**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-KSB**

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

**Forthe fiscal year ended December 31, 2005**

**Commissionfile number: 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 registeredunder Section 12(b) of the Exchange Act: **None**

Securities registered under Section 12(g) ofthe Exchange Act:

**CommonStock, $0.001 par value**

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 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 $2,031,480.

On March 31, 2006 the aggregate market value ofthe voting stock held by non-affiliates of the  registrant wasapproximately $59,024,000.

As of March 31, 2006 the Registrant hadoutstanding 132,107,949 shares of Common Stock and 611,111 shares of PreferredStock.

**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                         |   | 6 |   |
| e)                                                                                                                                     |   | Marketing                                     |   | 7 |   |
| f)                                                                                                                                     |   | Research and Development                      |   | 8 |   |
| g)                                                                                                                                     |   | Intellectual Property                         |   | 8 |   |
| h)                                                                                                                                     |   | Source And  Availability of Components        |   | 9 |   |
| i)                                                                                                                                     |   | Competitive  Conditions Affecting the Company |   | 9 |   |
| j)                                                                                                                                     |   | Subsidiaries                                  |   | 9 |   |
| k)                                                                                                                                     |   | Government Regulations                        |   | 9 |   |
| l)                                                                                                                                     |   | Employees                                     |   | 9 |   |
| 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)                                                                                                                                     |   | Recent Sales of Unregistered Securities       |   | 13 |   |
| e)                                                                                                                                     |   | Preferred  Stock                              |   | 13 |   |
| **ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATION**                                                                     |   | 14                                            |   |
| **OVERVIEW**                                                                                                                           |   | 14                                            |   |
| **CRITICAL ACCOUNTING POLICIES AND ESTIMATES**                                                                                         |   | 15                                            |   |
| **REVENUE  RECOGNITION**                                                                                                               |   | 15                                            |   |
| **ALLOWANCE FOR DOUBTFUL ACCOUNTS**                                                                                                    |   | 16                                            |   |
| **ACCOUNTING  FOR INCOME TAXES**                                                                                                       |   | 16                                            |   |
| **SELECTED  FINANCIAL DATA**                                                                                                           |   | 16                                            |   |
| **RESULTS OF OPERATIONS**                                                                                                              |   | 17                                            |   |
| **COMPARISON OF YEARS ENDED DECEMBER 31, 2005 AND 2004**                                                                               |   | 18                                            |   |
| **HISTORICAL  CASH FLOW ANALYSIS**                                                                                                     |   | 20                                            |   |
| **LIQUIDITY AND CAPITAL RESOURCES**                                                                                                    |   | 21                                            |   |
| **COMMITMENTS  AND GUARANTEES**                                                                                                        |   | 22                                            |   |
| **INCOME TAXES**                                                                                                                       |   | 22                                            |   |
| **RECENT ACCOUNTING PRONOUNCEMENTS**                                                                                                   |   | 22                                            |   |
| **ITEM  7. FINANCIAL STATEMENTS**                                                                                                      |   | 24                                            |   |
| **ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE**                                      |   | 48                                            |   |
| **ITEM 8A. CONTROLS AND PROCEDURES**                                                                                                   |   | 48                                            |   |
| **PART III.**                                                                                                                     |   | 49                                            |   |
| **ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND  CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT** |   | 49                                            |   |
| **ITEM 10. EXECUTIVE COMPENSATION**                                                                                                    |   | 51                                            |   |
| **ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**                           |   | 53                                            |   |
| **ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**                                                                            |   | 54                                            |   |
| **ITEM 13. EXHIBITS**                                                                                                                  |   | 55                                            |   |
| **ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                    |   | 57                                            |   |

 

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**PART I.**

**ITEM 1.**                DESCRIPTIONOF BUSINESS

**a)**   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. Sincethen, following power advances in its technology, the Company has placedincreasing emphasis on domestic markets, principally in California, New Jersey,and their surrounding states, and is addressing the needs of residential,commercial and industrial customers, in both the public and private sectors. TheCompany will continue to selectively submit proposals to various foreigngovernments in need of solving critical water supply and energy problems usingthe Company’s proprietary solar technology.

