**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

**Form 10-KSB**

**ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal yearended December 31, 2006**

**Commission filenumber: 000-16936**

**WorldWater &Power Corp.**

(Name of small businessissuer in its charter)

| **Delaware**                              |   | **33-0123045**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
| **55 Route 31 South, Pennington, NJ**     |   | **08534**               |
| (Address of  principal executive offices) |   | (Zip Code)              |

 

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

Securities registered under Section 12(b) ofthe Exchange Act: **None**

Securitiesregistered under Section 12(g) of the Exchange Act:

**Common Stock,$0.001 par value**

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes o  No x

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non accelerated filer (asdefined by Exchange Act Rule 12b-2).

Large accelerated filer   o   Acceleratedfiler   o   Non-acceleratedfiler   x

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

The issuer’s revenues for its most recent fiscal yearwas $17,333,681.

On March 30, 2007 the aggregate market value ofthe voting stock held by non-affiliates of the registrant was approximately$79,918,296.

As of March 30, 2007 the Registrant hadoutstanding 151,395,297 shares of Common Stock and 51,462,759 shares ofPreferred Stock.

**DOCUMENTSINCORPORATED BY REFERENCE**

None.

Transitional Small Business Disclosure Format (checkone) Yes o  No x

 

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**TABLEOF CONTENTS**

| **PART I.**                                                                                                                       |   | 3                                            |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
| **ITEM  1. DESCRIPTION OF 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                    |   | 8 |   |
| g)                                                                                                                                     |   | Intellectual  Property                       |   | 9 |   |
| h)                                                                                                                                     |   | Source And Availability of Components        |   | 9 |   |
| i)                                                                                                                                     |   | Competitive Conditions Affecting the Company |   | 9 |   |
| j)                                                                                                                                     |   | Subsidiaries                                 |   | 10 |   |
| k)                                                                                                                                     |   | Government  Regulations                      |   | 10 |   |
| l)                                                                                                                                     |   | Employees                                    |   | 10 |   |
| m)                                                                                                                                     |   | Risks  and Uncertainties                     |   | 10 |   |
| **ITEM 2. DESCRIPTION OF PROPERTIES**                                                                                                  |   | 12                                           |   |
| **ITEM  3. LEGAL PROCEEDINGS**                                                                                                         |   | 12                                           |   |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS**                                                                       |   | 12                                           |   |
| **PART II.**                                                                                                                      |   | 13                                           |   |
| **ITEM 5. MARKET FOR COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS**                                                                  |   | 13                                           |   |
| a)                                                                                                                                     |   | Price  Range of Common Stock                 |   | 13 |   |
| b)                                                                                                                                     |   | Holders  of Common Stock                     |   | 13 |   |
| c)                                                                                                                                     |   | Dividends                                    |   | 13 |   |
| d)                                                                                                                                     |   | Preferred  Stock                             |   | 13 |   |
| **ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  OPERATION**                                                                    |   | 16                                           |   |
| **OVERVIEW**                                                                                                                           |   | 16                                           |   |
| **CRITICAL ACCOUNTING POLICIES AND ESTIMATES**                                                                                         |   | 17                                           |   |
| **REVENUE  RECOGNITION**                                                                                                               |   | 17                                           |   |
| **ALLOWANCE FOR DOUBTFUL ACCOUNTS**                                                                                                    |   | 17                                           |   |
| **ACCOUNTING  FOR INCOME TAXES**                                                                                                       |   | 17                                           |   |
| **SELECTED  FINANCIAL DATA**                                                                                                           |   | 18                                           |   |
| **RESULTS OF OPERATIONS**                                                                                                              |   | 18                                           |   |
| **COMPARISON OF YEARS ENDED DECEMBER 31, 2006 AND 2005**                                                                               |   | 19                                           |   |
| **HISTORICAL  CASH FLOW ANALYSIS**                                                                                                     |   | 21                                           |   |
| **LIQUIDITY AND CAPITAL RESOURCES**                                                                                                    |   | 22                                           |   |
| **COMMITMENTS  AND GUARANTEES**                                                                                                        |   | 23                                           |   |
| **INCOME TAXES**                                                                                                                       |   | 23                                           |   |
| **PROPOSED  ACQUISITION**                                                                                                              |   | 23                                           |   |
| **RECENT ACCOUNTING PRONOUNCEMENTS**                                                                                                   |   | 24                                           |   |
| **ITEM  7. FINANCIAL STATEMENTS**                                                                                                      |   | 26                                           |   |
| **ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE**                                      |   | 53                                           |   |
| **ITEM 8A. CONTROLS AND PROCEDURES**                                                                                                   |   | 53                                           |   |
| **PART III.**                                                                                                                     |   | 54                                           |   |
| **ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND  CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT** |   | 54                                           |   |
| **ITEM 10. EXECUTIVE COMPENSATION**                                                                                                    |   | 57                                           |   |
| **ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**                           |   | 60                                           |   |
| **ITEM 12. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS**                                                                           |   | 61                                           |   |
| **ITEM 13.  EXHIBITS**                                                                                                                 |   | 62                                           |   |
| **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                    |   | 64                                           |   |

 

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**PART I.**

**ITEM1.**                DESCRIPTION OFBUSINESS

**a)**   OVERVIEW

WorldWater &Power Corp. (“WorldWater/Company”) is an international solar engineering andproject management company with unique, high-powered solar electric technologyand expertise, providing alternative energy solutions to a wide variety ofcustomers in both domestic and international markets. Until 2002, WorldWater’sbusiness was focused exclusively on providing developing countries with waterand power solutions. Since then, following power advances in its technology,the Company has placed increasing emphasis on domestic markets, principally inCalifornia, New Jersey, and their surrounding states, and is addressing theneeds of residential, commercial and industrial customers, in both the publicand private sectors. The Company will continue to selectively submit proposalsto various foreign governments in need of solving critical water supply andenergy problems using the Company’s proprietary solar technology.

With significantly risingenergy prices 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 patentedAquaMaxTM solar electric system, capable of operating pumps and motors up to1,000 hp for irrigation, refrigeration and cooling, and water utilities, makeit a breakthrough product delivering mainstream pumping capacity powered bysolar 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 areable to operate on solar alone or in combination with the electric grid ordiesel generators. Among the unique advantages of the Company’s proprietarysolar technology is that, in the event of a grid outage, load can be seamlesslyand automatically transferred to the solar electric system for continuedoperation without interruption and without operator intervention.

WorldWater’s proprietarytechnology permits the use of high power (up to 1,000 hp) AC motors and pumps,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 hybridAquaMaxTM irrigation system, which can operate motors up to 1,000 horsepower bysunshine alone or in combination with the existing electric grid or diesel, afarmer can irrigate at little or no additional cost over what is paid currentlyfor irrigation powered by grid electricity. There is limited ongoingmaintenance cost associated with the sun power source used to drive theirrigation equipment.

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 

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powershortages or blackouts. The functionality of this technology goes far beyondthe agricultural applications and is extremely well-suited for a wide range ofindustrial 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.

The Company wasincorporated in the state of Nevada on April 3, 1985 under the name ofGolden Beverage Company. In April 1997, the Company entered into a reversemerger transaction with WorldWater, Inc., a Delaware corporation formed inJanuary 1984. Since the merger transaction, the Company, operating underthe name of WorldWater Corp., has been engaged exclusively in the solar/waterpower industry. In June of 2000, the Company shareholders voted to changethe state of incorporation from Nevada to Delaware. In June 2005, theCompany shareholders voted to change the name to WorldWater & PowerCorp. from WorldWater Corp. The Company stock is publicly traded on the NASDAQOTC Bulletin Board under the symbol WWAT.OB.

The Company has itscorporate headquarters and research facilities located at 55 Route 31 South inPennington, New Jersey 08534. WorldWater conducts research and designs,develops and markets proprietary technology relating to solar energy and waterengineering, including solar power projects and international water managementconsulting, at this location.

**b)**   MAJOR CUSTOMERS BYGEOGRAPHIC 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 theCompany’s focus on domestic projects, and specifically in California, andsurrounding states, WorldWater, in September 2005, through itswholly-owned subsidiary, WorldWater Holdings Inc., acquired the assets of MJDSolutions, Inc., a Nevada Corporation, doing business as Quantum EnergyGroup (Quantum). Quantum, based in Applegate, California, is a solar energy,construction and project management company, and will assist in the sales,design and installation of residential, commercial, and institutional solarprojects.

During 2006, the Companycompleted two commercial projects with recognized revenue of $1,819,624 and hadsix commercial projects in progress as of December 31, 2006, withrecognized revenue of $9,658,362. The Company completed nine residentialprojects with aggregate revenue of $524,389, and completed one consultingservices project with revenue of $24,777. The company had one residentialproject in progress at December 31, 2006 with recognized revenue of $7,775.This project was completed in the first quarter of 2007.

Four other residentialprojects, with aggregate contract value of $231,763 were awarded in 2006, buthad no recognized revenue in 2006. These projects were started in the firstquarter of 2007, and are expected to be completed in 2007.

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**NEW JERSEY**

The Company entered theNew Jersey agricultural market in 2003 with the completion of a 24 kWsolar electrical 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 in thestate over the next five years. The Company has made New Jersey a target statefor the commercial and residential markets.

Six commercial projectswere completed in 2006 with recognized revenue of $2,108,018.

The company recognizedrevenue of $25,019 in 2006 from a NJBPU grant that is for research in thedevelopment of cost effective, grid-tied motor drives for photovoltaicapplications.

Three commercial projects,with recognized revenue of $2,127,695 in 2006, were in progress as of December 31,2006. These projects are a total of 310 kW.

As of December 31,2006, the Company had one contract that was awarded, but has not started. Thestart of this project is subject to securing the appropriate building permitsand project financing. The project has an aggregate contract value ofapproximately $1,039,584.

The company had oneadditional contract signed in the first quarter of 2007.  This $5,660,928 contract is for a 700 kW DCsolar power generation system.  The contract is subject to financing by thecustomer and approval of a rebate by the New Jersey Board of Public Utilities.

**DELAWARE**

The Company had completedtwo projects in 2006 with recognized revenue of $149,267. The Company completeda contract with a large publicly-traded chemical company, and covers the designand installation of a solar electric power generation system for itsphotovoltaic solutions technical laboratory. The project has a contract valueof $363,000; revenue of $234,000 was recognized in 2005 and $129,267 wasrecognized in 2006. The 40 kW installation will serve as a photovoltaicdemonstration unit for this customer.

The Company had one projectwith recognized revenue of $418,688 in progress as of December 31, 2006which was completed in the first quarter of 2007. This project is the Company’sfirst venture into the poultry market and is anticipated to lead to moreprojects within this industry.

**TEXAS**

The Company had oneproject in Texas with recognized revenue of $278,190 in progress as of December 31,2006 which was completed by end of the first quarter 2007.

**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.

In 2005, the Company wasawarded a $360,000 grant by the U.S. Trade and Development Agency (USTDA) tosupport completion of a pilot project for water supply in Sri Lanka. Billingsof $213,054 were rendered as of December 31, 2006. Revenue of $191,873 wasrecognized in 2006; the remaining revenue is expected to be recognized in 2007.The project is designed to assess the hydro-geological conditions of theproject area, and to provide safe, sustainable water supplies to people in sixvillages 

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near thetsunami-ravaged southern coast of Sri Lanka. Subject to satisfactory results ofWorldWater’s ground water assessment study, WorldWater anticipates furthercontracts with the Ministry of Urban Development and Water Supply to pump anddeliver water to 13,600 people in approximately 4,000 households in the sixvillages through use of its AquaMaxTM solar water pumping systems.

**PROPOSED ACQUISITION**

In June, 2006, the Companyannounced that it has entered into a Letter of Intent (LOI) with ENTECH, Inc.of Keller, TX (‘ENTECH’), to acquire all the outstanding stock of ENTECH uponcompletion of the necessary due diligence and after obtaining appropriatefinancing. ENTECH, a private company formed in 1983, is a developer andmanufacturer 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.

With the combinedtechnologies of the Company and ENTECH, we believe our solar systems will becapable of generating and delivering electrical and thermal energy on site atprices competitive to retail prices without relying on government sponsoredrebates. ENTECH’s patented concentrator technology allows for the installationof large solar “farms” with greatly reduced requirements for solar cellmaterials (silicon or multi-junction). Due to the advantages of ENTECH’sconcentrator, a significantly lessor amount of silicon used in flat plate solarmodules is required by current ENTECH modules to generate the same electricalpower. Consequently, the ENTECH technology greatly lessens the impact of thesilicon material shortage currently constricting flat plate solar panel supply.ENTECH concentrators utilize a two-axis tracker to follow the sun’s positionthroughout the day, maximizing energy production.

ENTECH’s technology canproduce photovoltaic electricity, or thermal energy (heat) for commercial usessuch as for heating and/or air conditioning. When applied in a combined fashionfor onsite power applications, the cost to the customer can be significantlyless for electricity generated and for BTU of heat provided versus separatecompeting systems currently on the market while being competitive with currentretail energy prices.

It is the Company’sintention to purchase ENTECH through a newly-formed subsidiary. The financingof the acquisition is intended to be based solely on the business prospects andassets of the acquired entity, ENTECH.

As a proposed subsidiaryof the Company, ENTECH will maintain its identity, location, and businessoperations in both terrestrial and space solar energy. The Company anticipatesthat 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.

To obtain the exclusiveopportunity through December 31, 2006 to conduct due diligence, theCompany made a $500,000 non-refundable payment to ENTECH to be used foroperating and working capital requirements of ENTECH. Additional due diligencefees of $290,769 were recorded on the balance sheet as of December 31,2006. and along with the $500,000 payment to ENTECH, left a capitalized amountof $790,769 as a balance sheet asset on December 31, 2006, classified asdeferred cost on proposed acquisition. Should this acquisition not go forwardin 2007, the capitalized amount would need to be expensed in that year.

As of March 30, 2007,the company is continuing to negotiate the acquisition of ENTECH.

**c)**   IMPLEMENTATIONSTRATEGY

James S. Farrin wasappointed Interim CEO on January 23, 2006, with Quentin T. Kelly, thefounder of the Company, retaining the Chairman’s role.

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Mr. Farrinestablished a strategy direction which was to optimize 2006 revenue by focusingthe sales force on two states, New Jersey and California, and theengineering/operations department on effective implementation of bookedprojects.

In accordance with hiscontract, James Farrin left the company effective January 23, 2007. Mr. Farrinis expected to continue assisting the company, as needed, in the role ofconsultant.

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

Frank Smith joined thecompany in the position of COO effective February 5, 2007.

The Company isimplementing appropriate processes, policies, and procedures to make theCompany more effective and to increase productivity. In addition, the Companyis improving the organization by making key additions to the infrastructure,especially project managers and application engineers to better handle theincreasing load of projects to be implemented.

**d)**   PRODUCTS ANDSERVICES

**SOLAR POWER SYSTEMS**

WorldWater’s photovoltaic(PV) net-metering systems are designed to “zero out” electrical usage chargesfor residential, 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.

**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 crossedanother technological 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. This is due to WorldWater’s technology running its booster pumps andoperating its major wells while also being available to perform net meteringwhile providing back-up power capability in the event of grid powerinterruption. Should the grid fail, disengagement from the grid will occur andpower will be assumed by the solar equipment, allowing operations to continue running until the electric grid isrestored,  with solar power eliminatingthe use of diesel or natural gas 

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duringthis potentially peak demand period. WorldWater believes it is uniquelypositioned to provide this service to the water utility market, as well as theagricultural market.

**e)**   MARKETING

Today, the price of theWorldWater commercial systems marketed in California and New Jersey range 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 inPennington, NJ.

The market for thephotovoltaic industry is significantly increasing, aided by steep increase inoil 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.

WorldWaterprovides solar solutions for water and power by:

·       Combiningthe two technological requirements of solar engineering and water engineering,thus enabling the Company to more effectively implement sustainable turnkeyprograms;

·       UtilizingCompany specialists to locate and evaluate power sources;

·       Conductingsite assessments to appropriately size solar electrical and water pumping andelectrical systems;

·       Installingthe Company’s proprietary solar products;

·       Focusingsufficient resources on community preparation and capacity-building for thetechnology;

·       Arrangingproject financing.

A key marketing strategyis the utilization of strategic alliances. WorldWater, as a water and powersolutions provider, has partnered with major international organizations toenhance its financing capabilities and with local organizations to enhanceproject implementation.

WorldWater has alongstanding relationship 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 ANDDEVELOPMENT

A key strategy ofWorldWater is to continue developing innovative, cutting edge products to meetwater and electricity needs with proprietary solar technology. The Company wasawarded a patent in 2001 on the electronic board controller, AquaDriveTM, of theAquaMaxTM system. In 2003, the Company also was awarded a patent on itsautomatic switching technology, which enables the system to perform multiplefunctions such as water pumping and battery charging and also to switchautomatically between solar and grid-tied, diesel or battery power sources. Throughthe end of 2006, the Company has been granted six patents, with five morepending (see table on page 10).

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**g)**   INTELLECTUALPROPERTY

WorldWater has obtainedsix patents and continuations-in-part for its newly developed electronicssystems and has filed for protections of its patents. WorldWater engineersThomas McNulty, Sr., Dr. Anand Rangarajan, Douglas Williams, andQuentin T. Kelly, Chairman and Chief Executive Officer, together with PrincetonUniversity engineers, have been issued patents, all of which are assigned toWorldWater. Among other patents, the Company holds patents on the electronicboard controller AquaDriveTM of the AquaMaxTM system and on an electronic boardthat allows, in case of the interruption of service in an AC grid power system,the automatic transfer to solar-powered systems for uninterrupted operation ofmotors and other power loads. The following table shows the Company’s existingpatents and pending patent applications.

**INTELLECTUALPROPERTY**

| **Patent Title**                          | ** ** | ** **              | ** ** | **Domestic /   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 ANDAVAILABILITY OF COMPONENTS

The solar modules used inthe Company’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.

**i)**   COMPETITIVECONDITIONS AFFECTING THE COMPANY

The Company’s productscompete with 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 readilyavailable.

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The Company’s mostcommonly encountered solar pumping competitor is Grundfos A/S of Denmark, amanufacturer of a large range of water pumps, including a solar pump line. TheGrundfos pumps run off a specially wound AC motor. Aero-Environment ofCalifornia has somewhat similar technology using limited size AC pumps. Thereare a number of other solar pump companies, including Solar Jack of the US, SunMotor of Canada, Southern Cross of Australia, and Total Energie from Europe,which produce limited horsepower DC pumps. The Company offers the only systemsable to operate conventional AC powered pumps up to 1000 hp.

**j)**   SUBSIDIARIES

WorldWater has an active100% wholly-owned domestic subsidiary, WorldWater Holdings Inc., dba QuantumEnergy Group.

WorldWater has thefollowing 100% wholly-owned inactive subsidiaries:

WorldWater, Inc.

WorldWater EastAfrica Ltd.

WorldWater Pakistan(Pvt.), Ltd.

**k)**   GOVERNMENTREGULATIONS

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

**l)**   EMPLOYEES

On December 31, 2006,the company employed 45 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 ANDUNCERTAINTIES

*Fixed-price Contracts*

TheCompany utilizes fixed-price contracts which result in business risk, such as:

·       uncertaintyin estimating the technical aspects and effort involved to accomplish the workwithin the contract scope and schedule;

·       laboravailability and productivity;

·       supplierand subcontractor pricing and performance; and

·       availability and pricing ofcomponents (particularly solar modules).

*Intellectual Property Rights*

The Company relies on avariety of intellectual property rights in the performance of its product andservice delivery to its customers. The Company may not be able to preservethese intellectual 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 

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successfullydefend challenges or infringement proceedings against the Company could materiallyand adversely affect the Company’s competitive position.

*Technological Developments*

The market for ourequipment and services is characterized by continual technological developmentsto provide better and more reliable performance and services. If the Company isnot able 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 become obsolete, it mayno longer be competitive and its business and revenues could be materially andadversely 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 internalcontrols are necessary for the Company to provide reliable financial reports.In addition, Section 404 of the Sarbanes-Oxley Act of 2002 requires theCompany to evaluate and report on its internal controls over financialreporting and have its independent auditors annually attest to its evaluation,as well as issue their own opinion on the Company’s internal controls overfinancial reporting, beginning with our Annual Report on Form 10-Kfor the year ending December 31, 2007.

