (File No. 333-66484).                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.4                       |       | Certificate  of Amendment of Certificate of Incorporation dated July 7, 2005.  Incorporated by reference to Exhibit 3.4 to the Company’s Form 10-KSB  filed with the Securities and Exchange Commission on April 14, 2006  (File No. 00016936).                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.5                       |       | Certificate  of Amendment of Certificate of Incorporation dated October 11, 2006.                                                                                                                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 4.1                       |       | Certificate  of Designations, Preferences and Rights of Series D Convertible  Preferred Stock dated November 29, 2006. Incorporated by reference to Exhibit 4.1  to the Company’s Form 8-K filed with the Securities and Exchange  Commission on December 5, 2006 (File No. 000-16936).                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.1                      |       | Securities  Purchase Agreement between WorldWater Corp. and SBI Brightline VIII LLC  dated April 1, 2004. Incorporated by reference to Exhibit 10.1 to the  Company’s Form SB-2filed with the Securities and Exchange Commission on July 30,  2004 (File No. 333-115561).                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.2                      |       | Term  Credit Agreement dated March 29, 2004 by and among WorldWater Corp.,  Hong Kong League Central Credit Union; HIT Credit Union and SBI Advisors,  LLC. Incorporated by reference to Exhibit 10.2 to the Company’s Form SB-2  filed with the Securities and Exchange Commission on July 30, 2004 (File  No. 333-115561). |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.3                      |       | Stock  Purchase Warrant dated March 29, 2004. Incorporated by reference to Exhibit 10.3  to Company’s Form SB-2 filed with the Securities and Exchange Commission  on July 30, 2004 (File No. 333-115561).                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.4                      |       | Registration  Rights Agreement by and between WorldWater and SBI Advisors, LLC dated as of March 29,  2004 Incorporated by reference to Exhibit 10.4 to the Company’s Form SB-2  filed with the Securities and Exchange Commission on July 30, 2004 (File  No. 333-115561).                                                  |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.5                      |       | Forms  of Warrant Purchase Agreements between WorldWater and certain Selling  Stockholders. Incorporated by reference to Exhibit 10.5 to the Company’s  Form SB-2 filed with the Securities and Exchange Commission on February 11,  2005 (File No. 333-122756).                                                                  |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.6                      |       | Form of  Registration Rights Agreement between WorldWater and certain Selling Stockholders.  Incorporated by reference to Exhibit 10.6 to the Company’s Form SB-2  filed with the Securities and Exchange Commission on February 11, 2005  (File No. 333-122756).                                                            |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.7                      |       | Restricted  Stock Agreement for Quentin T. Kelly dated July 1, 2002. Incorporated  by reference to Exhibit 10.12 to the Company’s Form SB-2 filed with  the Securities and Exchange Commission on January 3, 2003 (File No. 333-102348).                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.8                      |       | Quentin T.  Kelly Employment Agreement dated effective as of January 1, 2007.                                                                                                                                                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.9                      |       | Douglas  Washington Employment Agreement dated effective as of January 1, 2007.                                                                                                                                                                                                                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.10                     |       | Larry  Crawford Employment Agreement dated effective as of January 1, 2007.                                                                                                                                                                                                                                                                           |
|                      |       |                                                                                                                                                                                                                                                                                                                                                       |
| 10.11                     |       | James  S. Brown Employment Agreement dated May 24, 2004. Incorporated by  reference to Exhibit 10.10 to the Company’s Form SB-2 filed with  the Securities and Exchange Commission on February 11, 2005 (File No. 333-122756).                                                                                               |

 