With significantly rising energy prices and relatedshortages, along with significant state and federal incentives, and utilitycompany rebate programs, domestic markets have emerged as the Company’s highestpriority. WorldWater 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 soon to be introduced MobileMaxPureTM.

The Company’s patented AquaMaxTM solar electric system,capable of operating pumps and motors up to 600 hp for irrigation,refrigeration and cooling, and water utilities, make it a breakthrough productdelivering mainstream pumping capacity powered by solar technology. TheAquaMaxTM System has an electronic board that reads and translates the output ofdirect current (DC) from solar panels, converting the flow into alternatingcurrent (AC) for delivery to the electric grid, water pumps or any 3-phaseAC motor. These hybrid solar irrigation pumps are able to operate on solaralone or in combination with the electric grid or diesel generators. Among theunique advantages of the Company’s proprietary solar technology is that, in theevent of a grid outage, load can be seamlessly and automatically transferred tothe solar electric system for continued operation without interruption andwithout operator intervention.

WorldWater’s proprietary technology permits the use ofhigh power (up to 600 hp) AC motors and pumps, an option previously unavailablefrom solar power. AC pumps are widely available in countries throughout theworld, allowing replacement pumps and parts to be supplied on a local basis.Other forms of solar-powered photovoltaic (PV) pumping systems currentlyavailable use less reliable and less durable DC pumps or custom AC pumps, whichare more costly and not commonly in use.

By employing the hybrid AquaMaxTM irrigation system,which can operate motors up to 600 horsepower by sunshine alone or incombination with the existing electric grid or diesel, a farmer can irrigate atlittle or no additional cost over what is paid currently for irrigation poweredby grid electricity. There is limited ongoing maintenance cost associated withthe sun power source used to drive the irrigation equipment.

When a farmer is not irrigating, the sun is developingelectricity through WorldWater’s system, and the power is returned to theelectric utility for credit, a form of storage for later use, or for directutility bill credit (depending upon the state). This process is called netmetering and is already in operation in New Jersey and California as well as 38other states. By automatically switching between solar and other power sources,the AquaMaxTM enables a farmer to protect against a loss of irrigation ability duringdaylight 

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power shortages orblackouts. The functionality of this technology goes far beyond theagricultural applications and is extremely well-suited for a wide range ofindustrial and commercial uses.

WorldWater’s continuing commitment to its technologyand innovation is demonstrated in the development of the MobileMaxPureTM, aself-contained, trailer-mounted solar-powered system designed to pump andpurify water for both drinking and food preparation. This system, which will beintroduced in the second quarter of 2006, has the ability to draw surface waterfrom contaminated city resources, lakes, streams, canals, ponds, rivers, wellsor other sources and turn it into clean, drinkable water for thousands ofpeople per day. A predecessor of Mobile MaxPure was and is still being used inthe recovery efforts in Waveland, MS in the U.S. Gulf Coast in the wake ofHurricane Katrina.

The Company was incorporated in the state of Nevada onApril 3, 1985 under the name of Golden Beverage Company. In April 1997,the Company entered into a reverse merger transaction with WorldWater, Inc.,a Delaware corporation formed in January 1984. Since the mergertransaction, the Company, operating under the name of WorldWater Corp., hasbeen engaged exclusively in the solar/water power industry. In June of2000, the Company shareholders voted to change the state of incorporation fromNevada to Delaware. In June 2005, the Company shareholders voted to changethe name to WorldWater & Power Corp. from WorldWater Corp. The Companystock is publicly traded on the NASDAQ OTC Bulletin Board under the symbolWWAT.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)**   MAJORCUSTOMERS BY GEOGRAPHIC LOCATION

**CALIFORNIA**

The Company entered the California agriculture marketin 2002 with the implementation of a 50 hp irrigation pumping system for acotton farm in the San Joaquin Valley. In 2003, WorldWater installed its firstsolar refrigeration system at a food processing facility near Bakersfield, CA.In the first half of 2004, WorldWater supplied a one megawatt (MW) solarelectric system at Cerro Coso Community College, Ridgecrest, CA, the largest PVinstallation on a U.S. community college campus. In December 2004,WorldWater completed the installation of a major solar irrigation pumpingsystem at a citrus ranch in San Diego County, CA, which powers a 200 hpirrigation pump.