The Company is preparingfor compliance with Section 404 by strengthening, assessing and testingits system of internal controls to provide the basis for its report. Theprocess of strengthening its internal controls and complying with Section 404is expensive 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 will perform a Sarbanes-Oxley Act Consultingengagement designed to assist the Company in its efforts to comply with SOX Section 404,“Management’s Assessment of Internal Controls.” The engagement was designed with the understanding that should theCompany meet the criteria for an accelerated filing, the Company’s externalauditor will also be required to attest to the internal controls over financialreporting in the fiscal year ending December 31, 2007.

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In March 2007, theCompany engaged 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.

*Foreign Operations*

TheCompany operates in various countries that are subject to risks peculiar toeach country. With respect to any particular country, these risks may include:

·       expropriationand nationalization of our assets (including intellectual property) in thatcountry;

·       politicaland economic instability;

·       socialunrest, acts of terrorism, force majeure, war or other armed conflict;

·       inflation;

·       currencyfluctuations, devaluations and conversion restrictions;

·       confiscatorytaxation or other adverse tax policies;

·       governmentalactivities that limit or disrupt markets, restrict payments or limit themovement of funds;

·       governmentalactivities that may result in the deprivation of contract rights; and

·       traderestrictions and economic embargoes imposed by the United States and othercountries.

In 2006, foreign contractrevenue was limited to grant revenue, funded by USTDA, of $216,892, derivedfrom work 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.

**ITEM2.**                DESCRIPTION OFPROPERTIES

The Company’s executiveoffice, research and development facility is housed in a 13,270 square foot sitelocated at 55 Route 31 South, Pennington, New Jersey 08534. This facility isleased under an operating lease expiring June 25, 2007. The Company hassigned a new lease for 30,000 square feet on March 20, 2007. The facilityis leased under an operating lease commencing July 1, 2007, and expiring June 30,2015. The property is located at 200 Ludlow Drive, Ewing, New Jersey 08638.

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

In July 2004, theCompany opened a sales and technical support office in Foster City, Californiaunder a two-year lease expiring May 31, 2006, and which office was closedin June 2005

**ITEM3.**                LEGAL PROCEEDINGS

Although WorldWater isinvolved in ordinary, routine litigation from time to time incidental to itsbusiness, it is not presently a party to any other legal proceeding, theadverse determination of which, either individually or in the aggregate, wouldbe expected to have a material adverse affect on the Company’s business orfinancial condition.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.

None.

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**PART II.**

**ITEM 5.**                MARKETFOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

**a)**   Price Range ofCommon Stock

TheCompany’s common stock is included on the National Association of SecuritiesDealers Automated Quotation OTC Bulletin Board under the symbol “WWAT.OB.” Thefollowing table sets forth the quarterly high and low closing bid prices forthe common stock as reported on the OTC Bulletin Board for the periodsindicated. These prices are based on quotations between dealers, and do notreflect retail mark-up, mark-down or commissions, and may not necessarilyrepresent actual transactions.

| ** **      | ** ** | **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       |       |
|                 |            |            |            |            |            |            |            |  |  |  |

 

| ** **      | ** ** | **High**   | ** ** | **Low**    | ** ** | **Close**  | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|
| **FISCAL 2005** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter   |       | $          | 0.31       |       | $          | 0.25       |       | $ | 0.29 |   |
| Second Quarter  |       | 0.29       |       | 0.20       |       | 0.25       |       |
| Third Quarter   |       | 0.67       |       | 0.20       |       | 0.49       |       |
| Fourth Quarter  |       | 0.49       |       | 0.30       |       | 0.32       |       |
|                 |            |            |            |            |            |            |            |  |  |  |

 

**b)**   Holders of CommonStock

On December 31, 2006there were approximately 689 holders of record of common stock. This numberdoes not include beneficial owners of the common stock whose shares are held inthe names of various dealers, clearing agencies, banks, brokers and otherfiduciaries.

**c)**   Dividends

To date, the Company has not declared or paid anydividends on common stock. The payment by the Company of dividends, if any, iswithin the discretion of the Board of Directors and will depend on itsearnings, if any, capital requirements and financial condition, as well asother relevant factors. The Board of Directors does not intend to declare anydividends in the foreseeable future.

**d)**   Preferred Stock

As of October 1,2004, the preferred shareholder converted 66,667 shares of Series A 7%Convertible Preferred Stock into a like number of common shares. As of December 31,2006, the Company had 611,111 shares of Series B 7% ConvertiblePreferred Stock, 750,000 shares of Series C 6% Convertible PreferredStock, and 4,892,857 shares of Series D Convertible Preferred Stockoutstanding.

*Series BConvertible Preferred Stock*

In 2000, the Company issued 611,111 shares of Series B7% three-year Convertible Preferred Stock at $0.90 per share. The Series BPreferred Stock proceeds were intended to be used by the Company for theinitial operating requirements of WorldWater (Phils) Inc., the formerPhilippine subsidiary of the Company. The conversion privileges, which expired September 2003,were either into 10% of the Company’s former Philippine subsidiary WorldWater(Phils) Inc. or into 611,111 common shares of the Company.

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It is the Company’sposition that the holder of these preferred shares failed to convert to sharesof the Company’s common stock in accordance with the terms of issuance, andthat the preferred shares expired on September 8, 2003. It is the Company’sposition that the obligations for the payment of dividends on such shares alsoterminated on that date. The Company is engaged in negotiations with the holderof the Series B preferred shares to resolve the disputed terms ofconversion. Dividends were accrued through September 30, 2004 at the rateof 7%.

*Series C ConvertiblePreferred Stock*

On June 30, 2006, the Company issued 750,000shares of Series C 6% Convertible Preferred Stock at $1.00 per share. The Series CConvertible Preferred Stock proceeds were used to fund: (i) a $500,000payment made to the ENTECH, Inc. (“ENTECH”) to secure a binding letter ofintent allowing the Company the opportunity to conduct due diligence for theproposed acquisition of all of the common shares of ENTECH by the Company or anaffiliate; and (ii) due diligence expenses directly incurred in connectionwith the proposed acquisition transaction.

The Series C Convertible Preferred Stock held byeach 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 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 CConvertible Preferred Stock accrue at the annual rate of 6%, payable the firstday of each month, except that during the period July 1, 2006 through June 30,2007 dividends will be accrued but not paid. As of December 31, 2006, the Series CConvertible Preferred Stock had accrued and unpaid dividends in the aggregateamount of $22,500, which will be payable upon conversion.

*Series DConvertible Preferred Stock*

On November 30, 2006, the Company issued a pressrelease announcing the entry into three agreements with EMCORE Corporation (“EMCORE”),involving EMCORE’s agreement to purchase up to 26.5% of WorldWater on afully-diluted basis in exchange for $18 million. The three agreements enteredinto 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 the InvestmentAgreement and Registration Rights Agreement, the “Agreements”). The Boards ofDirectors of EMCORE and WorldWater each approved the Agreements.

Pursuant to the Investment Agreement, EMCORE agreed toinvest up to $18.0 million (the “Investment”) in return for (i) sixmillion, five hundred and twenty-three thousand, eight hundred and ten(6,523,810) shares of Series D Convertible Preferred Stock of WorldWater,par value $0.01 per share (the “Series D Stock”) and (ii) six hundredand sixty-eight thousand, one hundred and thirty-nine (668,139) warrants topurchase six hundred and sixty-eight thousand, one hundred and thirty-nine(668,139) shares of Series D Stock (the “Warrants”). The Series DStock and Warrants to be received by EMCORE are equivalent to an approximatelythirty-one percent (31%) equity ownership in WorldWater, or approximatelytwenty-six and half percent (26.5%) on a fully diluted basis.

On November 29, 2006, EMCORE invested $13.5million in the Company, representing the first tranche of its $18 millioninvestment, in return for which WorldWater issued to EMCORE (i) fourmillion, 

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eight hundred and ninetytwo thousand, eight hundred and fifty seven (4,892,857) shares of Series DConvertible Preferred Stock (convertible into Common Stock at a price of$0.276) and (ii) five hundred and five thousand and forty-four (505,044)warrants (the “Tranche A Warrants”) to purchase five hundred and five thousandand forty-four (505,044) shares of Series D Convertible Preferred Stock ata conversion price of $0.32 per share.

The investment of the remaining $4.5 million secondtranche (the “Tranche B Closing”) will be consummated subject to the executionof a definitive strategic agreement between the Parties and certain otherconditions set forth in the Investment Agreement. The Parties currently expectthe execution of the definitive strategic agreement and the Tranche B Closingto occur before the end of the year. 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.

In the Investment Agreement, the Company and EMCOREmade customary representations, warranties and covenants and the Company agreedto indemnify EMCORE against certain potential losses incurred in connectionwith its investment in the Company. Pursuant to the terms of the InvestmentAgreement, EMCORE has been granted the following rights, among others: (i) theright to 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.

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 WorldWater (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 WorldWater, (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 WorldWater, (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.

On November 29, 2006, the Company recorded abeneficial conversion on preferred stock dividends which needed to berecognized on the preferred shares of 48,928,570 and warrants of 505,044. Aftercalculating the intrinsic value, in conjunction with utilizing the BlackScholes method, an adjustment of $3,184,642 was recorded as a preferred stockdividend.

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**ITEM 6.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF OPERATION

Statements in thisManagement’s Discussion and Analysis, and elsewhere in this Annual Report on Form 10-KSBconcerning 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 & Power Corp. (“WorldWater/Company”)is an international solar engineering and project management company withunique, high-powered solar electric technology and expertise, providingalternative energy solutions to a wide variety of customers in both domesticand international markets. Until 2002, WorldWater’s business was focusedexclusively on providing developing countries with water and power solutions.Since then, the Company has placed increasing emphasis on domestic markets,principally in California, New Jersey, and surrounding states, and isaddressing the needs of residential, commercial and industrial customers, inboth the public and private sectors. The Company will continue to selectivelysubmit proposals to various foreign governments in need of solving criticalwater supply and energy problems using the Company’s proprietary solartechnology.

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 believes it is uniquely positioned to deliver a widerange of product and service offerings, from solar-powered equipment andinstallations, both fixed and mobile, to large-scale, turnkey solar energy andwater system solutions, specializing in variable frequency drive (VFD)applications that deliver high customer value. The foundation and enabler forthese offerings is WorldWater’s substantial technical expertise and proprietarysolar technology, including its AquaMaxTM System, AquaDriveTM Controller,AquaMeterTM Water Meter, and Mobile MaxPure.

The Company continues to evolve from anentrepreneurial 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 continue work to developinnovative new products to meet customer needs using new technology to seek toclearly differentiate its products from competitive products.

The cash raised through the issuance of convertibledebt and private equity sales has provided the Company with the working capitalresources needed to meet its operating activities in 2006 and 2005. The Companywill continue to seek to raise significant additional financing as required tofund the Company’s growing operations in 2007.

The Company does not knowwhether it will be able to raise additional financing or financing on termsfavorable to it. If adequate funds are not available or are not available onacceptable terms, the Company’s ability to fund current operations or otherwiserespond to competitive pressures will be significantly limited.

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**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The preparation ofconsolidated financial statements in accordance with U.S. generally acceptedaccounting principles requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, 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 revenue primarily from fixed-pricecontracts through which the Company provides engineering, design, andprocurement services, materials and equipment, and construction / installationservices. Revenue is also generated through the sale of solar-related equipmentand, to a lesser extent, from consulting projects and government-funded grants.

Contract revenues are recorded when there ispersuasive evidence that a binding contractual arrangement exists, the price isfixed and determinable, the Company has commenced work on the project, andcollectibility is reasonably assured.

Contract revenues are recognized using the percentageof completion method. The percentage of completion is calculated by dividingthe direct labor and other direct costs incurred by the total estimated directcost of the project. Contract value is defined as the total value of thecontract, plus the value of approved change orders. Estimates of costs tocomplete are reviewed periodically and modified as required. Provisions aremade for the full amount of anticipated losses, on a contract-by-contractbasis. These loss provisions are established in the period in which the lossesare first determined. Changes in estimates are also reflected in the periodthey become known.

Revenues from equipment sales containing acceptanceprovisions are recognized upon customer acceptance. Cash payments received inadvance of product or service revenue are recorded as customer 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 FORDOUBTFUL ACCOUNTS**

The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. If the financialcondition of its customers were to deteriorate, such that their ability to makepayments was impaired, additional allowances could be required.

**ACCOUNTING FORINCOME 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. These differencestogether with net operating loss carryforwards and tax credits may be recordedas deferred tax assets or liabilities on the balance sheet. A judgment mustthen be made of the likelihood that any deferred tax assets will be recoveredfrom future taxable income. To the extent that the Company determines that itis more likely than not that deferred tax assets will not be utilized, avaluation allowance 

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isestablished. Taxable income in future periods significantly different from thatprojected may cause adjustments to the valuation allowance that couldmaterially increase or decrease future income tax expense. As of December 31,2006 and 2005 an allowance equal to 100% of the deferred tax asset wasrecorded.

*Share-BasedCompensation*

On January 1, 2006, The Company adopted SFASNo. 123R, “Share-Based Payment,” which requires all companies to measureand recognize compensation expense at fair value for all stock-based paymentsto employees and directors. SFAS No. 123R is being applied on the modifiedprospective basis. Prior to the adoption of SFAS No. 123R, the Companyaccounted for its stock-based compensation plans for employees and directorsunder the recognition and measurement principles of Accounting Principles Board(APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, andrelated interpretations, and accordingly, the Company recognized nocompensation expense related to the stock-based plans for grants to employeesor directors. Grants to consultants under the plans were recorded under SFASNo. 123.

Under the modifiedprospective approach, SFAS No. 123R applies to new grants of options andawards of stock as well as to grants of options that were outstanding onJanuary 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.

**SELECTED FINANCIALDATA**

Thedata set forth below should be read in conjunction with the Company’s financialstatements and related notes and this “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” appearing elsewhere in thisfiling. The statement of operations data presented below for the fiscal yearsended December 31, 2006, 2005, and 2004 and the balance sheet data at December 31,2006, 2005, and 2004 have been derived from the audited financial statementswhich appear elsewhere in this filing. The statement of operations data presentedbelow for the year ended December 31, 2004, and the balance sheet data at December 31,2004 have been derived from the Company’s prior year’s audited financialstatements, which are not included in this filing.

| ** **                                                                | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Results**                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                   |       | $                                          | 17,333,681 |   | $ | 2,031,480 |   | $ | 5,837,224 |   |
| Gross Profit  (Loss)                                                      |       | 2,719,587                                  |       | (485,336 | ) | (149,085 | ) |
| Loss From  Operations                                                     |       | (5,257,298                                 | )          | (5,075,285 | ) | (6,087,358 | ) |
| Loss Applicable  To Common Stock                                          |       | (11,427,614                                | )          | (10,213,938 | ) | (8,056,694 | ) |
| Net Loss Per  Basic & Diluted Share Attributable To Common Stock |       | $                                          | (.08       | ) | $ | (0.11 | ) | $ | (0.12 | ) |
|                                                                           |            |                                            |            |  |  |  |  |  |  |  |  |  |

 

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| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Balance Sheet Data**                 | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and Cash  Equivalents                       |       | $                      | 5,801,852  |   | $ | 810,792 |   | $ | 38,852 |   |
| Working Capital  Surplus (Deficit)               |       | 10,553,807             |       | (1,282,316 | ) | (2,324,752 | ) |
| Total Assets                                     |       | 17,268,146             |       | 2,664,404 |   | 1,790,868 |   |
| Long term  obligations—less current portion |       | 103,986                |       | 3,088,797 |   | 2,026,589 |   |
| Redeemable  Preferred Stock                      |       | 12,884,388             |       | — |   | — |   |
| Stockholders’ Deficiency                    |       | (1,623,724             | )          | (3,881,759 | ) | (4,273,641 | ) |
|                                                  |            |                        |            |  |  |  |  |  |  |  |  |  |

 

**RESULTS OFOPERATIONS** (amounts arerounded to the nearest thousand)

*ContractRevenue.*   Contractrevenue for 2006 amounts to $17,117,000, and represents 99% of the Company’srevenue. Revenue of $17,117,000, or 100% of the total contract revenue, wasgenerated by domestic commercial and residential projects.

Commercial projects account for $16,585,000 or 96% ofdomestic contract revenue, and is made up of 23 projects.  Revenue was generated from nine commercialprojects in California, nine in New Jersey, three in Delaware, and one inTexas.

Residential projects account for $532,000 or 3% ofdomestic contract revenue; $532,000 from 10 California projects, $0 revenuefrom New Jersey projects.

*GrantRevenue.**  *The Company recognized grant revenue of$217,000 in 2006. This is composed of $192,000 from the U.S. Trade andDevelopment Agency (USTDA) and $25,000 from the New Jersey Board of PublicUtilities (NJBPU). The USTDA grant is in connection with a pilot project forwater supply in Sri Lanka. This project is designed to assess solartechnology methods to provide safe, sustainable water supplies to people in sixvillages near the tsunami-ravaged southern coast of Sri Lanka. The NJBPU grantis for research in the development of cost effective, grid-tied motor drivesfor photovoltaic applications.

*Costof Contract Revenue.*   Cost of contract revenue consists primarilyof third party construction and installation expense, materials and suppliesrequired for construction and component equipment, including the solar panels,solar array, inverters, variable speed drives and meters.

*Costof Grant Revenue.**  *Cost associated with grant revenue consists primarilyof third party subcontracted costs incurred for consulting expenses andprototype costs. The Company expenses internal research, engineering anddevelopment costs, as incurred. See Research and Development expense below.

*GrossProfit (Loss) on Contracts.*   The Company generated gross profits oncontracts totaling $2,705,000.  Grossprofits totaling $3,463,000 were attributable to 27 projects.  Gross profits were offset by $99,000 in grosslosses generated by four projects. Gross profits are also offset by warrantyreserves and other expenses not allocated to individual contracts totaling$659,000.

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

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

*DebtSourcing 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.

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*Research and DevelopmentExpense.**  *Research and development expense consistsprimarily of salary expense for internal personnel, and related personnelcosts, as well as prototype costs incurred to improve the design of the Company’sinstallations, and expand the Company’s product line. Research and developmentare critical to the Company’s strategic objectives of enhancing its technologyto meet the requirements of its targeted customers. The Company expects tomaintain, if not increase, its current level of expenditure for research anddevelopment on a going-forward basis.

**COMPARISON OF YEARSENDED DECEMBER 31, 2006 and 2005** (amounts are rounded to the nearest thousand)

*ContractRevenue.**  *Contractrevenue for the year ended December 31, 2006 was $17,117,000, anincrease of $15,199,000, or 792%, from $1,918,000 for 2005. Three projectsrepresented $10,378,000 or 60% of the contract revenue in 2006. One of theprojects was completed in 2006, while two were greater than 95% complete atyear end, and were completed in the first quarter of 2007.

*GrantRevenue.**  *Grant revenue for the year ended December 31,2006 was $217,000, an increase of $104,000, or 92% from $113,000 for 2005. Thefluctuation is a reflection of the timing of grant awards and completion ofassociated tasks/milestones called for under the grants. Grant revenue isexpected to be an immaterial portion of the Company’s revenue stream goingforward into 2007.

*Costof Contract Revenue.**  *The cost of contractrevenue for the year ended December 31, 2006 was $14,411,000, an increaseof $11,966,000 or 489% from $2,445,000 in 2005. The increase in cost ofcontract revenue is principally the result of higher volume in 2006 (revenue isup 792%).

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

*GrossProfit (Loss) on Contracts.**  *The Company generated agross profit on contracts in 2006. The gross profit of $2,705,00 in 2006,represents an increase of $3,232,000, versus the gross loss of $527,000 in 2005.Gross profits totaling $3,463,000 were attributable to 27 projects.  Gross profits were offset by $99,000 in grosslosses generated by four projects. Gross profits are also offset by warrantyreserves and other expenses not allocated to individual contracts totaling$659,000. The Company attributes its significant rise in gross profit partly toits evolution from an entrepreneurial to a fast growth company. Better overallefficiencies, bid processes, and trained staff have also supported theincreased job margins.

*GrossProfit (Loss) from Grants.**  *The Company generatedgross profit of $14,000 from grants in 2006, versus a gross profit of $42,000in 2005. Gross profit is made up of a gross loss of $9,000 from the USTDAgrant, and a gross profit of $25,000 from the NJBPU grant.

*Marketing,General and Administrative.**  *Marketing, general andadministrative expenses for the year ended December 31, 2006 were $7,775,000,an increase of $3,327,000 or 75%, from $4,448,000 for 2005.   The $3,327,000 increase includes increases insalaries and benefits of $1,450,000 and stock option expense of $1,124,000associated with increased headcount in 2006. The number of full-time employeesincreased 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.