81

----

 
| 10.12  |   | Securities Purchase  Agreement dated as of July 21, 2005 between WorldWater & Power  Corp., a Delaware corporation as the Company and Camofi Master LDC, its  successors and assigns as Purchaser. Incorporated by reference to 10.1 to the  Company’s Form 8-K filed with the Securities and Exchange Commission on July 28,  2005 (File No. 000-16936).                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13  |   | Registration Rights  Agreement dated as of July 21, 2005 between WorldWater & Power  Corp., a Delaware corporation and CAMOFI Master LDC as Purchaser.  Incorporated by reference to 10.3 to the Company’s Form 8-K filed with  the Securities and Exchange Commission on July 28, 2005 (File No. 000-16936).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | Common Stock Purchase  Warrant dated July 21, 2005 issued to CAMOFI Master LDC as Holder for  9,027,778 shares of common stock of WorldWater & Power Corp. at the  exercise price of $0.18 per share and terminating on July 21, 2009.  Incorporated by reference to 10.5 to the Company’s Form 8-K filed with  the Securities and Exchange Commission on July 28, 2005 (File No. 000-16936).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | Common Stock Purchase Warrant  dated July 21, 2005 issued to CAMOFI Master LDC as Holder for 1,277,778  shares of common stock of WorldWater & Power Corp. at the exercise  price of $0.22 per share and terminating on July 21, 2009. Incorporated  by reference to 10.6 to the Company’s Form 8-K filed with the Securities  and Exchange Commission on July 28, 2005 (File No. 000-16936).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Common Stock Purchase  Warrant dated July 25, 2005 issued to The Water Fund, LP for 416,667  shares of common stock of WorldWater & Power Corp. at the exercise  price of $0.22 per share and terminating on August 15, 2009.  Incorporated by reference to 10.17 to the Company’s Form SB-2 filed with  the Securities and Exchange Commission on October 21, 2005 (File No. 33-0123045).                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Common Stock Purchase  Warrant dated July 25, 2005 issued to The Water Fund, LP for 416,667  shares of common stock of WorldWater & Power Corp. at the exercise  price of $0.22 per share and terminating on August 15, 2009.  Incorporated by reference to 10.18 to the Company’s Form SB-2 filed with  the Securities and Exchange Commission on October 21, 2005 (File No. 33-0123045).                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.18  |   | Investment Agreement  dated as of November 29, 2006 between WorldWater & Power Corp.,  a Delaware corporation as the Company and Emcore Corporation. Incorporated by  reference to Exhibit 10.1 to the Company’s Form 8-K filed with the  Securities and Exchange Commission on December 5, 2006 (File No. 000-16936).                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.19  |   | Registration Rights  Agreement dated as of November 29, 2006 between WorldWater &  Power Corp., a Delaware corporation and Emcore Corporation. Incorporated by  reference to Exhibit 10.2 to the Company’s Form 8-K filed with the  Securities and Exchange Commission on December 5, 2006 (File No. 000-16936).                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.20  |   | Letter Agreement dated  as of November 29, 2006 between WorldWater & Power Corp., a  Delaware corporation and Emcore Corporation. Incorporated by reference to Exhibit 10.3  to the Company’s Form 8-K filed with the Securities and Exchange  Commission on December 5, 2006 (File No. 000-16936).                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.21  |   | Series D  Convertible Preferred Stock Purchase Warrant dated November 29, 2006  issued to Emcore Corporation for 505,044 shares of Series D Convertible  Preferred Stock of WorldWater & Power Corp. at the exercise price of  $3.17 per share and terminating on November 29, 2016. Incorporated by  reference to Exhibit 10.4 to the Company’s Form 8-K filed with the  Securities and Exchange Commission on December 5, 2006 (File No. 000-16936). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.22  |   | Lease Agreement dated  as of March 7, 2008 by and between ENTECH, Inc., as tenant, and Alliance  Gateway No. 23, Ltd., as landlord.                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.23  |   | Lease Guarantee dated  as of March 7, 2008 by and between WorldWater & Solar Technologies Corp.  as guarantor, and Alliance Gateway No. 23, Ltd.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 23     |   | Consent of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1   |   | Certification by the  Principal Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2   |   | Certification by the  Principal Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1   |   | Certification by the  Principal Executive Officer Pursuant to 18 U.S.C. Section 1350  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.2   |   | Certification by the  Principal Financial Officer Pursuant to 18 U.S.C. Section 1350  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                     |

 

(c)           FinancialStatement Schedules.  See Item 15(a)above.