Consistent with the Company’s focus on domesticprojects, and specifically in California, and surrounding states, WorldWater,in September 2005, through its wholly-owned subsidiary, WorldWaterHoldings Inc., acquired the assets of MJD Solutions, Inc., a NevadaCorporation, doing business as Quantum Energy Group (Quantum). Quantum, basedin Applegate, California, is a solar energy, construction and projectmanagement company, and will assist in the sales, design and installation ofresidential, commercial, and institutional solar projects.

During 2005, the Company completed three residentialprojects with aggregate revenue of $105,000, and completed one consultingservices project with revenue of $133,000. In addition, the Company had onecommercial project in progress as of December 31, 2005, with recognizedrevenue in 2005 of $199,000. This project is a 45 kW net-meteringphotovoltaic system being installed for a municipal water authority.

Three other projects, with aggregate contract value of$2,110,000, were awarded in 2005, but had no recognized revenue in 2005. Theseprojects include: a 44 kW installation of a solar electric generation anddistribution system, and the design, installation, and commissioning of two 

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net-meteringphotovoltaic systems; one at 229 kW and one at 44 kW. These projects werestarted in the first quarter of 2006, and are expected to be completed in 2006.

The Company has an additional contract that was signedin the first quarter of 2006, was started in the second quarter of 2006, andwill be completed during 2006. This $676,000 contract is for the design andinstallation of a 96 kW roof-mounted, net-metering photovoltaic system for alarge car wash.

Finally, the Company hastwo projects that were awarded in 2005, but have not commenced, subject tosecuring the appropriate building permits and project financing. These projectshave an aggregate contract value of approximately $9,500,000.

**NEW JERSEY**

The Company entered the New Jersey agricultural marketin 2003 with the completion of a 24 kW solar electrical system at FlatbrookFarm, an organic meat and poultry farm in Montague, NJ. The New Jersey Board ofPublic Utilities (BPU) has authorized a comprehensive range of incentives whichtook effect in January 2004 and which will support more than $600 millionworth of new PV installations in the state over the next five years. TheCompany has made New Jersey a target state for the commercial and residentialmarkets.

During 2005, the Company completed four residentialprojects with aggregate revenue of $159,000. In 2005, the Company was awarded amajor residential project to install a solar electric generation anddistribution system with contract value of $223,000. This project had not beenstarted, and is pending receipt of approved rebate application.

One commercial project, with recognized revenue of$1,057,000 in 2005, was in progress as of December 31, 2005. This projectis a 500 kW solar energy system at a municipal wastewater treatment plant,where the Company, via a Joint Venture with Conti Corp, is supplying solar-relatedequipment, engineering and design services, and installation.

In addition, one commercial project, with a contractvalue of $180,000 was awarded in 2005, but was not started until the firstquarter of 2006. This project is for the design and supply of photovoltaiccomponents for a 26 kW roof-mounted, net metering system. All projects inprogress as of December 31, 2005 are expected to be completed in 2006.

Finally, as ofMarch 31, 2006, the Company has two contracts that were awarded, but havenot started. The start of these projects is subject to securing the appropriatebuilding permits and project financing. These projects have an aggregatecontract value of approximately $2,800,000.

**DELAWARE**

The Company has oneproject in progress as of December 31, 2005. This contract is with a largepublicly-traded chemical company, and covers the design and installation of asolar electric power generation system for its photovoltaic solutions technicallaboratory. The project has a contract value of $363,000, of which $234,000 wasrecognized in 2005. The 40 kW installation will serve as a photovoltaicdemonstration unit for this customer. Constructioncommenced 2005 and field construction of the system was completed in the firstquarter of 2006. This demonstration unit will serve as a showcase and,hopefully, lead to additional projects for this customer.