*Researchand Development Expenses.**  *Research anddevelopment 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 MOBIL MAX. The Company has continued to develop its intellectualproperty as evidenced by the filing of two patent applications in 2006.

*Lossfrom Operations.**  *In the year ended December 31,2006 the Company incurred a loss from operations of $5,257,000, a decrease of$182,000 or 4% from $5,075,000 in 2005.

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*DebtSourcing 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.

*BeneficialConversion Interest/Warrant Exercise Inducement Fees.**  *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 $1,588,000 ofbeneficial conversion interest associated with the issuing of convertiblenotes. In 2005, the Company incurred beneficial conversion interest of$3,073,000. The decrease is attributable to a decrease in the amount ofconvertible debt issued in 2006 of $1,489,000 over the amount raised in 2005,and the variance in the market price of the Company’s common stock on thevarious issuance dates in the two years.

On November 29, 2006, the Company recorded abeneficial conversion on preferred stock dividends which needed to berecognized on the preferred shares of 48,928,570 and warrants of 505,044. Aftercalculating the intrinsic value, in conjunction with utilizing the BlackScholes method, an adjustment of $3,184,642 was recorded as a preferred stockdividend.

*InterestExpense.**  *Interest expense was $1,233,000 in theyear ended December 31, 2006, a decrease of $559,000 or 31% from$1,792,000 in 2005. This reflects the decrease in average convertible debtoutstanding during 2006 compared to 2005.

*Income Taxes.**  *TheCompany recognized an income tax benefit of $0 and $201,000 for theyears ended December 31, 2006 and 2005, respectively. The Companyparticipates in the State of New Jersey’s Corporation Business Tax BenefitCertificate Transfer Program (the “Program”), which allows certain hightechnology and biotechnology companies to sell unused New Jersey net operatingloss carryovers and research and development tax credits to other New Jerseycorporate taxpayers.

**HISTORICAL CASHFLOW ANALYSIS**

The “Historical Cash FlowsAnalysis” section discusses consolidated cash flow from operations, investingactivities and financing activities. Amounts have been rounded to the nearestthousand.

*Cash Flows from Operating Activities*

| ** **                             | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Net Cash Used in  Operating Activities |       | $                                          | 10,385,000 |   | $ | 4,305,000 |   |
|                                        |            |                                            |            |  |  |  |  |

 

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In2006, the Company had an increase in net cash used in operating activities of $6,080,000in a period when the Company had a decrease in net loss of $1,971,000. Ananalysis of the decreased loss is above in the RESULTS OF OPERATIONS andCOMPARISON OF YEARS ENDED DECEMBER 31, 2006 and 2005. The increase in net cashused in operating activities in 2006, a period when the Company’s net lossdecreased, is attributable to changes in non-cash charges and from the timingof cash receipts and disbursements related to working capital items in 2006shown below.

| Increases  (decreases) in non-cash charges:                                            |   |       |       |
|----------------------------------------------------------------------------------------|--------|------------|------------|
| Beneficial conversion feature of convertible notes                                     |   | $          | (1,484,000 | ) |
| Issuance of stock for service                                                          |   | 16,000     |       |
| Depreciation and amortization                                                          |   | (37,000    | )          |
| Issuance of warrants as inducement for warrants  exercise                              |   | 53,000     |       |
| Stock-based employee compensation cost                                                 |   | 1,124,000  |       |
| Amortization of interest expense                                                       |   | (513,000   | )          |
| Issuance of options and warrants for services                                          |   | 70,000     |       |
| Amortization of intangibles and loan origination  costs                                |   | (168,000   | )          |
| Amortization of deferred compensation                                                  |   | 15,000     |       |
| Issuance of stock in lieu of interest                                                  |   | (302,000   | )          |
|                                                                                   |   | (1,226,000 | )          |
| Changes in timing of cash receipts and disbursements  related to working capital items |   | (6,825,000 | )          |
|                                                                                   |   | (8,051,000 | )          |
| Change in net  loss—2006 compared to 2005                                         |   | 1,971,000  |       |
| Increase in net cash  used in operating activities                                     |   | $          | (6,080,000 | ) |

 

*Cash Flows from Investing Activities*

| ** **                             | ** ** | **Year ended December 31,**                           | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                             | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Net Cash Used in  Investing Activities |       | $                                                                    | 966,000    |   |   | $ | 36,000 |   |   |
|                                        |            |                                                                      |            |  |  |  |  |  |  |

 

In 2006 and 2005,investing activities included the purchase of office equipment includingcomputers for the increased workforce.

*Cash Flows from Financing Activities*

| ** **                                 | ** ** | **Year ended December 31,**               | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** |
| Net Cash Provided  By Financing Activities |       | $                                                        | 16,323,000 |   | $ | 5,045,000 |   |
|                                            |            |                                                          |            |  |  |  |  |

 

In 2006, the Companyissued 21,422,223 shares of 10% convertible debentures maturing in 2007 and2008 generating net proceeds of $3,792,500. In addition, 18,819,948 shares ofcommon stock were issued upon the exercise of warrants and stock options,raising $3,287,642. In conjunction with the issuance of the convertibledebentures, in 2006 the Company issued four-year warrants for the purchase ofup to 17,731,387 shares of the Company’s common stock, at an average exerciseprice of $0.19 per share, which are exercisable at any time. These capitalinfusions were reduced by the repayment of $2,965,021 in long-term debt and theincurrence of $284,138 in loan origination costs.

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**LIQUIDITY ANDCAPITAL RESOURCES**

At December 31, 2006, our current ratio was 2.87compared to 0.63 at December 31, 2005. As of December 31, 2006, wehad $10,553,807 of working capital compared to a working capital deficit of$1,282,316 as of December 31, 2005. Cash and cash equivalents were $5,801,852as of December 31, 2006, as compared to $810,792 as of December 31,2005.

The Company has historically financed operations andmet capital expenditures requirements primarily through sales of capital stockand solar system equipment sales. Management plans to continue to raise fundsthrough the sale of capital and forecasts increased revenues.

We believe that our existing cash balance togetherwith our other existing financial resources, including anticipated additionalcapital raises in 2007, and revenues from sales of our solar systems, will besufficient to meet our operating and capital requirements beyond the firstquarter of 2008. In light of our recent private placement of approximately$13.5 million worth of our convertible preferred stock inNovember 2006, we believe that we shall have the necessary financing tomeet our operating and capital requirements, at a minimum, into 2008.

Belowis a table showing the potential issuable shares and available authorizedcommon to be issued as of December 31, 2006.
|                                         | ** ** | **As of December 31, 2006** | ** **  |
|-----------------------------------------|------------|-------------------------------------------------|-------------|
| Number of  authorized common shares:    |       |                                            | 275,000,000 |   |   |
| Less common  shares outstanding:        |       |                                            | 149,359,052 |   |   |
| Less potential  issuable common shares: |       |                                            |        |   |   |
| Warrants                                |       |                                            | 24,792,873  |   |   |
| Debt conversion rights                  |       |                                            | 2,910,360   |   |   |
| Stock options                           |       |                                            | 20,270,623  |   |   |
| Stock purchase agreement rights         |       |                                            | 1,542,000   |   |   |
| Preferred stock conversion rights       |       |                                            | 51,462,759  |   |   |
|                                    |       |                                            | 100,978,615 |   |   |
| Available common shares  to be issued:  |       |                                            | 24,662,333  |   |   |

 

**COMMITMENTS ANDGUARANTEES**

TheCompany’s commitments as of December 31, 2006, for the years 2007 through2011 and thereafter as summarized below:

| ** **                                     | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2009**  | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| ** **                                     | ** ** | **(Amount rounded in thousands)** | ** ** |
| Long-tem debt  maturities (face amount)        |       | $                                                | 360,897    |     | $          | 200,000   |       | $        | —     |     | $          | 38,456         |       | $         | —     |   |   | $ | — |   |   | $ | 599,353 |   |
| Employment obligations                         |       | 585,000                                          |       | 585,000  |       | 585,000   |       | 250,000  |       | 250,000  |       |           | —     |      |       | 2,255,000 |   |
| Renewable energy  credit guarantee obligations |       | 98,710                                           |       | 64,701   |       | 64,701    |       | 64,701   |       | 55,329   |       |           | 1,412      |      |       | 349,554 |   |
| Operating lease  payments                      |       | 240,576                                          |       | 321,900  |       | 285,900   |       | 267,900  |       | 267,900  |       |           | 937,650    |      |       | 2,321,826 |   |
| Repayment of grant                             |       | 35,000                                           |       | —   |       | —    |       | —   |       | —   |       |           | —     |      |       | 35,000 |   |
| Total                                          |       | $                                                | 1,320,183  |     | $          | 1,171,601 |       | $        | 935,601    |     | $          | 621,157        |       | $         | 573,229    |   |   | $ | 939,062 |   |   | $ | 5,560,733 |   |

 

**INCOME TAXES**

As of December 31,2006, the Company had federal and state net operating loss carryforwardstotaling approximately $34,073,100 and $16,145,500, respectively, available toreduce future taxable income and tax liabilities which expire at various datesbetween 2007 and 2026. In addition, as of December 31, 2006, the Companyhad federal research and development tax credit carryforwards of approximately 

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$180,600available to reduce future taxable income and tax liabilities which expire atvarious dates between 2026. Under provisions of the Internal Revenue Code,substantial changes in the Company’s ownership may limit the amount of netoperating loss carryforwards and research and development credit carryforwards,which can be used in future years.

**PROPOSEDACQUISITION**

In June, 2006, the Company announced that it hasentered into a Letter of Intent (LOI) with ENTECH, Inc. of Keller, TX (‘ENTECH’),to acquire all the outstanding stock of ENTECH upon completion of the necessarydue diligence and after obtaining appropriate financing. ENTECH, a privatecompany 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.

With the combined technologies of the Company andENTECH, 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, significantlylessor amount of silicon used in flat plate solar 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’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 of heat provided versus separate competingsystems currently on the market while being competitive with current retailenergy prices.

It is the Company’s intention to purchase ENTECHthrough a newly-formed subsidiary. The financing of the acquisition is intendedto be based solely on the business prospects and assets of the acquired entity,ENTECH.

As a proposed subsidiary of the Company, ENTECH willmaintain its identity, location, and business operations in both terrestrialand space solar energy. The Company anticipates that ENTECH will continue toperform its contract work for NASA, the U.S. Department of Defense, and othercustomers, as well as its internal R&D programs leading to improved futureproducts.

To obtain the exclusive opportunity through December 31,2006 to conduct due diligence, the Company made a $500,000 non-refundablepayment to ENTECH to be used for operating and working capital requirements ofENTECH. Additional due diligence fees of $290,769 were recorded on the balancesheet as of December 31, 2006. and along with the $500,000 payment toENTECH, left a capitalized amount of $790,769 as a balance sheet asset on December 31,2006, classified as deferred cost on proposed acquisition. Should thisacquisition not go forward in 2007, the capitalized amount would need to beexpensed in that year.

As of March 30, 2007,the company is continuing to negotiate the acquisition of ENTECH.

**RECENT ACCOUNTINGPRONOUNCEMENTS**

In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities.” This Statement permits entities to

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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 choose differentmeasurement attributes for similar types of assets and liabilities. ThisStatement 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.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” which is effective for the Company on January 1,2008. The Statement defines fair value, establishes a framework for measuringfair value in accordance with generally accepted accounting principles, andexpands disclosures about fair value measurements. The Statement codifies thedefinition of fair value as the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. The standard clarifies the principle thatfair value should be based on the assumptions market participants would usewhen pricing the asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. The Company isstill determining the impact of this FASB, but does not expect it to have amaterial effect on the Company’s consolidated financial statements.

In September 2006, the SEC staff issued StaffAccounting Bulletin (SAB) Topic 1N (SAB No. 108), “Financial Statements—Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements,” which is effective for calendar yearcompanies as of December 31, 2006. SAB No. 108 provides guidance onhow prior-year misstatements should be taken into consideration whenquantifying misstatements in current-year financial statements for purposes ofdetermining whether the financial statements are materially misstated. Underthis guidance, companies should take into account both the effect of amisstatement on the current-year balance sheet as well as the impact upon thecurrent-year income statement in assessing the materiality of a current-yearmisstatement. Once a current-year misstatement has been quantified, theguidance in SAB Topic 1M, “Financial Statements—Materiality,” (SAB No. 99)will be applied to determine whether the misstatement is material. The adoptionof this Statement has not had a material effect on the Company’s consolidatedfinancial statements.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109”. This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.This Interpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. The Interpretation is effective for fiscal years beginning after December 15,2006. The Company does not believe that its historical or expected taxreporting positions, which considered before application of the valuationallowance, will have a material impact on its consolidated financialstatements. See Note 15, Income Taxes.

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**ITEM 7.**                FINANCIALSTATEMENTS.

**Report ofIndependent Registered Public Accounting Firm**

**We have audited the accompanyingconsolidated balance sheets of WorldWater & Power Corp. andSubsidiaries as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, changes in stockholders’ deficiency, andcash flows for each of the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.**

**We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly we express nosuch opinion. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.**

**As discussed in Note 1 to theconsolidated financial statements, the Company changed its method of accountingfor stock based compensation upon the adoption of Statement of FinancialAccounting Standard, No. 123(R), “Share-Based Payment”.**

**In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of WorldWater & Power Corp. andSubsidiaries as of December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the years then ended, in conformitywith U.S. generally accepted accounting principles.**

 

**April 9,2007Edison, New Jersey**

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**WORLDWATER &POWER CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSFOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005**

| ** **                                                                                                                                                                                | ** ** | **December 31, 2006** | ** **     | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|----------------|---------------------------------|------------|
| **Assets**                                                                                                                                                                                | ** ** |                            | ** **     | ** **                      |       |   | ** ** | ** ** |   |
| **Current Assets:**                                                                                                                                                                       | ** ** |                            | ** **     | ** **                      |       |   | ** ** | ** ** |   |
| Cash and cash  equivalents                                                                                                                                                                |       |                            | $              | 5,770,595                       |       |   |   | $ | 798,649 | ** ** |   |
| Restricted cash                                                                                                                                                                           |       |                            | 31,257         |                            |       |   | 12,143 | ** ** |   |
| Accounts  receivable, net of allowance of $29,257 and $69,908 at December 31,  2006, and December 31, 2005, respectively                                                        |       |                            | 5,288,241      |                            |       |   | 354,739 | ** ** |   |
| Accounts  receivable, related party                                                                                                                                                       |       |                            | 22,500         |                            |       |   | 32,426 | ** ** |   |
| Inventory                                                                                                                                                                                 |       |                            | 748,470        |                            |       |   | 383,722 | ** ** |   |
| Costs and  estimated earnings/losses in excess of billings                                                                                                                                |       |                            | 2,548,427      |                            |       |   | 466,985 | ** ** |   |
| Prepaid expenses  and deposits—current                                                                                                                                               |       |                            | 1,763,293      |                            |       |   | 109,104 | ** ** |   |
| Advances to  employees                                                                                                                                                                    |       |                            | 33,676         |                            |       |   | 17,282 | ** ** |   |
| **Total  Current Assets**                                                                                                                                                                 | ** ** |                            | **16,206,459** | ** **                      |       |   | **2,175,050** | ** ** |   |
| Equipment and Leasehold Improvements, Net                                                                                                                                                 |       |                            | 195,808        |                            |       |   | 50,615 | ** ** |   |
| Intangible And Other  Assets                                                                                                                                                              |       |                            |           |                            |       |   |   | ** ** |   |
| Loan origination  costs, net                                                                                                                                                              |       |                            | —         |                            |       |   | 287,688 | ** ** |   |
| Other intangible  assets, net                                                                                                                                                             |       |                            | 66,667         |                            |       |   | 109,667 | ** ** |   |
| Deferred costs on  proposed acquisition                                                                                                                                                   |       |                            | 790,769        |                            |       |   | — | ** ** |   |
| Other deposits                                                                                                                                                                            |       |                            | 8,443          |                            |       |   | 41,384 | ** ** |   |
| **Total Assets**                                                                                                                                                                          | ** ** |                            | **$**          | **17,268,146**                  | ** ** |   |   | **$** | **2,664,404** | ** ** |   |
| **Liabilities, Convertible  Redeemable Preferred Stock, and Stockholders’ Deficiency**                                                                                               | ** ** |                            | ** **     | ** **                      |       |   | ** ** | ** ** |   |
| **Current Liabilities:**                                                                                                                                                                  | ** ** |                            | ** **     | ** **                      |       |   | ** ** | ** ** |   |
| Accounts payable  and accrued expenses                                                                                                                                                    |       |                            | $              | 4,862,877                       |       |   |   | $ | 2,288,607 | ** ** |   |
| Long-term debt and  notes payable, current portion                                                                                                                                        |       |                            | 495,367        |                            |       |   | 769,180 | ** ** |   |
| Customer deposits                                                                                                                                                                         |       |                            | 43,453         |                            |       |   | 89,719 | ** ** |   |
| REC guarantee  liability, current portion                                                                                                                                                 |       |                            | 98,710         |                            |       |   | 87,220 | ** ** |   |
| Billings in excess  of costs and estimated earnings/losses                                                                                                                                |       |                            | 149,245        |                            |       |   | 31,802 | ** ** |   |
| Notes payable,  related parties                                                                                                                                                           |       |                            | 3,000          |                            |       |   | 35,748 | ** ** |   |
| Accrued losses on  construction in progress                                                                                                                                               |       |                            | —         |                            |       |   | 155,090 | ** ** |   |
| **Total  Current Liabilities**                                                                                                                                                            | ** ** |                            | **5,652,652**  | ** **                      |       |   | **3,457,366** | ** ** |   |
| Long-term debt and  notes payable                                                                                                                                                         |       |                            | 103,986        |                            |       |   | 2,759,446 | ** ** |   |
| REC guarantee  liability, net of current portion                                                                                                                                          |       |                            | 250,844        |                            |       |   | 329,351 | ** ** |   |
| **Total  Liabilities**                                                                                                                                                                    | ** ** |                            | **6,007,482**  | ** **                      |       |   | **6,546,163** | ** ** |   |
| **Commitments  and contingencies**                                                                                                                                                        | ** ** |                            | —         |                            |       |   | — | ** ** |   |
| **Convertible redeemable preferred stock**                                                                                                                                                | ** ** |                            | ** **     | ** **                      |       |   | ** ** | ** ** |   |
| Series C convertible  redeemable preferred stock                                                                                                                                     |       |                            | 750,000        |                            |       |   | — | ** ** |   |
| Series D  convertible redeemable preferred stock                                                                                                                                     |       |                            | 12,134,388     |                            |       |   | — | ** ** |   |
| **Total  Convertible Redeemable Preferred Stock**                                                                                                                                         | ** ** |                            | **12,884,388** | ** **                      |       |   | **—** | ** ** |   |
| **Stockholders’ Deficiency:**                                                                                                                                                        | ** ** |                            | ** **     | ** **                      |       |   | ** ** | ** ** |   |
| Preferred Stock Convertible $.01 par value authorized  10,000,000; issued and outstanding:                                                                                                |       |                            |           |                            |       |   |   | ** ** |   |
| Series B 7%—611,111  shares liquidation preference $550,000 as of December 31, 2006 and  December 31, 2005                                                            |       |                            | 6,111          |                            |       |   | 6,111 | ** ** |   |
| Common Stock, $.001 par  value; authorized 275,000,000;   149,359,052 issued and outstanding at December 31, 2006 and   108,786,940 issued and outstanding at December 31, 2005 |       |                            | 149,359        |                            |       |   | 108,787 | ** ** |   |
| Additional paid-in  capital                                                                                                                                                               |       |                            | 47,493,182     |                            |       |   | 33,893,104 | ** ** |   |
| Deferred  compensation                                                                                                                                                                    |       |                            | —         |                            |       |   | (45,000 | **)** |   |
| Accumulated deficit                                                                                                                                                                       |       |                            | (49,272,376    | )                               |       |   | (37,844,761 | **)** |   |
| **Total  Stockholders’ Deficiency**                                                                                                                                                  | ** ** |                            | **(1,623,724** | **)**                           |       |   | **(3,881,759** | **)** |   |
| **Total Liabilities, Convertible  Redeemable Preferred Stock and Stockholders’ Deficiency**                                                                                          | ** ** |                            | **$**          | **17,268,146**                  | ** ** |   |   | **$** | **2,664,404** | ** ** |   |