 

 

82

----

 

 

**SIGNATURES**

 

                In accordance withsection 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

WorldWater &Solar Technologies Corp.

(formerlyWorldWater & Power Corp.)

(Registrant)

 
| By:    | /s/ QUENTIN T. KELLY                                | Date:  | March 27,  2008 |
|--------|-----------------------------------------------------|--------|----------------------|
|   | Quentin T. Kelly                                    |   |                 |
|   | *Chairman*                                          |   |                 |
|   |                                                |   |                 |
| By:    | /s/ LARRY L. CRAWFORD                               |   | March 27,  2008 |
|   | Larry L. Crawford                                   |   |                 |
|   | *Executive Vice President/**ChiefFinancial Officer* |   |                 |

 

 

 

83

----

 

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, this Form 10-K has been signed by thefollowing persons in the capacities and as of the dates indicated:

 
| **Signature**                | ** ** | **Title**                                          | ** ** | **Date**            |
|------------------------------|------------|----------------------------------------------------|------------|---------------------|
| ** **                   | ** ** | ** **                                         | ** ** | ** **          |
| /s/ QUENTIN T. KELLY         |       | Chairman                                           |       | March 27, 2008 |
| Quentin T. Kelly             |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ DAVID ANTHONY            |       | Director                                           |       | March 27, 2008 |
| David Anthony                |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ LARRY L. CRAWFORD        |       | Executive  Vice President, Chief Financial Officer |       | March 27, 2008 |
| Larry L. Crawford            |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ JOSEPH CYGLER            |       | Director                                           |       | March 27, 2008 |
| Joseph Cygler                |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ DAVID GELBAUM            |       | Director                                           |       | March 27, 2008 |
| David Gelbaum                |       |                                               |       |                |
|                         |       |                                               |       |                |
|                         |       | Director                                           |       | March 27, 2008 |
| Dr. Walter Hesse             |       |                                               |       |                |
|                         |       |                                               |       |                |
|                         |       | Director                                           |       | March 27, 2008 |
| Dr. Hong Hou            |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ DR. DAVINDER SETHI  |       | Director                                           |       | March 27, 2008 |
| Dr. Davinder Sethi      |       |                                               |       |                |
|                         |       |                                               |       |                |
|                         |       | Director                                           |       | March 27, 2008 |
| Reuben F. Richards, Jr. |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ LANGE SCHERMERHORN       |       | Director                                           |       | March 27, 2008 |
| Lange Schermerhorn           |       |                                               |       |                |
|                         |       |                                               |       |                |
| /s/ HARRISON WELLFORD        |       | Director                                           |       | March 27, 2008 |
| Harrison Wellford            |       |                                               |       |                |

 

 

 

84

----

 

 

**EXHIBIT INDEX**

 
| 10.22  |   | Lease Agreement dated  as of March 7, 2008 by and between ENTECH, Inc., as tenant, and Alliance  Gateway No. 23, Ltd., as landlord.                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                     |
| 10.23  |   | Lease Guarantee dated  as of March 7, 2008 by and between WorldWater & Solar Technologies  Corp. as guarantor, and Alliance Gateway No. 23, Ltd.           |
|   |   |                                                                                                                                                                     |
| 23     |   | Consent  of Independent Registered Public Accounting Firm.                                                                                                               |
|   |   |                                                                                                                                                                     |
| 31.1   |   | Certification  by the Principal Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                       |
|   |   |                                                                                                                                                                     |
| 31.2   |   | Certification  by the Principal Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                       |
|   |   |                                                                                                                                                                     |
| 32.1   |   | Certification  by the Principal Executive Officer Pursuant to 18 U.S.C. Section 1350  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |
|   |   |                                                                                                                                                                     |
| 32.2   |   | Certification  by the Principal Financial Officer Pursuant to 18 U.S.C. Section 1350  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |

 

 

85

----