**INTERNATIONAL**

WorldWater has operated in the Philippines since 1997when the Company delivered 25 solar powered pumps for installation by theNational Irrigation Authority (NIA) under a directive from former PresidentFidel V. Ramos. The Company has a Philippine subsidiary, WorldWater(Phils) Inc. 

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The Company is evaluatingits Philippine strategy and, as of December 31, 2005, 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 $71,000 were rendered as of December 31, 2005, and collected in thefirst quarter of 2006. The project is designed to assess the hydro-geologicalconditions of the project area, and to provide safe, sustainable water suppliesto people in six villages near the tsunami-ravaged southern coast of Sri Lanka.Subject to satisfactory results of WorldWater’s ground water assessment study,WorldWater anticipates further contracts with the Ministry of Urban Developmentand Water Supply to pump and deliver water to 13,600 people in approximately4,000 households in the six villages through use of its AquaMaxTM solar waterpumping systems.

**c)**   IMPLEMENTATIONSTRATEGY

James S. Farrin was appointed Interim CEO on January 23,2006, with Quentin T. Kelly, the founder of the Company, retaining the Chairman’srole.

Mr. Farrin has established a strategy direction whichis to optimize 2006 revenue by focusing the sales force on two states, NewJersey and California, and the engineering/operations department on effectiveimplementation of booked projects.

The Company is alsoimplementing 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” electric usage charges forresidential, commercial, industrial, and governmental applications. The systemsgenerate clean electricity from the sun and, when the power from the sunexceeds 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 hybrid irrigation pumps take solarwater pumping systems to unprecedented production levels. WorldWater has thetechnological capability to drive motors and pumps up to 600 hp, deliveringthousands of gallons of water per minute by solar energy alone, or in automaticcombination with the electric grid or diesel generators. Irrigating fields inremote areas with solar power requires no fuel costs, limited maintenance,while generating no noise and no pollution. With WorldWater’s hybrid systems,if sunlight is not available or decreases as a result of cloud cover, theAquaMaxTM can automatically switch to an alternate power source: dieselgeneration, batteries, or the electric grid.

The patented AquaDriveTM controller converts solar DCcurrent to AC, then supplies the AC power to a motor or pump from either thesolar array or the grid (or other sources such as diesel generators, windgenerators, etc.) or simultaneously from both sources. The hybrid operation is 

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programmed to becompletely automatic so manual intervention is not required to switch from onepower 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 use solar to save up to 70% of theenergy of its operation. This is due to WorldWater’s technology running itsbooster pumps and operating its major wells while also being available toperform net metering while providing back-up power capability in the event ofgrid power interruption. Should the gird fail, an automatic isolation from thegrid will occur allowing operations to continue running until the electric gridis restored thereby eliminating the use of diesel or natural gas during thispotentially peak demand period. WorldWater is uniquely positioned to providethis service to the water utility market, as well as the agricultural market.

**e)**   MARKETING

Today, the price of the WorldWater commercial systemsmarketed in California and New Jersey range from approximately $300,000 toseveral million dollars. Residential solar installations average $30,000 to$50,000. In California, WorldWater has a sales and technical support office inApplegate, north of Sacramento. WorldWater’s east coast and internationaloperations are managed from its headquarters in Pennington, NJ.

The market for the photovoltaic industry is exploding,aided by steep increase in oil generated electricity. The total market isexpected to soar from $5 billion to $27 billion by 2020. Management believesthat WorldWater is positioned to capitalize on this trend with its solarexpertise and proprietary technology in both power and water.