 

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

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**WORLDWATER &POWER CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDEDDECEMBER 31, 2006 AND DECEMBER 31, 2005**

| ** **                                                                | ** ** | **Years Ended:** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Revenues:                                                                 |       |                  |       |   |   |
| Contract                                                                  |       | $                     | 17,116,789 |   | $ | 1,918,420 |   |
| Grant                                                                     |       | 216,892               |       | 113,060 |   |
| Total                                                                     |       | 17,333,681            |       | 2,031,480 |   |
| Cost of Revenues:                                                         |       |                  |       |   |   |
| Contract                                                                  |       | 14,411,406            |       | 2,445,441 |   |
| Grant                                                                     |       | 202,688               |       | 71,375 |   |
| Total                                                                     |       | 14,614,094            |       | 2,516,816 |   |
| Gross Profit  (Loss):                                                     |       |                  |       |   |   |
| Contract                                                                  |       | 2,705,383             |       | (527,021 | ) |
| Grant                                                                     |       | 14,204                |       | 41,685 |   |
| Total                                                                     |       | 2,719,587             |       | (485,336 | ) |
| Operating  Expenses:                                                      |       |                  |       |   |   |
| Marketing, general and administrative expenses                            |       | 7,774,871             |       | 4,447,767 |   |
| Research and development expense                                          |       | 202,014               |       | 142,182 |   |
| Total Expenses                                                            |       | 7,976,885             |       | 4,589,949 |   |
| Loss from  Operations                                                     |       | (5,257,298            | )          | (5,075,285 | ) |
| Other (Expense)  Income                                                   |       |                  |       |   |   |
| Debt sourcing fees and commissions                                        |       | (284,138              | )          | (441,956 | ) |
| Warrant exercise inducement fees                                          |       | (1,588,432            | )          | (3,072,963 | ) |
| Interest expense, net                                                     |       | (1,233,207            | )          | (1,792,000 | ) |
| Other (Expense) Income, Net                                               |       | 120,103               |       | 168,266 |   |
| Total Other (Expense) Income, Net                                         |       | (2,985,674            | )          | (5,138,653 | ) |
| Net Loss                                                                  |       | (8,242,972            | )          | (10,213,938 | ) |
| Beneficial Conversion and Warrants on Preferred  Stock Dividend           |       | (3,184,642            | )          | — |   |
| Net Loss Attributable to Common Shareholders                              |       | ($11,427,614          | )          | ($10,213,938 | ) |
| Basic and diluted net loss per share                                      |       | $                     | (0.08      | ) | $ | (0.11 | ) |
|                                                                      |       |                  |       |   |   |
| Weighted Average  Common Shares Outstanding used in Per Share Calculation |       | 135,921,421           |       | 93,767,378 |   |

 

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

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**WORLDWATER &POWER CORP. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER  31, 2006AND DECEMBER 31, 2005**

| ** **                                                                   | ** ** | **2006**        | ** **    | **2005**       | ** ** |
|------------------------------------------------------------------------------|------------|-----------------|---------------|----------------|------------|
| **Cash Flows from Operating  Activities:**                                   |       |            |          |           |       |
| Net loss                                                                     |       | $               | (8,242,972    | )              | $          | (10,213,938 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |            |          |           |       |
| Beneficial conversion feature of convertible notes                           |       | 1,588,433       |          | 3,072,964      |       |
| Stock based employee compensation cost                                       |       | 1,123,755       |          | —         |       |
| Amortization of interest expense                                             |       | 904,899         |          | 1,417,460      |       |
| Amortization of intangibles and loan origination  costs                      |       | 330,688         |          | 498,214        |       |
| Issuance of stock for service                                                |       | 227,481         |          | 211,272        |       |
| Issuance of options and warrants for services                                |       | 70,000          |          | —         |       |
| Share based non-employee compensation cost                                   |       | 52,780          |          |           |       |
| Amortization of deferred compensation                                        |       | 45,000          |          | 30,000         |       |
| Issuance of stock in lieu of interest                                        |       | 68,973          |          | 371,087        |       |
| Depreciation and amortization                                                |       | 30,272          |          | 67,015         |       |
| Changes  in assets and liabilities:                                          |       |            |          |           |       |
| Accounts receivable                                                          |       | (4,933,503      | )             | 1,223,339      |       |
| Accounts receivable—related parties                                     |       | 9,926           |          | (32,426        | )          |
| Inventory                                                                    |       | (364,748        | )             | (381,272       | )          |
| Costs and estimated earnings/losses in excess of  billings                   |       | (2,081,442      | )             | (466,985       | )          |
| Prepaid expenses and deposits                                                |       | (1,621,248      | )             | (61,337        | )          |
| Advances to employees                                                        |       | (16,394         | )             | (3,049         | )          |
| Accounts payable and other accrued expenses                                  |       | 2,574,270       |          | (275,619       | )          |
| Accrued losses on construction in progress                                   |       | (155,090        | )             | 155,090        |       |
| Billings in excess of costs and estimated  earnings/losses                   |       | 117,443         |          | 31,802         |       |
| Renewable energy credits guarantee liability                                 |       | (67,017         | )             | 22,954         |       |
| Customer deposits                                                            |       | (46,266         | )             | 28,920         |       |
| **Net Cash (Used in) Operating Activities**                                  | ** ** | **(10,384,759** | **)**         | **(4,304,509** | **)**      |
| **Cash  Flows from Investing Activities:**                                   |       |            |          |           |       |
| Purchase of equipment and leasehold improvements                             |       | (175,465        | )             | (35,872        | )          |
| Deferred costs on proposed acquisition                                       |       | (790,769        | )             | —         |       |
| **Net Cash (Used in) Investing Activities**                                  | ** ** | **(966,234**    | **)**         | **(35,872**    | **)**      |
| **Cash  Flows from Financing Activities:**                                   |       |            |          |           |       |
| Proceeds from issuance of debt, and notes payable  with detachable warrants  |       | —          |          | 3,780,000      |       |
| Proceeds from exercise of warrants and stock options                         |       | 3,532,085       |          | 1,316,955      |       |
| Proceeds from issuance of redeemable convertible  preferred stock            |       | 12,884,388      |          | —         |       |
| Proceeds from issuance of common stock                                       |       | —          |          | 1,222,222      |       |
| Increase in Restricted Cash and Restricted Cash  Equivalents                 |       | (19,114         | )             | —         |       |
| Increase in Loan Origination costs                                           |       | —          |          | (418,832       | )          |
| Payments on long-term debt                                                   |       | (74,420         | )             | (855,402       | )          |
| **Net Cash Provided by Financing Activities**                                | ** ** | **16,322,939**  |          | **5,044,943**  | ** ** |
| Net effect of currency translation on cash                                   |       | —          |          | 55,235         |       |
| **Net Increase in cash and cash equivalents**                                |       | 4,971,946       |          | 759,797        |       |
| **Cash and cash equivalents, Beginning of year**                             | ** ** | **798,649**     | ** **    | **38,852**     | ** ** |
| **Cash and cash equivalents, End of year**                                   | ** ** | **$**           | **5,770,595** |           | **$**      | **798,649** | ** ** |
| **Supplemental  Disclosure:**                                                | ** ** | ** **      |          | ** **     | ** ** |
| **Beneficial  Conversion and Warrants on Preferred Stock Dividend**          | ** ** | **3,184,642**   |          | **—**     | ** ** |

 

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

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**WORLDWATER &POWER CORP.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCYFOR THE YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005**

| ** **                                                      | ** ** | ** **          | ** ** | ** **         | ** ** | ** **  | ** ** | ** **         | ** **  | **Additional**  | ** ** | **Additional**    | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|-------------|------------|--------------------|-------------|-----------------|------------|-------------------|------------|------------------|------------|-------------------|------------|-------------|------------|------------|------------|
| ** **                                                      | ** ** | ** **          | ** ** | ** **         | ** ** | ** **  | ** ** | ** **         | ** **  | **Paid-In**     | ** ** | **Paid-In**       | ** ** | ** **       | ** ** | **Other**         | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Preferred Stock** | ** ** | **Common Stock**   | ** ** | **Capital** | ** ** | **Capital**        | ** **  | **Deferred**    | ** ** | **Comprehensive** | ** ** | **Accumulated**  | ** ** | ** **        | ** ** |
| ** **                                                      | ** ** | **Shares**          | ** ** | **Par Value** | ** ** | **Shares**  | ** ** | **Par Value** | ** **  | **(Preferred)** | ** ** | **(Common)**      | ** ** | **Compensation** | ** ** | **Income (loss)** | ** ** | **Deficit** | ** ** | **Total**  | ** ** |
| Balance, December 31,  2004                                |       | 611,111             |       |               | $          | 6,111       |       |               | 79,834,341  |            |       | $                 | 79,834     |             |       |              | $          | 537,331     |       |       | $          | 22,864,141 |   |   | $ | (75,000 | ) |   |   | $ | (56,080 | ) |   | $ | (27,629,978 | ) | $ | (4,273,641 | ) |
|                                                            |       |                |       |               |       |        |       |               |        |            |       |              |       |             |       |              |       |        |       |       | —     |   |   |   | — |   |   | — |   |   |   |
| Beneficial conversion feature of convertible notes              |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | 3,072,963   |       |       | —     |   |   |   | — |   |   | — |   | 3,072,963 |   |
| 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 leui 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                                                        |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | —      |       |       | —     |   |   |   | — |   |   | (10,214,783 | ) | (10,214,783 | ) |
| Other comprehensive  expense—                              |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | —      |       |       | —     |   |   |   | — |   |   | — |   | — |   |
| Currency translation adjustment                                 |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | —      |       |       | —     |   |   |   | 56,080 |   |   | — |   | 56,080 |   |
| Total comprehensive loss                                        |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | —      |       |       | —     |   |   |   | — |   |   | — |   | (10,158,703 | ) |
| Balance, December 31,  2005                                |       | 611,111             |       |               | 6,111      |        |       | 108,786,940        |        |            | 108,787    |              |       |             | 537,331    |              |       | 33,355,773  |       |       | (45,000    | ) |   |   | — |   |   | (37,844,761 | ) | (3,881,759 | ) |
| Beneficial Conversion and Warrants on Preferred Stock  Dividend |       |                |       |               |       |        |       |               |        |            |       |              |       |             |       |              |       | 3,184,642   |       |       |       |   |   |   | — |   |   | (3,184,642 | ) | — |   |
| 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                 |       | —              |       |               | —     |        |       | 761,311            |        |            | 761        |              |       |             | —     |              |       | 226,720     |       |       | —     |   |   |   | — |   |   | — |   | 227,481 |   |
| Exercise of warrants                                            |       | —              |       |               | —     |        |       | 17,731,387         |        |            | 17,731     |              |       |             | —     |              |       | 3,404,683   |       |       | —     |   |   |   | — |   |   | — |   | 3,422,414 |   |
| Exercise of options                                             |       | —              |       |               | —     |        |       | 450,561            |        |            | 451        |              |       |             | —     |              |       | 109,220     |       |       | —     |   |   |   | — |   |   | — |   | 109,671 |   |
| In lieu of payment of interest                                  |       | —              |       |               | —     |        |       | 206,630            |        |            | 207        |              |       |             | —     |              |       | 68,766      |       |       | —     |   |   |   | — |   |   | — |   | 68,973 |   |
| Warrants granted to induce exercise of warrants                 |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | 1,588,432   |       |       | —     |   |   |   | — |   |   | — |   | 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 |   |
| Net loss                                                        |       | —              |       |               | —     |        |       | —             |        |            | —     |              |       |             | —     |              |       | —      |       |       | —     |   |   |   | — |   |   | (8,242,972 | ) | (8,242,972 | ) |
| Balance,  December 31,  2006                               |       | 611,111             |       |               | $          | 6,111       |       |               | 149,359,052 |            |       | $                 | 149,359    |             |       |              | $          | 537,331     |       |       | $          | 46,955,850 |   |   | $ | — |   |   |   | $ | — |   |   | $ | (49,272,375 | ) | $ | (1,623,724 | ) |

 

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

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**WORLDWATER & POWER CORP. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

At December 31, 2006, our current ratio was 2.87compared to 0.63 at December 31, 2005. As of December 31, 2006, wehad $10,553,807 of working capital compared to a working capital deficit of$1,282,316 as of December 31, 2005. Cash and cash equivalents were $5,801,852as of December 31, 2006, as compared to $801,792 as of December 31,2005.

The Company has historically financed operations andmet capital expenditures requirements primarily through sales of capital stockand solar system equipment sales. Management plans to continue to raise funds throughthe sale of capital stock, and forecasts increased revenues.

We believe that ourexisting cash balance together with our other existing financial resources,including anticipated additional capital raises in 2007, and revenues fromsales of our solar systems, will be sufficient to meet our operating andcapital requirements beyond the first quarter of 2008. In light of our recentprivate placement of approximately $13.5 million worth of our convertiblepreferred stock in November 2006, we believe that we shall have thenecessary financing to meet our operating and capital requirements, at aminimum, into 2008.

**Note (2)**   Natureof the Business

Effective June 22, 2005 the shareholders of theCompany approved the change of the Company’s name from WorldWater Corp. toWorldWater & Power Corp.

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 ofcustomers in both domestic and international markets. Until 2002, WorldWater’sbusiness was focused exclusively on providing developing countries with waterand power solutions. Since then, the Company has placed increasing emphasis ondomestic markets, principally in California, New Jersey, and their 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 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.

31

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

| ** **    | ** ** | **Revenue** | ** ** | **Long-lived Assets** | ** ** |
|---------------|------------|-------------|------------|----------------------------|------------|
| ** **    | ** ** | **2006**    | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States |       | $           | 17,141,808 |                       | $          | 1,998,937 |   | $ | 195,808 |   | $ | 50,615 |   |
| Philippines   |       | —      |       | 32,543                     |       | — |   | — |   |
| Sri Lanka     |       | 191,873     |       | —                     |       | — |   | — |   |
| Total         |       | $           | 17,333,681 |                       | $          | 2,031,480 |   | $ | 195,808 |   | $ | 50,615 |   |

 

**Note (3)**   Summaryof 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 ofConsolidation*

The consolidated financial statements include theaccounts of the Company’s subsidiaries WorldWater (Phils) Inc. and WorldWaterHoldings Inc., a Delaware Corporation, and certain other inactive subsidiaries.All significant intercompany accounts and transactions have been eliminated inconsolidation.

The Company’s wholly-owned inactive subsidiariesinclude:

WorldWater, Inc.,a Delaware Corporation

WorldWaterEast Africa Ltd., a Tanzanian Corporation

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

*Use of Estimates*

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements, and the reported amounts of revenue and expenses duringthe reporting period. Estimates are used for, but not limited to, depreciation,taxes, the guaranty liability for the value of Renewable Energy Credits, loseson uncompleted contracts and the value of shares issued. Although theseestimates are based on management’s best knowledge of current events andactions that the company may undertake in the future, actual results may bedifferent from the estimates.

*Fair Value ofFinancial Instruments*

The carrying value ofaccounts receivable, accounts payable, and accrued expenses approximate theirrespective fair values due to their short maturities. The fair value of theCompany’s notes payable and debt are estimated based on the current ratesoffered to the Company for debt of the same remaining maturities and similarterms. See “Guarantor Agreements” below for disclosures regarding the fairvalue of the Company’s exposure for Renewable Energy Credits (“RECs”) whichhave been accrued on the Balance Sheet as of December 31, 2006 and 2005.

*Concentration ofCredit 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 

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December 31,2006, 76% of the receivables, including related party receivables, were fromthree commercial customers and 2% were rebates owed by state agenciesadministering clean energy initiatives generated from the sale of solarequipment installed in the United States. The Company does not requirecollateral or other security against accounts receivable; however, it maintainsreserves for potential credit losses and such losses have historically beenwithin management’s expectations. The Company had one major customer accountingfor 45% of revenue for the year ended December 31, 2006, and 52% ofreceivables at December 31, 2006; and two customers accounting for 64% ofrevenue for the year ended December 31, 2005.

*GuarantorArrangements*

In November 2002, theFASB issued FIN No. 45 “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, 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 the 267,840 kW(DC) solar-driven irrigation and energy system built in 2004 and a 42.7 kWsolar-pumping and energy system currently in construction, the Company hasguaranteed 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. Without the knowledge of thefuture value of these RECs, the Company recorded as reductions of Contract Revenue:estimated losses of $393,617 in the year ended December 31, 2005 and $0 inthe year ended December 31, 2006. Adjustments to the estimated guaranteeobligation will be recognized as an adjustment of revenue over the seven yearterm of the respective guarantee obligations.

Product Warranty

TheCompany provides for the estimated cost of product warranties at the timerevenue is recognized. Since the Company has a limited operating history,adjustments in future periods may be required as its installations mature. Thefollowing table summarizes the activity regarding the Company’s warrantyaccrual:

| Balance,  December 31, 2004           |   | $       | 107,000 |   |
|--------------------------------------------|--------|---------|---------|--------|
| Accruals for warranties issued during 2005 |   | 6,863   |    |
| Utilization of  warranty reserve           |   | (4,476  | )       |
| Balance,  December 31, 2005           |   | $       | 109,387 |   |
| Accruals for warranties issued during 2006 |   | 272,086 |    |
| Utilization of  warranty reserve           |   | (3,511  | )       |
| Balance,  December 31, 2006           |   | $       | 377,962 |   |

 

The product warrantyaccrual is included in Accounts Payable and Accrued Expenses in the Company’sConsolidated Balance Sheet.

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*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’ deficiency. SFAS No.130 requires onlyadditional disclosures in the financial statements; it does not affect theCompany’s financial position or results of operations.

*Revenue Recognition*

The Company derives revenue primarily from fixed-pricecontracts through which the Company provides engineering, design, andprocurement services, materials and equipment, and construction / installationservices. Revenue is also generated through the sale of solar-relatedequipment, and to a lesser extent from consulting projects, andgovernment-funded grants.

Contract revenues are recorded when there ispersuasive evidence that a binding contractual arrangement exists, the price isfixed and determinable, the Company has commenced work on the project, andcollectibility is reasonably assured.

Contract revenues are recognized using the percentageof completion method. The percentage of completion is calculated by dividingthe direct labor and other direct costs incurred, by the total estimated directcost of the project. Contract value is defined as the total value of thecontract, plus the value of approved change orders. Estimates of costs tocomplete are reviewed periodically and modified as required. Provisions aremade for the full amount of anticipated losses, on a contract-by-contractbasis. These loss provisions are established in the period in which the lossesare first determined. Changes in estimates are also reflected in the periodthey become known.

Revenues from solar-related 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.

*Allowance for DoubtfulAccounts*

The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments. If the financialcondition of its customers were to deteriorate, such that their ability to makepayments was impaired, additional allowances could be required.

*Accounting forIncome 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.

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*Cash and CashEquivalents*

The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents. The carrying amount of cash and cash equivalentsapproximates its fair value due to its short-term nature.

*Inventory*

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

*Equipment andLeasehold Improvements*

Equipment and leasehold improvements are carried atcost, less accumulated depreciation and amortization, and are depreciated andamortized for financial reporting purposes using the straight-line method.Depreciation for income tax purposes is computed using accelerated methods. Theestimated 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 7 years or the life of the lease. Upon retirementor disposal, the asset cost and related accumulated depreciation are removedfrom the accounts and the net amounts, less any proceeds, are charged orcredited to income.

Expenditures formaintenance and repairs are expensed as incurred. Expenditures, whichsignificantly increase asset value or extend useful lives, are capitalized.

*Loan OriginationCosts*

The Company finances partof its operations through the issuance of debt and incurs a substantial amountof costs associated with the acquisition of such debt. The Loan OriginationCosts are capitalized and amortized over the life of the debt. Upon earlytermination of the debt, any remaining costs are charged to Debt Sourcing Fees.

*Research andDevelopment*

Research and developmentcosts are expensed as incurred.

*Advertising Costs*

Advertising costs areexpensed as incurred and were approximately $56,949 and $42,472 for the yearsending December 31, 2006 and 2005, respectively.

*Share-BasedCompensation*

On January 1, 2006, The Company adopted SFAS No. 123R,“Share-Based Payment,” which requires all companies to measure and recognizecompensation expense at fair value for all stock-based payments to employeesand directors. SFAS No. 123R is being applied on the modified prospectivebasis. Prior to the adoption of SFAS No. 123R, the Company accounted forits stock-based compensation plans for employees and directors under therecognition and measurement principles of Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations, and accordingly, the Company recognized no compensationexpense related to the stock-based plans for grants to employees or directors.Grants to consultants under the plans were recorded under SFAS No. 123.

Under the modified prospective approach, SFAS No. 123Rapplies to new grants of options and awards of stock as well as to grants ofoptions that were outstanding on January 1, 2006 and that may 

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subsequently berepurchased, cancelled or materially modified. Under the modified prospectiveapproach, compensation cost recognized for the year ended December 31,2006 includes compensation cost for all share-based payments granted prior to,but not yet vested on, January 1, 2006, based on fair value as of theprior grant-date and estimated in accordance with the provisions of SFAS No. 123R.Prior periods were not required to be restated to reflect the impact ofadopting the new standard.

SFAS No. 123R also requires companies tocalculate an initial “pool” of excess tax benefits available at the adoptiondate to absorb any tax deficiencies that may be recognized under SFAS No. 123R.The pool includes the net excess tax benefits that would have been recognizedif the Company had adopted SFAS No. 123 for recognition purposes on itseffective date. The Company has elected to calculate the pool of excess taxbenefits under the alternative transition method described in FASB StaffPosition (“FSP”) No. FAS 123(R)-3, “Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards,” which also specifiesthe method to calculate excess tax benefits reported on the statement of cashflows. The Company is in a net operating loss position; therefore, no excesstax benefits from share-based payment arrangements have been recognized for theyear ended December 31, 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, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Net loss:                                                                                                              |       |                                             |       |   |   |
| As reported                                                                                                            |       |                                             | $          | (11,427,614 | ) |   |
| Less: stock-based  employee compensation expense included in reported net loss                                         |       |                                             | 45,000     |   |   |
| Impact of total  stock-based compensation expense determined   under fair-value-based method for all grants and awards |       |                                             | —     |   |   |
| Pro-forma                                                                                                              |       |                                             | $          | (11,382,614 | ) |   |
| Net loss per share:                                                                                                    |       |                                             |       |   |   |
| As reported                                                                                                            |       |                                             | $          | (0.08 | ) |   |
| Pro-forma                                                                                                              |       |                                             | $          | (0.08 | ) |   |

 

TheCompany uses the Black-Scholes option-pricing model to estimate fair value ofgrants of stock options with the following weighted average assumptions:

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

 

The Company calculatesexpected volatility 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. For estimatingthe expected term of share-based grants made in the year ended December 31,2006, the Company has adopted the simplified method authorized in StaffAccounting Bulletin No. 107. 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 expected 

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employeebehaviors related to option exercises and forfeitures. Prior to our adoption ofSFAS No. 123R, the Company reduced pro-forma share-based compensationexpense, presented in the notes to its financial statements, for actualforfeitures as they occurred.

With respect to both grants of options and awards ofrestricted stock, the risk free rate of interest is based on the U.S. Treasuryrates appropriate for the expected term of the grant or award.

The Company adoptedStatement 123(R) on January 1, 2006. This statement applies to allawards granted after the date of adoption and to awards modified, repurchased,or cancelled after that date. The value of the unvested stock options atDecember 31, 2006 is approximately $240,720, of which $240,720 will beexpensed in 2007 under General & Administrative Expense on the P&L.

*Net Loss Per Common Share*

Basicloss per share includes no dilution and is computed by dividing net lossattributable to common stockholders by the weighted average number of commonshares outstanding for the period. As presented, the Company’s basic anddiluted loss per share attributable to common stockholders is based on theweighted average number of common shares outstanding during the period. Thecalculation of diluted net loss per common share for the years ended December 31,2006 and 2005 does not include other potential common shares, including sharesissuable upon exercise of options, warrants and conversion rights, since theireffect would be antidilutive due to the Company’s losses. Below is a table ofthe potential issuable shares as of December 31, 2006 and 2005,respectively:

| ** **                         | ** ** | **As of   December 31, 2006** | ** **  | **As of  December 31, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------------|-------------|---------------------------------------------|------------|
| Warrants                           |       |                                              | 24,792,873  |                                        |       |   | 36,789,366 |   |   |
| Debt conversion rights             |       |                                              | 2,910,360   |                                        |       |   | 24,332,581 |   |   |
| Stock options                      |       |                                              | 20,270,623  |                                        |       |   | 11,810,392 |   |   |
| Stock Purchase Agreement  Rights   |       |                                              | 1,542,000   |                                        |       |   | — |   |   |
| Preferred stock  conversion rights |       |                                              | 51,462,759  |                                        |       |   | 611,111 |   |   |
| Total                              |       |                                              | 100,978,615 |                                        |       |   | 73,543,450 |   |   |

 

*Recent AccountingPronouncements*

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities.” ThisStatement permits entities to choose to measure many financial instruments andcertain other items at fair value that are not currently required to bemeasured at fair value. The objective is to improve financial reporting byproviding entities with the opportunity to mitigate volatility in reportedearnings caused by measuring related assets and liabilities differently withouthaving to apply complex hedge accounting provisions. This statement also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween entities that choose different measurement attributes for similar typesof assets and liabilities. This Statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007 and will becomeeffective for us beginning with the first quarter of 2008. We have not yetdetermined the impact of the adoption of SFAS No. 159 on our financialstatements and footnote disclosures.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” which iseffective for the Company on January 1, 2008. The Statement defines fairvalue, establishes a framework for measuring fair value in accordance withgenerally accepted accounting principles, and expands disclosures about fairvalue measurements. The Statement codifies the definition of fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants at the measurement date.The standard clarifies the principle that fair value should be based on theassumptions market participants would use when pricing the asset or liabilityand establishes a fair 

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valuehierarchy that prioritizes the information used to develop those assumptions.The adoption of this Statement is not expected to have a material effect on theCompany’s consolidated financial statements.

In September 2006,the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N (SAB No. 108),“Financial Statements—Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements,” which iseffective for calendar year companies as of December 31, 2006. SAB No. 108provides guidance on how prior-year misstatements should be taken intoconsideration when quantifying misstatements in current-year financialstatements for purposes of determining whether the financial statements arematerially misstated. Under this guidance, companies should take into accountboth the effect of a misstatement on the current-year balance sheet as well asthe impact upon the current-year income statement in assessing the materialityof a current-year misstatement. Once a current-year misstatement has beenquantified, the guidance in SAB Topic 1M, “Financial Statements—Materiality,”(SAB No. 99) will be applied to determine whether the misstatement ismaterial. The adoption of this Statement has not had a material effect on theCompany’s consolidated financial statements.

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109”. ThisInterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. This Interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. The Interpretation is effectivefor fiscal years beginning after December 15, 2006. The Company does notbelieve that its historical or expected tax reporting positions, whichconsidered before application of the valuation allowance, will have a materialimpact on its consolidated financial statements. See Note 15, Income Taxes.

*Reclassifications*

Certain prior yearbalances have been reclassified to conform to current year presentation.

**Note (4)**   ProposedAcquisition

In June, 2006, the Companyannounced that it has entered into a Letter of Intent (LOI) with ENTECH, Inc.of Keller, TX (‘ENTECH’), to acquire all the outstanding stock of ENTECH uponcompletion of the necessary due diligence and after obtaining appropriatefinancing. ENTECH, a private company formed in 1983, is a developer andmanufacturer 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.

With the combinedtechnologies of the Company and ENTECH, we believe our solar systems will becapable of generating and delivering electrical and thermal energy on site atprices competitive to retail prices without relying on government sponsoredrebates. ENTECH’s patented concentrator technology allows for the installationof large solar “farms” with greatly reduced requirements for solar cellmaterials (silicon or multi-junction). Due to the advantages of ENTECH’sconcentrator, a significantly lessor amount of silicon used in flat plate solarmodules is required by current ENTECH modules to generate the same electricalpower. Consequently, the ENTECH technology greatly lessens the impact of thesilicon material shortage currently constricting flat plate solar panel supply.ENTECH concentrators utilize a two-axis tracker to follow the sun’s positionthroughout the day, maximizing energy production.

ENTECH’s technology canproduce photovoltaic electricity, or thermal energy (heat) for commercial usessuch as for heating and/or air conditioning. When applied in a combined fashionfor onsite power applications, the cost to the customer can be significantlyless for electricity generated and for BTU of heat provided versus separatecompeting systems currently on the market while being competitive with currentretail energy prices.

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It is the Company’sintention to purchase ENTECH through a newly-formed subsidiary. The financingof the acquisition is intended to be based solely on the business prospects andassets of the acquired entity, ENTECH.

As a proposed subsidiaryof the Company, ENTECH will maintain its identity, location, and businessoperations in both terrestrial and space solar energy. The Company anticipatesthat 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.

To obtain the exclusiveopportunity through December 31, 2006 to conduct due diligence the Companymade a $500,000 non-refundable payment to ENTECH to be used for operating andworking capital requirements of ENTECH. Additional due diligence fees of$290,769 were recorded on the balance sheet as of December 31, 2006, andalong with the $500,000 payment to ENTECH, left a capitalized amount of$790,769 on the balance sheet asset at December 31, 2006, classified asdeferred cost on proposed acquisition. Should the proposed acquisition not goforward in 2007, the capitalized amount would need to be expenses in that year.

As of March 30, 2007,the company is continuing to negotiate the acquisition of ENTECH.

**Note (5)**   Contracts

| ** **                                                                                                     | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Costs incurred on contracts                                                                                    |       | $                                     | 14,411,406 |   | $ | 2,442,477 |   |
| Estimated earnings, less foreseeable losses                                                                    |       | 2,705,383                             |       | (527,021 | ) |
|                                                                                                           |       | 17,116,789                            |       | 1,915,456 |   |
| Billings to date                                                                                               |       | (14,717,607                           | )          | (1,480,273 | ) |
| Net costs and estimate earnings/losses in excess of  billings                                                  |       | $                                     | 2,399,182  |   | $ | 435,183 |   |
| These amounts are included in the accompanying  consolidated balance sheets under the following captions: |       |                                  |       |   |   |
| Costs and estimated earnings/losses in excess of  billings                                                     |       | $                                     | 2,548,427  |   | $ | 466,985 |   |
| Billings in excess of costs and estimated  earnings/losses                                                     |       | (149,245                              | )          | (31,802 | ) |
|                                                                                                           |       | $                                     | 2,399,182  |   | $ | 435,183 |   |

 

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**Note (6)**   Equipmentand Leasehold Improvements

Equipmentand leasehold improvements consist of the following at December 31, 2006and 2005:

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Office furniture and equipment                  |       | $        | 130,551    |     | $          | 122,205 |   |
| Vehicles                                        |       | 78,143   |       | 79,634   |       |
| Computers                                       |       | 16,568   |       | 64,719   |       |
| Test equipment and  assembly fixtures           |       | —   |       | 34,903   |       |
| Leasehold improvements                          |       | 5,453    |       | 7,171    |       |
|                                            |       | 230,715  |       | 308,632  |       |
| Less accumulated  depreciation and amortization |       | (34,907  | )          | (258,017 | )          |
| Equipment and leasehold improvements, net       |       | $        | 195,808    |     | $          | 50,615 |   |

 

Depreciation expenses in2006 and 2005 were $30,272 and $25,991 respectively.

**Note (7)**   IntangibleAssets

Intangibleassets are listed below as of December 31, 2006 and the associatedamortization for the year ended December 31, 2006.

| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Loan origination costs                               |       | $                                     | 287,688    |   | $ | 661,634 |   |
| Accumulated amortization                             |       | (287,688                              | )          | (373,946 | ) |
| Loan origination costs,  net                         |       | $                                     | —     |   | $ | 287,688 |   |
| Non-compete agreement,  customer list and trade name |       | $                                     | 123,000    |   | $ | 123,000 |   |
| Accumulated amortization                             |       | (56,333                               | )          | (13,333 | ) |
| Non-compete agreement,  net                          |       | $                                     | 66,667     |   | $ | 109,667 |   |
| Purchased customer  contracts                        |       | $                                     | —     |   | $ | 98,500 |   |
| Accumulated amortization                             |       | —                                |       | (98,500 | ) |
| Purchased customer contracts, net                    |       | $                                     | —     |   | $ | — |   |

 

Amortization expenses for2006 and 2005 were $330,688 and $455,288 respectively.

**Note(8)**   Accounts Payable and Accrued Expenses

Accounts payable andaccrued expenses consist of the following at December 31, 2006 and 2005:

| ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Accounts  payable—contracts        |       | $        | 2,328,963  |     | $          | 854,397 |   |
| Accounts payable—other             |       | 760,702  |       | 761,809  |       |
| Accrued salaries                        |       | 271,039  |       | 250,085  |       |
| Accrued interest                        |       | 268,501  |       | 226,446  |       |
| Accrued warranty reserve                |       | 377,962  |       | 109,387  |       |
| Accrued sales commission                |       | 190,140  |       | 56,991   |       |
| Accrued payroll taxes  and withholdings |       | —   |       | 13,127   |       |
| Accrued sales &  use taxes     |       | 302,000  |       | —   |       |
| Accrued project costs                   |       | 143,890  |       | —   |       |
| Accrued project  contingency            |       | 45,000   |       | —   |       |
| Preferred dividend  payable             |       | 22,500   |       | —   |       |
| Accrued legal expenses                  |       | 73,708   |       | —   |       |
| Other accrued expenses                  |       | 78,472   |       | 16,365   |       |
| Total                                   |       | $        | 4,862,877  |     | $          | 2,288,607 |   |

 

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**Note (9)**   SecuritiesPurchase Agreements

*2004-SecuritiesPurchase Agreement with SBI Brightline VIII LLC (“SBI Brightline SPA”)*

In April 2004,the Company entered into the SBI Brightline SPA calling for the sale ofcommon stock and issuance of warrants as shown in the table below.

| ** **                                              | ** ** | **Common Stock Purchase Rights** | ** ** | **Warrant Rights**     | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|
| **Tranche No.**                                    | ** ** | ** **                                      | ** ** | **No. of Shares** | ** ** | **Price Per Share** | ** ** | **No. of Warrants** | ** ** | **Price Per Warrant** | ** ** |
| Purchased Prior to  December 31, 2004              |       |                                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 1                                                       |       |                                            | 7,000,000  |                        |       |   | $ | 0.17 |   |   |   | 2,100,000 |   |   |   | $ | 0.17 |   |   |
| 2                                                       |       |                                            | 5,000,000  |                        |       |   | $ | 0.22 |   |   |   | 1,500,000 |   |   |   | $ | 0.22 |   |   |
| Available to Be  Purchased As of December 31, 2004 |       |                                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 3                                                       |       |                                            | 5,000,000  |                        |       |   | $ | 0.27 |   |   |   | 1,500,000 |   |   |   | $ | 0.27 |   |   |
| Total/Average                                           |       |                                            | 17,000,000 |                        |       |   | $ | 0.214 |   |   |   | 5,100,000 |   |   |   | $ | 0.214 |   |   |
|                                                         |            |                                                 |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The trading price of the Company’s common stock duringthe several weeks leading up to April 1, 2004, the effective date of theSBI Brightline SPA, was generally greater than the price per share for theTranche No. 1 shares that were sold under the SBI Brightline SPA; however,the average closing price during March 2004 was slightly more than $0.20per share and the average share price of all of the shares to be sold under theSBI Brightline SPA is slightly greater than $0.21 per share.

In the first quarter of 2005, the Company issued andsold to SBI Brightline**740,740 sharesof common stock at a price of $0.27 per share as the initial installment of thethird Tranche resulting in equity proceeds of $200,000. In conjunction with thesale of the stock, the Company issued 222,222 unregistered warrants at a priceof $0.27 per share included in the third Tranche shown above.

On July, 2005, SBIBrightline assigned its rights to the remaining shares of the third tranche ofthe SPA to Camofi 2005.

*2005 SecuritiesPurchase Agreement with Camofi Master LDC (“Camofi SPA”)*

Under the terms ofthe Camofi SPA agreement entered in July, 2005, Camofi acquired:

·       4,259,260common shares of the Company at $0.24 per share resulting in net proceeds of$1,022,222 which were the remaining shares of the third Tranche of the SPA;

·       Warrantsto purchase an aggregate of 1,277,778 shares of common stock of the Company atan exercise price of $.22 per share associated with the sale of common stock.

·       A$3,250,000 principal amount 10% convertible note due July 21, 2008 (“July 21,2008 Note”) for a purchase price of $3,000,000, which was convertible into18,055,556 shares of the Company’s common stock at closing (see Long-Term Debtand Notes Payable Note) and was fully converted as of December 31, 2006;and

·       Warrants to purchase anaggregate of 9,027,778 shares of common stock of the Company at an exerciseprice of $.18 per share associated with the July 21, 2008 Note issuance.

In the fourth quarter of 2006, Camofi converted250,000 shares at $0.18 per share, in full settlement of the outstanding debtdue from the Company.

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*2006 InvestmentAgreement with EMCORE Corporation*

*Series DConvertible Preferred Stock*

On November 30, 2006, the Company issued a pressrelease announcing the entry into three agreements with EMCORE Corporation(“EMCORE”), involving EMCORE’s agreement to purchase up to 26.5% of WorldWateron a fully-diluted basis in exchange for $18 million. The three agreementsentered 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 approvedthe Agreements.

**Note (10)**   Long-TermDebt and Notes Payable

Long-termdebt (including convertible debt) and notes payable consist of the followinguncollateralized loans outstanding at December 31, 2006 and 2005:

| ** **               | ** ** | ** **                                         | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                                   | ** ** | **Option**         | ** ** | ** **        | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **                      | ** **                | ** **      | ** ** | ** ** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|--------------|------------|---------------|------------|----------------------------------------------|------------|--------------------|------------|-------------------|------------|-----------------------|------------|---------------------------------|------------|---------------------------------|---------------------------|-----------------|------------|------------|------------|
| ** **               | ** ** | ** **                                         | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                                   | ** ** | **to Pay**    | ** ** | ** **        | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **                      | ** **                | ** **      | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                                         | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                                   | ** ** | **Interest**       | ** ** | ** **        | ** ** | **Potential**         | ** ** | ** **                      | ** ** | ** **                      | ** **                | ** **      | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                                         | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                                   | ** ** | **in either** | ** ** | **Conversion**    | ** ** | **Number of**    | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** **                |
| ** **               | ** ** | ** **                                         | ** ** | **Stated**   | ** ** | **Effective** | ** ** | ** **                                   | ** ** | **Common**         | ** ** | **Price of** | ** ** | **Shares Upon**  | ** ** | ** **                      | ** ** | **Net**                         | ** **                | ** **      | ** ** | **Net**    | ** ** |
| **Maturity**             | ** ** | **Loans**                                          | ** ** | **Interest** | ** ** | **Interest**  | ** ** | **Interest**                                 | ** ** | **Stock**          | ** ** | **Common**        | ** ** | **Conversion @** | ** ** | **Face**                        | ** ** | **Amount**                      | ** **                | **Face**        | ** ** | **Amount** | ** ** |
| **Date**                 | ** ** | ** **                                         | ** ** | **Holder**   | ** ** | **Rate**      | ** ** | **Rate**                                     | ** ** | **Period**         | ** ** | **or Cash**  | ** ** | **Stock**             | ** ** | **12/31/06**                    | ** ** | **Amount**                      | ** **                | **Outstanding** | ** ** | **Amount** | ** ** | **Outstanding** | ** ** |
| 2006                     |       | Funds &  Qualified  individual  investors |       | 10%          |       | 19-30%        |       | Semi-Annual                                  |       |               | Yes        |              |       |                  | $          | 0.15                            |       |                            |                      | —          |       |       | $          | — |   |   | $ | — |   |   | $ | 235,000 |   |   | $ | 218,522 |   |   |
| 2007                     |       | Funds &  Qualified  individual  investors |       | 10%          |       | 19-30%        |       | Semi-Annual                                  |       |               | Yes        |              |       |                  | $          | 0.15                            |       |                            |                      | 1,233,667       |       |       | 185,050    |   |   | 185,050 |   |   | 267,550 |   |   | 230,842 |   |   |
| 2008                     |       | Funds &  Qualified  individual  investors |       | 10%          |       | 19-30%        |       | Majority  Monthly                            |       |               | Yes        |              |       |                  | $          | 0.15                            |       |                            |                      | 1,333,333       |       |       | 200,000    |   |   | 200,000 |   |   | 3,675,000 |   |   | 2,823,287 |   |   |
| On Demand                |       | Qualified  individuals                             |       | 0%  to 10%   |       | 0%  to 15%    |       | Majority  Monthly &  Semi-annually       |       |               | No         |              |       |                  | N/A        |                            |       |                            | N/A                       |            |       | 30,347     |       |   | 30,347 |   |   | 3,000 |   |   | 3,000 |   |   |
| On Demand                |       | Qualified  individual  investors                   |       | 10%          |       | 10%           |       | Maturity                                     |       |               | No         |              |       |                  | $          | 0.40                            |       |                            |                      | 132,500         |       |       | 53,000     |   |   | 53,000 |   |   | 53,000 |   |   | 53,000 |   |   |
| Stated MaturityDate 1997 |       | Qualified  individual  investors                   |       | 8%           |       | 8%            |       | Maturity                                     |       |               | No         |              |       |                  | $          | 0.40                            |       |                            |                      | 125,000         |       |       | 50,000     |   |   | 50,000 |   |   | 50,000 |   |   | 50,000 |   |   |
| Not Stated               |       | Qualified  individual  investors                   |       | 4.50%        |       | 4.50%         |       | Not stated                                   |       |               | N/A        |              |       |                  | $          | 0.495                           |       |                            |                      | 85,859          |       |       | 42,500     |   |   | 42,500 |   |   | 42,500 |   |   | 42,500 |   |   |
| 2010                     |       | Financial  Institution                             |       | 8%           |       |          |       | Monthly  principal &  interest  payments |       |               | No         |              |       |                  | N/A        |                            |       |                            | N/A                       |            |       | 38,456     |       |   | 38,456 |   |   | 107,475 |   |   | 107,475 |   |   |
|                     |       |                                               |       |         |       |          |       |                                         |       |               |       |              |       |                  | Total      |                            |       |                            | 2,910,359                 |            |       | $          | 599,353    |   |   | 599,353 |   |   | $ | 4,433,525 |   |   | 3,528,626 |   |   |
|                     |       |                                               |       |         |       |          |       | ** **                                   |       |               |       |              |       |                  |       |                            | ** ** | ** **                      | **Less current  portion** |            |       |       |       |   | 495,367 |   |   |   |   |   | 769,180 |   |   |
|                     |       |                                               |       |         |       |          |       | ** **                                   |       |               |       |              |       |                  |       |                            | ** ** | ** **                      | **Long-term  portion**    |            |       |       |       |   | $ | 103,986 |   |   |   |   |   | $ | 2,759,446 |   |   |
|                          |            |                                                    |            |              |            |               |            |                                              |            |                    |            |                   |            |                       |            |                                 |            |                                 |                           |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In July 2005, the Company 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 shares of the Company’scommon stock. The note was convertible into the Company’s common stock at aprice equal to the lesser of (i) the volume-weighted average stock pricefor the 10 trading days prior to conversion, and (ii) $0.18 per share;provided that the conversion price shall not exceed the closing price on theday prior to conversion. As of December 31, 2006, the note was fullyconverted.

Also in July 2005, the Company entered into twoconvertible notes totaling $350,000: $250,000 with an investment fund and$100,000 with a private investor. The notes bear 10% interest which at theoption of the Company can be paid in cash or in shares of the common stock ofthe Company, or a combination of 

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both. The note holdershave the option to convert all or any part of the outstanding principal intocommon stock of the Company at a conversion price of $0.18 per share. Throughthe third quarter of 2006, the investment fund holder converted $125,000,respectively, of their outstanding principal into 694,444 common shares of theCompany.

In conjunction with the issuance of the convertiblenotes in July 2005, the Company recorded beneficial conversion expense of$3,072,973. The detachable warrants issued resulted in a discount of $1,447,308to the notes. The fair value of the warrants was determined using theBlack-Scholes option pricing model. The warrant discount of the notes wasrecorded as additional paid-in capital and is being amortized to interestexpense over the term of the Convertible Notes. As of December 31, 2006all notes were converted, resulting in the full amortization of the warrantdiscount in the amount of $300,616, recorded in the fourth quarter.

In conjunction with the issuance of the convertiblenotes in July 2005, the Company issued four-year warrants for the purchaseof up to 9,611,112 shares of the Company’s common stock, at an average exerciseprice of $0.18 per share, which are exercisable at any time by the noteholders.

On August 25, 2006, the Company entered into aBridge Loan totaling $500,000. The note bears 10% interest, which, at theoption of the Company, can be paid in cash or in shares of the common stock ofthe Company or a combination of both. The loan was repaid in the fourthquarter. In accordance with the terms of the loan agreement, the Company issueda five-year warrant for 500,000 shares with an exercise price of $0.22 pershare.

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

| 2007  |   | $       | 360,897 |   |
|-------|--------|---------|---------|--------|
| 2008  |   | 200,000 |    |
| 2009  |   | —  |    |
| 2010  |   | 38,456  |    |
| Total |   | $       | 599,353 |   |

 

**Note (11)**   RelatedParty Transactions

*Notes Payable*

TheCompany had outstanding notes payable owed to directors, officers and employeesof the Company as of December 31, 2006 and 2005 as follows:

| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                    |       | $        | 3,000      |     | $          | 3,000 |   |
| Officers and  employees                      |       | —   |       | 32,748   |       |
| Total                                        |       | 3,000    |       | 35,748   |       |
| Less current  maturities                     |       | (3,000   | )          | (35,748  | )          |
| Total long term note  payable, related party |       | $        | —     |     | $          | — |   |

 

Notes payable todirectors, officers and employees are due on demand and accrue interest at 10%per annum.

*Other Related PartyTransactions*

The Company leased officeand laboratory facilities from the Chairman of the Company. Lease payments tothe Chairman were $18,000 and $36,000 in 2006 and 2005, respectively, plusutilities and maintenance. This lease was terminated as of June 30, 2006.

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**Note (12)**   ConvertiblePreferred Stock

In 2001, the Company issued a total of 66,667 sharesof Series A 7% three-year Convertible Preferred Stock in exchange forfinancial public relations services. The shares were issued at $0.90 per shareand the services were valued at $60,000 and recorded in the financialstatements. In October 2004, the shares of Series A Preferred Stockwere converted into 66,667 shares of common stock issue at $0.90 per share.

In 2000, the Company issued 611,111 shares of Series B7% three-year Convertible Preferred Stock at $0.90 per share. The Series BPreferred Stock proceeds were intended to be used by the Company for theinitial operating requirements of WorldWater (Phils) Inc., the Company’sPhilippine subsidiary. The conversion privileges, which expired September 2003,were convertible either into 10% of WorldWater (Phils) Inc. or into 611,111common shares 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.

Dividends on the Series Bwere accrued through September 30, 2004 at the rate of 7% and shown as ‘Accretionof preferred stock dividends’ in the Consolidated Statements of Operations.

*Series CConvertible Preferred Stock*

The Company issued 750,000 shares of Series C 6%Convertible Preferred Stock at $1.00 per share. The Series C ConvertiblePreferred Stock proceeds were used to fund: (i) a $500,000 payment made tothe ENTECH, Inc. (“ENTECH”) to secure a binding letter of intent allowingthe Company the opportunity to conduct due diligence for the proposedacquisition of all of the common shares of ENTECH by the Company or anaffiliate; and (ii) due diligence expenses directly incurred in connectionwith the proposed acquisition transaction.

The Series C Convertible Preferred Stock held byeach 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 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 CConvertible Preferred Stock accrue at the annual rate of 6%, payable the firstday of each month, except that during the period July 1, 2006 through June 30,2007 dividends will be accrued but not paid. As of December 31, 2006, the Series CConvertible Preferred Stock had accrued and unpaid dividends in the aggregateamount of $22,500, which will be payable upon conversion.

*Series DConvertible Preferred Stock*

On November 30, 2006, the Company issued a pressrelease announcing the entry into three agreements with EMCORE Corporation (“EMCORE”),involving EMCORE’s agreement to purchase up to 26.5% of WorldWater on afully-diluted basis in exchange for $18 million. The three agreements enteredinto 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, 

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the “Agreements”). TheBoards of Directors of EMCORE and WorldWater each approved the Agreements.

Pursuant to the Investment Agreement, EMCORE agreed toinvest up to $18.0 million (the “Investment”) in return for (i) sixmillion, five hundred and twenty-three thousand, eight hundred and ten(6,523,810) shares of Series D Convertible Preferred Stock of WorldWater,par value $0.01 per share (the “Series D Stock”) and (ii) six hundredand sixty-eight thousand, one hundred and thirty-nine (668,139) warrants topurchase six hundred and sixty-eight thousand, one hundred and thirty-nine(668,139) shares of Series D Stock (the “Warrants”). The Series DStock and Warrants to be received by EMCORE are equivalent to an approximatelythirty-one percent (31%) equity ownership in WorldWater, or approximatelytwenty-six and half percent (26.5%) on a fully diluted basis.

On November 29, 2006, EMCORE invested $13.5million in the Company, representing the first tranche of its $18 millioninvestment, in return for which WorldWater issued to EMCORE (i) fourmillion, eight hundred and ninety two thousand, eight hundred and fifty seven(4,892,857) shares of Series D Convertible Preferred Stock and (ii) fivehundred and 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 secondtranche (the “Tranche B Closing”) will be consummated subject to the executionof a definitive strategic agreement between the Parties and certain otherconditions set forth in the Investment Agreement. The Parties currently expectthe execution of the definitive strategic agreement and the Tranche B Closingto occur before the end of the year. At the Tranche B Closing, WorldWater willissue to EMCORE (i) an additional one million, six hundred and thirty thousand,nine hundred and fifty-three (1,630,953) shares of Series D ConvertiblePreferred Stock and (ii) one hundred and sixty-three thousand andninety-five (163,095) warrants to purchase one hundred and sixty-three thousandand ninety-five (163,095) shares of Series D Stock.

In the Investment Agreement, the Company and EMCOREmade customary representations, warranties and covenants and the Company agreedto indemnify EMCORE against certain potential losses incurred in connectionwith its investment in the Company. Pursuant to the terms of the InvestmentAgreement, EMCORE has been granted the following rights, among others: (i) theright to 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.

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 WorldWater (the “Common Stock”) initiallyequal to such number of shares of Series D Stock multiplied by ten,subject to certain adjustments as more fully set forth in the Certificate ofDesignation 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 WorldWater, (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 WorldWater, (v) certain liquidation preferences as detailedin the Certificate of Designation and (vi) the right to receive dividendsin an amount equal to the amount of 

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dividends that such holderwould have received had the holder converted its shares of Series D Stockinto shares of Common Stock as of the date immediately prior to the record datefor such dividend.

On November 29, 2006,the Company recorded a beneficial conversion on preferred stock dividends whichneeded to be recognized on the preferred shares of 48,928,570 and warrants of505,044. After calculating the intrinsic value, in conjunction with utilizingthe Black Scholes method, an adjustment of $3,184,642 was recorded as apreferred stock dividend.

*LiquidationPreference*

*Uponliquidation, holders of the Series C and D Convertible Redeemable PreferredStock will be entitled to the greater of (1) a per share amount equal tothe original purchase price plus any dividends accrued but not paid and(2) the amount that the holder would receive in respect of a share ofSeries C and D, preferred if immediately prior to dissolution andliquidation, all shares of Series C and D Convertible Redeemable PreferredStock were converted into shares of common stock. The liquidation preference ofSeries C and D is $772,500 and $13,500,000, respectively.*

**Note (13)**   CommonStock Transactions

Commonstock transactions during the twelve months ended December 31, 2006consisted of the following:

| ** **                                                                                              | ** ** | ** **  | ** ** | **Price Per** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                                              | ** ** | **Shares**  | ** ** | **Share**          | ** ** |
| Shares Issued and  Outstanding December 31, 2005                                                   |       | 108,786,940 |       |               |       |   |   |
| Conversion of Convertible  Loans totaling $3,792,500                                                    |       | 21,422,223  |       |               | $          | 0.18 |   |   |
| Warrants  exercised                                                                                     |       | 17,731,387  |       |               | $          | 0.19 |   |   |
| Shares sold under  Stock Purchase Agreements                                                            |       | —      |       |               | $          | — |   |   |
| Shares issued in  lieu of payment of cash for interest                                                  |       | 206,630     |       |               | $          | 0.19 |   |   |
| Stock options exercised                                                                                 |       | 450,561     |       |               | $          | 0.19 |   |   |
| Shares issued as  compensation for public relations, business development and for the purchase  of RECs |       | 761,311     |       |               | $          | 0.19 |   |   |
| Shares issued  during the year ended December 31, 2006                                             |       | 40,571,582  |       |               | $          | 0.19 |   |   |
| Shares issued and Outstanding  December 31, 2006                                                   |       | 149,359,052 |       |               |       |   |   |

 

**Note (14)**   WarrantTransactions

The Company accounts for transactions withnon-employees, in which financing, goods or services are the considerationreceived for the issuance of equity warrant instruments under the fair valuemethod. The fair value of the warrant was calculated using the Black-Scholespricing model with the following assumptions: dividend yield of zero percent;expected volatility of 27%; risk free interest rate of 5% and an average termof 10 years. The relative fair value of the warrants resulted in non-cashexpenses charges of $528,000 and $1,985,000 for the years endedDecember 31, 2006 and 2005. All warrants are exercisable.

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Warranttransactions consisted of the following during the year ended December 31,2006:

| ** **                                                                                           | ** ** | **Exercisable** | ** ** | ** **           | ** **    |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|---------------|
| ** **                                                                                           | ** ** | **Warrants**    | ** ** | **Stock Price** | ** **    |
| Warrants  Outstanding As of December 31, 2005                                                   |       | 36,789,366      |       | $                    | 0.15 to $0.50 |   |
| Detachable  warrants issued in conjunction with the issuance registered common stock  shares         |       | 1,083,614       |       | $                    | 0.35 to $0.39 |   |
| Warrants issued  in consideration for extensions of short-term loans by a Director and  Shareholders |       | 875,000         |       | $                    | 0.18 to $0.22 |   |
| Warrants granted  on commissions as debt and equity financings                                       |       | 2,612,169       |       | $                    | 0.25 to $0.32 |   |
| Warrants for  services                                                                               |       | 500,000         |       | $                    | 0.41          |   |
| Exercise of  warrants (capital addition included in the Stock Transactions Note)                |       | (16,620,276     | )          | $                    | 0.15 to $0.30 |   |
| Expiration of  outstanding warrants                                                                  |       | (447,000        | )          |                 |          |
|                                                                                                 |       | (11,996,493     | )          |                 |          |
| Warrants Outstanding As  of December 31, 2006                                                   |       | 24,792,873      |       | $                    | 0.15 to $0.50 |   |

 

Warrantsoutstanding expire as follows:

| ** ** | ** ** | **Warrants** | ** ** | **Strike**   | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| **Year**   | ** ** | ** **   | ** ** | **Expiring** | ** ** | **Price** | ** ** |
| 2007       |       | 2,885,666    |       | $            | 0.15-0.50  |   |
| 2008       |       | 2,551,697    |       | 0.15-0.37    |       |
| 2009       |       | 15,236,650   |       | 0.15-0.41    |       |
| 2011       |       | 4,118,860    |       | 0.18-0.375   |       |
| ** ** |       | 24,792,873   |       |         |       |
|            |            |              |            |              |            |  |  |  |

 

**Note (15)**   IncomeTaxes

Incometax benefit for the years ended December 31, 2006 and 2005 were asfollows:

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

 

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Incometaxes computed using the federal statutory income tax rate differs from theCompany’s effective tax rate primarily due to the following for the years endedDecember 31, 2006 and 2005:

| ** **                                                                      | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Income tax  benefit at US federal statutory tax rate                            |       | $         | (2,802,600 | )         | $          | (3,541,000 | ) |
| State income  taxes, net of federal tax effect                                  |       | (211,200  | )          | (426,800  | )          |
| Permanent items                                                                 |       | 258,900   |       | 1,098,200 |       |
| Change in  deferred tax asset valuation allowance                               |       | 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 31,2006, the Company had Federal and state net operating loss carryforwardstotaling approximately $32,055,800 and $17,189,500, respectively, available toreduce future taxable income and tax liabilities which expire at various datesbetween 2007 and 2026. In addition, as of December 31, 2006, the Companyhad federal 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. The carryforwards will expireas follows: 

| **Year**     | ** ** | **Net Operating Loss  Carryforwards** | ** ** | **Research and Development   Tax Credits** | ** ** |
|--------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Expiring** | ** ** | ** **                                      | ** ** | **Federal**                                                    | ** ** | **State** | ** ** | **Federal** | ** ** | **State** | ** ** |
| 2007         |       | $                                               | 251,100    |                                                           | $          | — |   | $ | — |   |   | $ | — |   |   |
| 2008         |       | 641,300                                         |       | —                                                         |       | — |   |   | — |   |   |
| 2009         |       | 887,900                                         |       | —                                                         |       | 19,600 |   |   | — |   |   |
| 2010         |       | 912,400                                         |       | —                                                         |       | 15,200 |   |   | — |   |   |
| 2011         |       | 981,200                                         |       | 4,759,500                                                      |       | 15,400 |   |   | — |   |   |
| 2012         |       | 1,263,200                                       |       | 5,318,200                                                      |       | 12,900 |   |   | — |   |   |
| 2013         |       | 1,337,700                                       |       | 7,111,800                                                      |       | 20,400 |   |   | — |   |   |
| 2014         |       | 660,000                                         |       | —                                                         |       | 16,100 |   |   | — |   |   |
| 2015         |       | 1,687,500                                       |       | —                                                         |       | 17,700 |   |   | — |   |   |
| 2016         |       | 1,453,700                                       |       | —                                                         |       | 16,500 |   |   | — |   |   |
| 2017         |       | 1,688,400                                       |       | —                                                         |       | 8,100 |   |   | — |   |   |
| 2018         |       | 3,101,900                                       |       | —                                                         |       | 18,700 |   |   | — |   |   |
| 2019         |       | 4,759,500                                       |       | —                                                         |       | 20,000 |   |   | — |   |   |
| 2020         |       | 5,318,200                                       |       | —                                                         |       | — |   |   | — |   |   |
| 2021         |       | 7,111,800                                       |       | —                                                         |       | — |   |   | — |   |   |
|         |       | $                                               | 32,055,800 |                                                           | $          | 17,189,500 |   | $ | 180,600 |   |   | $ | — |   |   |
|              |            |                                                 |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Managementof the Company has evaluated the positive and negative evidence bearing uponthe realizability of its deferred tax assets. Management has considered theCompany’s history of losses and, in accordance with the applicable accountingstandards, has fully reserved the deferred tax asset. Deferred tax assetsconsist of the following at December 31, 2006 and 2005:

| ** **                                 | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|
| Gross deferred  tax assets                 |       |        |       |        |       |
| Net operating loss carryforwards           |       | $           | 12,327,100 |        | $          | 10,108,500 |   |
| Warranty reserve                           |       | 169,000     |       | 43,900      |       |
| Accrued expenses and deferred compensation |       | 534,000     |       | 122,800     |       |
|                                       |       | 13,030,100  |       | 10,275,200  |       |
| Gross deferred  tax liabilities            |       |        |       |        |       |
| Deferred tax valuation allowance           |       | (13,030,100 | )          | (10,275,200 | )          |
|                                       |       | $           | —     |        | $          | — |   |

 

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 transferunused New Jersey net operating loss carryovers and research and developmenttax credits to other New Jersey corporation business taxpayers. In 2005, theCompany submitted applications to the New Jersey Economic Development Authority(the “EDA”) to participate in the Program for the years 2004 and 2003, and theapplications were approved. The EDA then issued certificates certifying theCompany’s eligibility to participate in the Program for these years.

During 2005, the Companysold approximately $2,207,000 and $210,000 of its 2004 and 2003 New JerseyState net operating loss carryforwards, and $10,800 of its 2004 research anddevelopment tax credits, resulting in the recognition of a $200,953 taxbenefit.

**Note (16)**   Stock-BasedCompensation Plans

Incentive Stock Option Plan

In 1999, the Board of Directors and stockholdersapproved the Company’s 1999 Incentive Stock Option Plan (the “1999 Plan”),which was amended in 2006 with the approval of the Board of Directors andstockholders to increase the amount of available shares under the plan to amaximum of 25,000,000 million 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.

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Thefollowing is a summary of stock option activity:

| ** **                                   | ** ** | ** ** | ** ** | **Weighted-  Average**  | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Balance,  December 31, 2004             |       | 10,015,325 |       |                    | $          | 0.25 |   |   |
| Granted                                      |       | 3,430,988  |       |                    | 0.31       |   |   |
| Cancelled                                    |       | (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       |   |   |
| Cancelled                                    |       | (997,600   | )          |                    | 0.32       |   |   |
| Exercised                                    |       | (450,561   | )          |                    | 0.24       |   |   |
| Balance,  December 31, 2006             |       | 13,358,231 |       |                    | $          | 0.27 |   |   |
| Options Exercisable,  December 31, 2006 |       | 11,605,819 |       |                    | $          | 0.26 |   |   |

 

Summarizedinformation about stock options outstanding is as follows:

| **Range of  Exercise Prices** | ** ** | ** ** | ** ** | **Options  Outstanding  as of  December 31, 2006** | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Average  Exercise  Price** | ** ** | **Options  Exercisable as of  December 31, 2006** | ** ** | **Average  Exercise  Price of  Exercisable  Options** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| $                                       | 0.02-0.15  |       |       | 3,365,173                                                         |       |                                      |       | 5.0                          | yrs.       |                                                                  |       |                                                       | $          | 0.14 |   |   |   | 3,365,173 |   |   |   | $ | 0.14 |   |   |
|                                    | 0.19-0.30  |       |       | 4,928,170                                                         |       |                                      |       | 7.6                          |       |                                                                  |       |                                                       | 0.27       |   |   |   | 3,538,170 |   |   |   | 0.27 |   |   |
|                                    | 0.31-0.40  |       |       | 4,860,888                                                         |       |                                      |       | 6.8                          |       |                                                                  |       |                                                       | 0.34       |   |   |   | 4,498,476 |   |   |   | 0.34 |   |   |
|                                    | 0.45-0.59  |       |       | 204,000                                                           |       |                                      |       | 1.2                          |       |                                                                  |       |                                                       | 0.49       |   |   |   | 204,000 |   |   |   | 0.49 |   |   |
|                                    | Total      |       |       | 13,358,231                                                        |       |                                      |       |                         |       |                                                                  |       | $                                                          | 0.27       |   |   |   | 11,605,819 |   |   |   | $ | 0.26 |   |   |
|                                         |            |            |            |                                                                   |            |                                           |            |                              |            |                                                                       |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaggregate intrinsic value of options outstanding and exercisable atDecember 31, 2006 was $1,369,509.

Restricted StockAgreement

In 2002, the Company granted 1,000,000 shares ofrestricted common stock for the benefit of its Chairman. Compensation expensefor the grant was based on the market price ($0.15) for the common stock and isbeing amortized on a straight-line basis over the five year vesting periodbased on continuous service. The recipient has the right to vote all sharessubject to the grant, whether or not the shares have vested. These shares wereissued in January, 2007.

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

**Note (17)**   Employees’Savings Plan

The Company established a401(k) plan in 2000 for eligible employees. Under the provisions of theplan, eligible employees may voluntarily contribute a portion of theircompensation up to the statutory limit. In addition, the Company can make amatching contribution at its discretion. As of December 31, 2006, theCompany has not made any contributions to the plan.

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**Note (18)**   Commitmentsand Guarantees

TheCompany’s commitments as of December 31, 2006, for the years 2007 through2011 and thereafter are estimated below: 

| **Amounts rounded in thousands** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-tem debt maturities (face amount)     |       | $        | 360,897    |     | $          | 200,000    |       | $        | —     |     | $          | 38,456         |       | $         | —     |   |   | $ | — |   |   | $ | 599,353 |   |
| Employment obligations                          |       | 585,000  |       | 585,000  |       | 585,000    |       | 250,000  |       | 250,000  |       |           | —     |      |       | 2,255,000 |   |
| Renewable energy credit guarantee obligations   |       | 98,710   |       | 64,701   |       | 64,701     |       | 64,701   |       | 55,329   |       |           | 1,412      |      |       | 349,554 |   |
| Operating lease payments                        |       | 240,576  |       | 321,900  |       | 285,900    |       | 267,900  |       | 267,900  |       |           | 937,650    |      |       | 2,321,826 |   |
| Repayment of grant                              |       | 35,000   |       | —   |       | —     |       | —   |       | —   |       |           | —     |      |       | 35,000 |   |
| Total                                           |       | $        | 1,320,183  |     | $          | 1,171 ,501 |       | $        | 935,601    |     | $          | 621,057        |       | $         | 573,229    |   |   | $ | 939,062 |   |   | $ | 5,560,733 |   |

 

*Operating Leases*

The Company’s executive office, research anddevelopment facility is housed in a 13,270 square foot site located at 55 Route31 South, Pennington, New Jersey 08534. This facility is leased under anoperating lease expiring June 25, 2007. The Company has signed a new leasefor 30,000 square feet on March 20, 2007. The facility is leased under anoperating lease commencing July 1, 2007, and expiring June 30, 2015.The property is located at 200 Ludlow Drive, Ewing, New Jersey 08638.

In September 2005, the Company acquired QuantumEnergy Group in Applegate, California which included the transfer of their fiveyear lease expiring April 30, 2009, with two five-year options to extendthe lease.

In July 2004, theCompany opened a sales and technical support office in Foster City, Californiaunder a two-year lease expiring May 31, 2006, and which office was closedin June 2005

*EmploymentAgreements*

On December 18, 2006,  the Company entered into a five-yearemployment agreement with Mr. Kelly, effective January 1, 2007.Adjusted compensation under the agreement is $250,000 annual salary and $1,200per month auto allowance. Mr. Kelly participates in the Company “fringebenefits” including health coverage and the maintenance of a whole life policy.The benefits continue if employment is terminated without cause or by reason ofdeath or disability to Mr. Kelly or his estate for the remaining term ofthe agreement or a period of 24 months, whichever is longer. Effective January 19,2007, Mr. Kelly was granted 5,000,000 stock options at an exercise priceof $0.40, fair market value at the date of the grant. These shares will vesttwenty percent (20%) per year, with the first twenty percent (20%) vestingimmediately upon the grant of the options and the remaining options vestingtwenty percent (20%) per year on the annual anniversary of the initial grant.

In July 2002, Mr. Kelly was granted1,000,000 shares of restricted stock, all of which are vested as of December 31,2006. Total other compensation expense recognized was $45,000 in December 31,2006 and in 2005.

Included in accrued sales commissions as of December 31,2006 is $58,622 owed to Mr. Kelly under a Management Services FeeAgreement expired on December 31, 2006, calling for a managementservices/sales incentive fee equal to one-half percent (0.5%) of the Company’sgross product revenues less any related product returns, rebates, allowances,freight charges, tariffs and sales taxes, not to exceed $250,000 per annum.

On July 10, 2006, the Company entered into anemployment agreement with Mr. Larry L. Crawford, Executive Vice Presidentand Chief Financial Officer with a term which expires July 9, 2009. Annual

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compensation under theagreement is $150,000 and included an initial grant of 600,000 stock optionsvesting over the term of the employment agreement. On March 8, 2007, theCompany entered into a new three-year employment agreement with Mr. Crawford.The contract 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, the Company entered into anemployment agreement with Douglas L. Washington, Executive Vice President, Marketing,effective January 1, 2007 for a period of three year. Annual compensationunder the agreement is $160,000 and includes an initial grant of 600,000 stockoptions vesting over the term of the employment agreement.

On May 24, 2004, theCompany entered into an employment agreement with James S. Brown. ExecutiveVice President, Project Finance with a term which expired December 31,2006. Annual compensation under the agreement is $150,000 and included aninitial grant of 250,000 stock options vesting over the term of the employmentagreement.

**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)**   SupplementalDisclosure of Cash Flow Information 

| ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Cash paid during  the year for interest |       | $        | 80,957     |     | $          | 242,154 |   |
|                                         |            |          |            |          |            |  |  |

 

**Note (21)**   SubsequentEvents

In the quarter ending March 31, 2007, the Companyissued 377,116 shares of common stock as the result of warrants and stockoptions being exercised, loans being converted and the Company issuing commonstock for services and in lieu of the payment of interest. The exercise ofwarrants and common stock options resulted in the infusion of $86,261 in newcapital to the Company in the quarter.

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**ITEM8.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

**None.**

**ITEM8A.**        CONTROLS AND PROCEDURES.

a) Evaluation ofdisclosure controls and procedures

*Limitations On Effectiveness of Controls*

The Company believes thata control system, no matter how well designed and operated, cannot provideabsolute assurance that the objectives of the control system are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within a company have been detected. TheCompany’s disclosure controls and procedures are designed to provide areasonable assurance of achieving their objectives.

The Company’s management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures as of December 31, 2006. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are generally effective for gathering,analyzing and disclosing the information that the Company is required todisclose in the reports filed under the Securities Exchange Act of 1934, withinthe time periods specified in the SEC’s rules and forms. Such evaluationdid not identify any change in the year ended December 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting; however, there are two areas ofmaterial weakness of concern.

In connection with itsaudit of, and in the issuance of its report on the Company’s financialstatements for the year ended December 31, 2006, Amper, Politziner &Mattia, P.C. delivered a letter to the Audit Committee of our Board ofDirectors and the Company’s management that identifies certain items that itconsiders to be material weaknesses in the effectiveness of the Company’sinternal controls pursuant to standards established by the Public CompanyAccounting Oversight Board. A “material weakness” is a significant deficiency(as defined in the Public Company Accounting Oversight Board’s AuditingStandard No. 2), or a combination of significant deficiencies, thatresults in more than a remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected on atimely basis.

The material weaknessis lack of adequate controls within the accounting software used by theCompany to properly handle the accounting functions of a public company.

The Company believes, asstated above, the limited number of projects completed in the year ended 2006,and the recruitment of its new CFO, the Company’s disclosure controls andprocedures are generally effective for gathering, analyzing and disclosing theinformation the Company is required to disclose in the reports filed under theSecurities Exchange Act of 1934, within the time periods specified in the SEC’srules and forms. The Company agrees with its independent auditors that itssystem of internal control and reporting controls should be improved in linewith expected continued growth in commercial operations and intends to take thefollowing implementation steps to improve its accounting functions. The impactof the above conditions were relevant to the fiscal year ended December 31,2006 and did not affect the results of this period or any prior period.

*Mitigation Steps BeingImplemented By The Company*

In March 2007,the Company engaged Microstrategies, Inc. to provide an improved IT,financial reporting, and ERP system to enhance efficiencies and financial andoperating controls as it works to implement Sarbanes-Oxley requirements andprocedures.

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**PART III.**

**ITEM9.**                DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OFTHE EXCHANGE ACT

Thefollowing table sets forth the names, ages and positions of the executiveofficers and directors of the Company as of December 31, 2006. Theirrespective backgrounds are described following the table: 

| **NAME**                      | ** ** | ** ** | ** ** | **AGE** | ** ** | **POSITION WITH THE COMPANY**        | ** ** |
|-------------------------------|------------|------------|------------|---------|------------|-----------------------------------------------------|------------|
| Quentin T. Kelly              |       |       | 72         |    |       | Chairman,  Chief Executive Officer                  |       |
| Dr. Frank W.  Smith      |       |       | 48         |    |       | Executive  Vice President, Chief Operating Officer  |       |
| Larry L. Crawford             |       |       | 58         |    |       | Executive  Vice President, Chief Financial Officer  |       |
| Dr. Anand  Rangarajan    |       |       | 57         |    |       | Executive  Vice President, Chief Technology Officer |       |
| Douglas L.  Washington        |       |       | 59         |    |       | Executive  Vice President, Sales                    |       |
| James S. Brown                |       |       | 50         |    |       | Executive  Vice President, Project Finance          |       |
| Joseph Cygler                 |       |       | 71         |    |       | Director                                            |       |
| Dr. Hong Hou             |       |       | 42         |    |       | Director                                            |       |
| Reuben F.  Richards, Jr. |       |       | 51         |    |       | Director                                            |       |
| Lange  Schermerhorn           |       |       | 65         |    |       | Director                                            |       |
| Dr. Davinder  Sethi      |       |       | 59         |    |       | Director                                            |       |
| Harrison Wellford             |       |       | 66         |    |       | Director                                            |       |

 

Quentin T. Kellyfounded WorldWater, Inc. in 1984 as a consulting and R&D company andhas been Chairman since then. Mr. Kelly also served as CEO from 1984 toJanuary, 2006, and resumed his role as CEO in January 2007. Mr. Kellywas previously Director of Information Services and Assistant to the Presidentof Westinghouse Electric Corporation from 1965 to 1971, and subsequently becamePresident of Kelly-Jordan Enterprises, Inc., a leisure products companyfrom 1971 to 1975, and then President of Pressurized Products, Inc.,manufacturers and international marketers of specialized water systems andproducts, from 1976 to 1984. Mr. Kelly is an alumnus of Kenyon College andholds three U.S. patents relating to water systems. He has many years’experience in business relating to water and power needs in the U.S. and thedeveloping world. He has worked on water supply and solar power projects in theU.S. and with more than a dozen governments and private contractors throughoutthe world.

Dr. Frank W. Smithjoined the Company as Chief Operating Officer in February 2007. Hepreviously served as Vice President of Strategy and Business Development atEMCORE Corporation, where he identified target acquisitions, managed the duediligence process, and provided strategic direction for the company. Prior tothis, he was an Operations Director at JDS Uniphase, where he managed severalbusiness units since 1999, before which he was a Program Manager at LockheedMartin. He was also a Manager at MIT’s Lincoln Labs and has accumulated fivepatents under his name as well as having published nearly two dozen articles. Dr. Smithgraduated with a B.S. in Engineering & Applied Science from YaleUniversity and completed a Masters and Ph.D. in Electrical Engineering &Computer Science from MIT, with a minor in Business Administration from MIT’sSloan School of Business.

Mr. Larry Crawford,Executive Vice President and Chief Financial Officer, joined the Company in July 2006.Previously, Mr. Crawford served as Chief Financial Officer and ExecutiveVice President of Escala Group, Inc. since 2001. Mr. Crawford servedas Chief Financial Officer of Arzee Holdings, Inc. from 1996 to 2001 andas Vice President of Finance and Chief Financial Officer of Talon, Inc., asubsidiary of Coats Viyella plc from 1987 to 1996. Mr. Crawford is acertified 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 over 20 yearsexperience in all aspects of the solar electric business and has pioneered thedevelopment of several proprietary solar water 

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pumpingsystems, products and markets. His systems have been installed in over 20countries. He holds a Ph.D. in Engineering from the University of Wisconsin.

Douglas L. Washington,Executive Vice President, Marketing and International Operations, has been employedby the Company since 2004. He has worked at Johnson & Johnson, wherehe served as Worldwide Director of New Business Development, Consumer Sector,and Director of Business Development, Advanced Materials Company, developingbusiness opportunities with a variety of governmental, educational and otherresearch institutions in the United States and in countries in Asia, Africa andelsewhere. He attended the University of Texas, and has had professionaltraining at the Kellogg School of Business and the Wharton School of Business,and has been a private consultant, specializing in biotechnology and consumerwater programs.

James S. Brown, ExecutiveVice President, Project Finance, joined the Company in May 2004. Mr. Brownhas extensive financial experience in the energy industry. From August 2002until May 2003, 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 to1986, an executive with Honeywell Information Systems from 1964 to1976, and a marketing representative with International Business Machines from1961 to 1964. Mr. Cygler has a BS in Engineering from the U.S. MilitaryAcademy at West Point.

Dr. Hong Hou has beena director 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 Energyweapon research lab managed by Lockheed Martin. Prior to that, he served withAT&T Bell Laboratories, engaging in research on high-speed optoelectronicdevices. He holds a Ph.D. in electrical engineering from the University ofCalifornia at San Diego. He has published over 150 journal articles and holdsseven U.S. patents.

Reuben F. Richards, Jr.has been a director of the Company since January 2007. Mr. Richards,who joined EMCORE Corporation in October 1995 as its President and ChiefOperating Officer, became Chief Executive Officer in 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—1991, Mr. Richards was a Director atPrudential-Bache Capital Funding in its Investment Banking Division. Mr. Richardshas served  on the Boards of theUniversity of New Mexico School of Engineering, Sandia National LaboratoriesExternal Review Panel and Board of GELcore, EMCORE’s joint venture with GeneralElectric.

Lange Schermerhorn hasserved as a Director since 2001. She is a retired U.S. Ambassador to Djibouti,is an economist who has spent 30 years in the Foreign Service and has coveredthe globe as a senior foreign officer in such places as Brussels, where she wasDeputy Chief of Mission, with specific 

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emphasison economics relating to NATO and EU. She has also had significant ForeignService experience in Sri Lanka, Vietnam, Tehran, London and Washington D.C. Ms. Schermerhorn’seducation and related experience include Mt. Holyoke College (B.A. 1961),Harvard Business School, and National War College.

Dr. Davinder Sethihas served as a Director since 2000. He has been an independent advisor inthe fields of information technology and finance. He has served asChairman and Chief Executive Officer of iPing, Inc.,and was a Director and Senior Advisor to Barclays de Zoete Wedd. Inaddition, Dr. Sethi spent seven years at Bell Laboratories in operationsresearch and communications network planning and seven years in corporatefinance at AT&T. Dr. Sethi holds a Ph.D. and M.S.in Operations Research, Economics and Statistics from theUniversity of California, Berkeley, and is a graduateof the Executive Management Program at Penn State.

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 theareas of energy, mergers and acquisitions, and project finance law. Mr. Wellfordis active in the management and financing of renewable energy and energyefficiency technology companies. He currently serves as either a board memberor advisor to several companies in the energy field. Mr. Wellford servedas the Executive Associate Director of the President’s Office of Management andBudget from 1977 to 1981. He also has held several senior management positionsin Presidential transitions since 1976. In the 1980’s Mr. Wellford was aleading advocate for the creation of the competitive power industry and afounder of the largest trade association for independent power companies. Mr. Wellfordearned his B.A. from Davidson College, his M.A. from Cambridge University, hisPh.D. in Government from Harvard University and his J.D. from Georgetown University.

**MEETINGATTENDANCE**

The business of theCompany is managed under the direction of the Board. The Board meets during theCompany’s fiscal year to review significant developments affecting the Companyand to act on matters requiring Board approval. The Board held nine meetingsand acted by unanimous written consent numerous times during the fiscal yearended December 31, 2006. All of the Directors attended the meetings heldduring the year.

**COMMITTEESOF THE BOARD OF DIRECTORS**

The Board of Directors hasa standing Audit Committee and a standing Compensation Committee. The AuditCommittee and Compensation Committee met following the end of each of thefiscal quarters in 2006 and 2005.

Mr. Cygler, Dr. Sethi,and Ms. Schermerhorn comprise the Audit Committee. The Audit Committeeoperates under a formal written charter. The Audit Committee makesrecommendations concerning the engagement of independent public accountants,reviews with the independent accountants the results of the audit engagement,approves professional services provided by the accountants including the scopeof non-audit services, if any, and reviews the adequacy of the Company’sinternal accounting controls.

Mr. Cygler, Dr. Sethi,and Ms. Schermerhorn comprise the Compensation Committee. The CompensationCommittee makes recommendations to the Board regarding the executive andemployee compensation programs of our company. Committee  makes recommendations  to  the  Board  regarding  theexecutive  and  employee  compensation  programs  of our  company.

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**ITEM10.**         EXECUTIVE COMPENSATION

**SUMMARYCOMPENSATION TABLE**

Thefollowing table sets forth information with respect to the compensation paid bythe Company to its chairman and to each other executive officer of the Companywho received at least $100,000 in salary and bonus during 2006 and 2005. The “NamedExecutive Officers” are:

| **Name & Principal** | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock   Awards** | ** ** | **Option   Awards** | ** ** | **Non-Equity   Incentive Plan** | ** ** | **Nonqualified   Deferred   Compensation** | ** ** | **All Other**    | ** ** | **Total**                 | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|-----------|------------|-------------------------|------------|--------------------------|------------|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| **Position**                       | ** ** | ** ** | ** ** | **Year**   | ** ** | **($)**   | ** ** | **($)**                 | ** ** | **($)**                  | ** ** | **($)**                                   | ** ** | **Compensation ($)**                            | ** ** | **Earnings ($)** | ** ** | **Compensation ($)** | ** ** | **($)** | ** ** |
| Quentin T. Kelly                   |       |       | 2005       |       |       | 170,000   |       | —                  |       |                     | —     |                                      |       |                                                 | 37,200     | (2)                   |       |                      | —     |   |   |   | — |   |   |   | 58,000 | (1) |   | 265,200 |   |
| Chairman & CEO            |       |       | 2006       |       |       | 160,000   |       | 50,000                  |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | 58,000 | (1) |   | 268,000 |   |
| Larry Crawford                     |       |       | 2005       |       |       | —    |       | —                  |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | — |   |   | — |   |
| EVP, CFO                           |       |       | 2006       |       |       | 71,423    |       | 11,093                  |       |                     | —     |                                      |       |                                                 | 102,000    | (3)                   |       |                      | —     |   |   |   | — |   |   |   | — |   |   | 184,516 |   |
| Dr. Anand Rangarajan          |       |       | 2005       |       |       | 121,250   |       | 7,230                   |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | 9,000 | (5) |   | 137,480 |   |
| EVP, CTO                           |       |       | 2006       |       |       | 123,738   |       | 17,748                  |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | 9,000 | (5) |   | 150,486 |   |
| James S. Brown                     |       |       | 2005       |       |       | 150,000   |       | —                  |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | — |   |   | 150,000 |   |
| EVP, Project Finance               |       |       | 2006       |       |       | 131,625   |       | 16,269                  |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | — |   |   | 147,894 |   |
| James S. Farrin                    |       |       | 2005       |       |       | —    |       | —                  |       |                     | —     |                                      |       |                                                 | —     |                  |       |                      | —     |   |   |   | — |   |   |   | — |   |   | — |   |
| Former CEO                         |       |       | 2006       |       |       | 80,045    |       | 73,950                  |       |                     | —     |                                      |       |                                                 | 223,915    | (4)                   |       |                      | —     |   |   |   | — |   |   |   | — |   |   | 377,910 |   |
|                                    |            |            |            |            |            |           |            |                         |            |                          |            |                                           |            |                                                      |            |                       |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                Represents the premium paid for a life insurancepolicy, the beneficiary of which is Mr. Kelly’s wife ($46,000) plus use ofthe Company vehicle ($12,000).

(2)                120,000 options granted 12/31/2005 at exercise price atdate of grant; options vest over one-year.  FASB 123R expense for 2005 and 2006 was $0 and$37,200, respectively.

(3)                600,000 options granted 7/10/2006 in connection withemployment contract; options were granted at the market price at date of grant.No options vested during the year ended December 31, 2006. 100,000 optionsvested on 1/10/2007; the remainder vest monthly through 7/10/2009. FASB 123Rexpense for 2006 was $0.00.

(4)                1,000,000 options were granted 1/23/2006 in connectionwith employment contract. 200,000 options vested at contract execution with theremainder vesting in twelve monthly installments through 1/23/2007. FASB 123Rexpense for 2006 was $208,987.

(5)                Represents $9,000 for Company providedvehicle.

57

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**Outstanding Equity Awards at 2006 Fiscal Year-End**

 

| **Option Awards**     | ** ** | **Stock Awards**                                                    | ** ** |
|-----------------------|------------|---------------------------------------------------------------------|------------|
| **Name**              | ** ** | **Number of  Securities  Underlying  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  (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market  or Payout  Value of  Unearned  Shares,  Units or  Other Rights  That Have  Not Vested  ($)** | ** ** |
| **(a)**               | ** ** | **(b)**                                                             | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** | **(g)** | ** ** | **(h)** | ** ** | **(i)** | ** ** | **(j)** | ** ** |
| Quentin T. Kelly      |       |                                                                | 37,975     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 5/31/2007 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 120,000    |   |   |   | — |   |   |   | — |   |   |   | 0.34 |   |   |   | 5/31/2008 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 1,250,000  |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 12/31/2011 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 60,000     |   |   |   | — |   |   |   | — |   |   |   | 0.34 |   |   |   | 12/31/2011 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 60,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 12/31/2012 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 30,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 6/30/2014 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 30,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 9/30/2013 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 60,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 12/31/2012 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 30,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 6/30/2014 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 30,000     |   |   |   | — |   |   |   | — |   |   |   | 0.28 |   |   |   | 12/30/2014 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 120,000    |   |   |   | — |   |   |   | — |   |   |   | 0.28 |   |   |   | 12/31/2014 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 120,000    |   |   |   | — |   |   |   | — |   |   |   | 0.31 |   |   |   | 12/31/2015 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| James S. Farrin       |       |                                                                | 933,333    |   |   |   | 66,667 |   |   |   | — |   |   |   | 0.38 |   |   |   |   |   |   |   | 66,667 |   |   |   | 667 |   |   |   | — |   |   |   | — |   |   |
| Larry L. Crawford     |       |                                                                | —     |   |   |   | 600,000 |   |   |   | — |   |   |   | 0.27 |   |   |   | 7/19/2016 |   |   |   | 600,000 |   |   |   | 72,000 |   |   |   | — |   |   |   | — |   |   |
| Dr. Anand  Rangarajan |       |                                                                | 96,000     |   |   |   | — |   |   |   | — |   |   |   | 0.34 |   |   |   | 5/31/2008 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 100,000    |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 12/31/2011 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 48,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 12/31/2012 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 24,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 6/30/2014 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 24,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 9/30/2013 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 48,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 12/31/2012 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 24,000     |   |   |   | — |   |   |   | — |   |   |   | 0.15 |   |   |   | 6/30/2014 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 750,000    |   |   |   | 250,000 |   |   |   | — |   |   |   | 0.25 |   |   |   | 12/31/2014 |   |   |   | 250,000 |   |   |   | 27,500 |   |   |   | — |   |   |   | — |   |   |
| James S. Brown        |       |                                                                | 250,000    |   |   |   | — |   |   |   | — |   |   |   | 0.38 |   |   |   | 6/30/2014 |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | — |   |   |
|                  |       |                                                                | 696,430    |   |   |   | 250,000 |   |   |   |   |   |   |   | 0.28 |   |   |   | 12/31/2014 |   |   |   | 250,000 |   |   |   | 27,500 |   |   |   | — |   |   |   | — |   |   |

 

Compensation of Directors

Outside directors areentitled to receive options to purchase 50,000 shares of the Company’s commonstock for each year of service on the Board of Directors. Members of thestanding committees of the Board of Directors are compensated on a quarterlybasis for their participation in meetings of the respective committees.

**Director Compensation -2006**

| **Name**                             | ** ** | **Fees Earned or  Paid in Cash** | ** ** | **Stock  Awards ($)** | ** ** | **Option Awards ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation ($)** | ** ** | **Nonqualified  Deferrred  Compensation  Earnings ($)** | ** ** | **All Other  Compensation ($)** | ** ** | **Total ($)** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| **(a)**                              | ** ** | **(b)**                                              | ** ** | **(c)**                    | ** ** | **(d)**                         | ** ** | **(e)**                                                    | ** ** | **(f)**                                                      | ** ** | **(g)**                                   | ** ** | **(h)**            | ** ** |
| **All  Non-Employee  Board Members** | ** ** |                                                 | ** ** | ** **                 |       |                            | ** ** | ** **                                                 |       |                                                         | ** ** | ** **                                |       |               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Joe Cygler                           |       |                                                 | $          | 12,000                     | ** ** |                            |       | —                                                     | ** ** |                                                         |       | $                                         | 6,000      | (1)                |       |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | $ | 18,000 | ** ** |   |
| Joe Cygler                           |       |                                                 | —     | ** **                 |       |                            | —     | ** **                                                 |       |                                                         | 8,000      | (2)                                       |       |               | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 8,000 | ** ** |   |
| Lange Schermerhorn                   |       |                                                 | 8,000      | ** **                 |       |                            | —     | ** **                                                 |       |                                                         | 6,000      | (1)                                       |       |               | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 14,000 | ** ** |   |
| Lange Schermerhorn                   |       |                                                 | —     | ** **                 |       |                            | —     | ** **                                                 |       |                                                         | 8,000      | (2)                                       |       |               | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 8,000 | ** ** |   |
| Davindar Sethi                       |       |                                                 | 12,000     | ** **                 |       |                            | —     | ** **                                                 |       |                                                         | 6,000      | (1)                                       |       |               | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 18,000 | ** ** |   |
| Davindar Sethi                       |       |                                                 | —     | ** **                 |       |                            | —     | ** **                                                 |       |                                                         | 8,000      | (2)                                       |       |               | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 8,000 | ** ** |   |
| Total                                |       |                                                 | $          | 32,000                     | ** ** |                            |       | —                                                     | ** ** |                                                         |       | $                                         | 42,000     |               |       |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | $ | 74,000 | ** ** |   |

 

58

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(1)              50,000 share option grant for services, at a price of$.26 per share was issued on June 14, 2006. The Black Scholes method wasutilized to determine the Company expense.

(2)              50,000 share option grant for services, at a price of$.22 per share was issued on September 8, 2006. The Black Scholes methodwas utilized to determine the Company expense.

**EmploymentContracts**

On December 18,2006,  the Company entered into afive-year employment agreement with Mr. Kelly, effective January 1,2007. Adjusted compensation under the agreement is $250,000 annual salary and$1,200 per month auto allowance. Mr. Kelly participates in the Company “fringebenefits” including health coverage and the maintenance of a whole life policy.The benefits continue if employment is terminated without cause or by reason ofdeath or disability to Mr. Kelly or his estate for the remaining term ofthe agreement or a period of 24 months, whichever is longer. Effective January 19,2007, Mr. Kelly was granted 5,000,000 stock options at an exercise priceof $0.40, fair market value at the date of the grant. These shares will vesttwenty percent (20%) per year, with the first twenty percent (20%) vestingimmediately upon the grant of the options and the remaining options vestingtwenty percent (20%) per year on the annual anniversary of the initial grant.

In July 2002, Mr. Kellywas granted 1,000,000 shares of restricted stock, all of which were vested asof December 31, 2006. Total other compensation expense recognized was$45,000 in December 31, 2006 and in 2005.

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, 2005,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 term which expires July 9,2009. Annual compensation under the agreement is $150,000 and included aninitial grant of 600,000 stock options vesting over the term of the employmentagreement.

Effective December 18,2006, the Company entered into an employment agreement with Douglas L. Washington,Executive Vice President, Marketing, effective January 1, 2007 for aperiod of three year. Annual compensation under the agreement is $160,000 and includesan 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, ExecutiveVice President, Project Finance with a term which expired December 31,2006. Annual compensation under the agreement is $150,000 and included aninitial grant of 250,000 stock options vesting over the term of the employmentagreement.

As of December 31,2006, the Company has unpaid salaries of $235,760, including $51,450 owed Mr. Kelly(see above), which has been deferred by officers (current and former) and areincluded in accrued expenses.

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**ITEM 11.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Thefollowing table sets forth the number and percentage of the shares of theregistrant’s Common stock owned as of December 31, 2006 by all personsknown to the registrant who own more than 5% of the outstanding number of suchshares, by all directors of the registrant, and by all officers and directorsof the registrant as a group. Unless otherwise indicated, each of thestockholders has sole voting and investment power with respect to the sharesbeneficially owned.

|                                                                  | ** ** | **Number of Shares** | ** ** | ** **   | ** ** |
|------------------------------------------------------------------|------------|--------------------------------|------------|--------------|------------|
| ** **                                                       | ** ** | **Beneficially**               | ** ** | **Percent**  | ** ** |
| **Name and Address  of Beneficial Owner(1)** | ** ** | ** **                     | ** ** | **Owned(1)** | ** ** | **of Class** | ** ** |
| CAMOFI Master LDC                                                |       | 9,431,900                      | (2)        |         | 6          | % |   |
| C/O Centrecourt Asset  Management                                |       |                           |       |         |       |   |   |
| 30 Third Avenue, 14th   Floor                               |       |                           |       |         |       |   |   |
| New York, NY 10022                                               |       |                           |       |         |       |   |   |
| EMCORE Corporation                                               |       | 53,909,009                     | (3)        |         | 26.7       | % |   |
| 145 Belmont Drive                                                |       |                           |       |         |       |   |   |
| Somerset, New  Jersey 08873                                      |       |                           |       |         |       |   |   |
| Quentin T. Kelly *                                               |       | 5,164,975                      | (4)        |         | 3.4        | % |   |
| James S. Farrin *                                                |       | 1,250,000                      | (5)        |         | 0.8        | % |   |
| Dr. Anand Rangarajan *                                      |       | 1,114,000                      | (6)        |         | 0.7        | % |   |
| Larry L. Crawford *                                              |       | 600,000                        | (7)        |         | 0.4        | % |   |
| James S. Brown *                                                 |       | 1,000,000                      | (8)        |         | 0.7        | % |   |
| Joseph Cygler *                                                  |       | 934,300                        | (9)        |         | 0.6        | % |   |
| Dr. Davinder Sethi *                                        |       | 670,100                        | (10)       |         | 0.4        | % |   |
| Lange Schermerhorn *                                             |       | 300,000                        | (11)       |         | 0.2        | % |   |
| All Directors and Officers  as a group (8 persons)          |       | 11,033,275                     |       |         | 6.8        | % |   |
|                                                                  |            |                                |            |              |            |  |  |  |  |

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*                    All officers and directors may be contactedat the Company’s address: WorldWater & Power Corp., PenningtonBusiness Park, 55 Route 31 South, Pennington, New Jersey 08534

       (1)   For purposes of this table, a person or groupof persons is deemed to have “beneficial ownership” of any shares of commonstock that such person has the right to acquire within 60 days of December 31,2006. For purposes of computing the percentage of outstanding shares of commonstock held by each person or group of persons named above, any security whichsuch person or persons has or have the right to acquire within such a date isdeemed to be outstanding but is not deemed to be outstanding for the purpose ofcomputing the percentage ownership of any other person. Except communityproperty laws, the Company believes, based on information supplied by suchpersons, that the persons named in this table have sole voting and investmentpower with respect to all shares of common stock which they beneficially own.

       (2)   This amount includes 6,250,000 sharesissuable upon the exercise of warrants and 3,181,900 shares of Common Stockowned as of December 31, 2006.

       (3)   This amount includes preferred stockconvertible into 48,928,571 shares of common stock and warrants to purchase  5,050,438  shares of common stock as of December 31,2006, 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.

60

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       (4)   This amount includes 606,060 shares owned by Mrs. QuentinT. Kelly, CFK Limited Partnership and QTK Limited Partnership which were formedfor the benefit of Mr. Kelly’s children, and options and warrants topurchase 1,974,975 shares as of December 31, 2006.

       (5)   This amount includes options and warrants topurchase 1,250,000 shares as of December 31, 2006.

       (6)   This amount represents options to purchase1,114,000 shares as of December 31, 2006.

       (7)   This amount represents options to purchase600,000 shares as of December 31, 2006.

       (8)   This amount includes 53,570 shares of commonstock and options to purchase 946,430 shares as of December 31, 2006.

       (9)   This amount represents 280,000 shares ofcommon stock and options to purchase 654,300 shares as of December 31,2006.

(10)   This amount represents 662,600 options and 7,500warrants to purchase common stock as of December 31, 2006.

(11)   This amount represents options to purchase300,000 shares as of December 31, 2006.

**For additional informationregarding equity compensation, see Financial Statements note 16.**

**ITEM 12.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

TheCompany had outstanding notes payable owed to directors, officers and employeesof the Company as of December 31, 2006 and 2005 as follows:

| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                    |       | $        | 3,000      |     | $          | 3,000 |   |
| Officers and  employees                      |       | —   |       | 32,748   |       |
| Total                                        |       | 3,000    |       | 35,748   |       |
| Less current  maturities                     |       | (3,000   | )          | (35,748  | )          |
| Total long term note  payable, related party |       | $        | —     |     | $          | — |   |

 

Notes payable todirectors, officers and employees are due on demand and accrue interest at 10%per annum.

*Other Related PartyTransactions*

The Company leases office and laboratory facilitiesfrom the Chairman of the Company. Lease payments to the Chairman were $18,000and $36,000 in 2006 and 2005, respectively, plus utilities and maintenance; seeCommitments note.

Included in accrued sales commissions as of December 31,2006 is $58,622 owed the Chairman under a management services fee agreementwhich expired December 31, 2006 calling for a management services/salesincentive fee equal to one-half percent (0.5%) of the Company’s gross productrevenues less any related product returns, rebates, allowances, freightcharges, tariffs and sales taxes, not to exceed $250,000 per annum.

61

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**PART IV**

**ITEM 13.**         EXHIBITS

(a)          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). |
|                        |            |                 |        |  |  |  |

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|        | 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).                                                                                                                                                                         |
|   | 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).                                                                       |

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|        | 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). |
|   | 31.1  |   |   |   | Certification by  the Chief Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 31.2  |   |   |   | Certification by  the Chief Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 32.1  |   |   |   | Certification by the  Chief 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 Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                               |

 

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The Company’s Board of Directors reviews and approvesaudit and permissible non-audit services performed by its independentaccountants, as well as the fees charged for such services. In its review ofnon-audit service fees and its appointment of Amper, Politziner &Mattia, P.C. as the Company’s independent accountants, the Board of Directorsconsidered whether the provision of such services is compatible withmaintaining independence. All of the services provided and fees charged byAmper, Politziner & Mattia, P.C. in 2006 were approved by the AuditCommittee of the Board of Directors.

AUDITFEES

The aggregate fees billed to us by the independentauditors, Amper, Politziner &  Mattia P.C., for professionalservices rendered in connection with our Quarterly Reports on Form 10-QSBand for the audits of our financial statements included in this Annual Reporton Form 10-KSB for the years ended December 31, 2006 and 2005were $110,000 and $87,500, respectively.

AUDIT RELATED FEES

The aggregate fees billed to us by Amper, Politziner &Mattia, P.C. for assurance and related services that are reasonably related tothe performance of the audit and review of our financial statements that arenot already reported in the paragraph immediately above totaled approximately$64,700 and $22,500 for the years ended December 31, 2006 and 2005,respectively. The 2006 costs are primarily related to services provided inconnection with the audits and due diligence target in 2006 of EntechCorporation.

TAX FEES

There were no tax fees billed by our independentauditors during 2006 and 2005.

ALL OTHER FEES

There were no other fees billed by our independentauditors during the last two fiscal years for products and or services.

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**Signatures**

Inaccordance with section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
| WorldWater & Power Corp.  (Registrant) |
|-------------------------------------------------|
| By:                                             |   | /s/ QUENTIN T. KELLY |   | Date: | April 9, 2007 |
| * *                                        |   | Quentin T. Kelly,*Chairman / Chief Executive Officer* |   |   |   |
| By:                                             |   | /s/  LARRY L. CRAWFORD |   |   | April 9, 2007 |
| * *                                        |   | Larry L. Crawford*Executive Vice President/  ChiefFinancial Officer* |   |   |   |

 

**INTENTIONALLYLEFT BLANK**

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Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-KSBhas been signed by the following persons in the capacities and as of the datesindicated:
|                               | **Signature** | ** **                                | ** ** | ** **    | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------------|---------------|-------------------------------------------|------------|---------------|-----------|------------|------------|------------|----------|------------|
| /s/ QUENTIN T. KELLY          |          | Chairman. Chief Executive Officer         |       | April 9, 2007 |
| Quentin T. Kelly              |          |                                      |       |          |
| /s/ LARRY L. CRAWFORD         |          | Executive Vice President, Chief Financial |       | April 9, 2007 |
| Larry L. Crawford             |          | Officer                                   |       |          |
| /s/ JOSEPH CYGLER             |          | Director                                  |       | April 9, 2007 |
| Joseph Cygler                 |          |                                      |       |          |
| /s/ Dr. HONG HOU         |          | Director                                  |       | April 9, 2007 |
| Dr. Hong Hou             |          |                                      |       |          |
| /s/ Dr. DAVINDER SETHI   |          | Director                                  |       | April 9, 2007 |
| Dr. Davinder Sethi       |          |                                      |       |          |
|                          |          | Director                                  |       | April 9, 2007 |
| Reuben F.  Richards, Jr. |          |                                      |       |          |
| /s/ LANGE SCHERMERHORN        |          | Director                                  |       | April 9, 2007 |
| Lange Schermerhorn            |          |                                      |       |          |
|                          |          | Director                                  |       | April 9, 2007 |
| Harrison Wellford             |          |                                      |       |          |

 

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**EXHIBITINDEX**

|   | 3.5   |   |   | Certificate of Amendment  of Certificate of Incorporation dated October 11, 2006.                                                                          |
|--------|-------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 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.                                                                                |
|   | 31.1  |   |   | Certification by the  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                             |
|   | 31.2  |   |   | Certification by the  Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                             |
|   | 32.1  |   |   | Certification by the  Chief 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  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |

 

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