Solarenergy continues to be increasingly more attractive given the energy costincreases in fossil fuels as the following table shows.

| ** **      | ** ** | ** **                                      | ** ** | **Percent of**        | ** ** |
|-----------------|------------|-------------------------------------------------|------------|----------------------------|------------|
| ** **      | ** ** | **Percent Increase In Electric** | ** ** | **Electric**               | ** ** |
| ** **      | ** ** | **Generation Fuels**                       | ** ** | **Generation**             | ** ** |
| ** **      | ** ** | **2003 to 2004**                      | ** ** | **2004 to 2005** | ** ** | **December ’05** | ** ** |
| **Coal**        |       |                                            | 10         | %                          |       |   | 11 | % |   |   | 51 | % |   |
| **Natural Gas** |       |                                            | 37         | %                          |       |   | 46 | % |   |   | 15 | % |   |
| **Petroleum**   |       |                                            | 15         | %                          |       |   | 61 | % |   |   | 3 | % |   |
| **Pet Coke**    |       |                                            | 46         | %                          |       |   | 18 | % |   |   | 1 | % |   |
| **Solar**       |       |                                            | **0**      | **%**                      | ** ** | ** ** | **0** | **%** | ** ** | ** ** | **.0006** | **%** | ** ** |

 

*Source:   March 2006 Electric Power Monthlypublished by the Energy Information Administration of the Department of Energy.*

WorldWater providessolar 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 water sources;

·       Conductingsite assessments to appropriately size solar water pumping and electricalsystems;

·       Installingthe Company’s proprietary solar products;

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

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·       Arrangingproject financing.

A key marketing strategy is the utilization ofstrategic alliances. WorldWater, as a water and power solutions provider, haspartnered with major international organizations to enhance its financingcapabilities and with local organizations to enhance project 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 Companyholds a patent on the electronic board controller AquaDriveTM of the AquaMaxTMsystem. In 2003, the Company also was awarded a patent on its automaticswitching technology, which enables the system to perform multiple functionssuch as water pumping and battery charging and also to switch automaticallybetween solar and grid-tied, diesel or battery power sources.

**g)**   INTELLECTUALPROPERTY

WorldWater has obtainedpatents and continuations-in-part for its newly developed electronics systemsand has filed for protections of its patents. Thomas McNulty, Sr., Dr. AnandRangarajan, and Douglas Williams all of WorldWater and Quentin T. Kelly,Chairman, together with Princeton University engineers have been issuedpatents, all of which are assigned to WorldWater. The Company holds patents onthe electronic board controller AquaDriveTM of the AquaMaxTM system and on theSolar Thermal Powered Water Pump. In 2003, the Company was issued a patent onan electronic board that allows, in case of the interruption of service in an ACgrid power system, the automatic transfer to solar-powered systems foruninterrupted operation of motors and other power loads. The following tableshows the Company’s existing patents and pending patent applications.

**INTELLECTUALPROPERTY**

| **Patent Title**                           | ** ** | ** **                  | ** ** | **Domestic/  International** | ** ** | **Patent File No.** | ** ** | **Status** | ** ** | **Expiration** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------------|------------|------------|------------|----------------|------------|
| Solar Thermal  Powered Water Pump               |       | Domestic                    |       | US 5,163,821            |       | Approved                      |       |       | 2011       |           |       |
| Switchable  Multiple Source Power Supply        |       | Domestic                    |       | US 6,583,522            |       | Approved                      |       |       | 2020       |           |       |
| Bias controlled DC  to AC Converter and Systems |       | Domestic                    |       | US 6,275,403            |       | Approved                      |       |       | 2018       |           |       |
| Bias controlled DC  to AC Converter and Systems |       | International/  Philippines |       | 1-1999-03261                 |       | Approved                      |       |       | 2019       |           |       |
| No Load Motor  Cut-off Method and Apparatus     |       | Domestic                    |       | Application  #10/938,829     |       | Pending                       |       |       |       |           |       |
| AC/DC Hybrid Power  System                      |       | Domestic                    |       | Application  #10/704,241     |       | Pending                       |       |       |       |           |       |
| Maximum Power  Point Motor Control              |       | Domestic                    |       | Application  #11/158,876     |       | Pending                       |       |       |       |           |       |
| Multiple Motor  Operation Using Solar Power     |       | Domestic                    |       | Application  #60/723,268     |       | Pending/  Provisional         |       |       |       |           |       |
| Using a Variable  Frequency for Non-Motor Loads |       | Domestic                    |       | Application  #0/723,269      |       | Pending/  Provisional         |       |       |       |           |       |

 

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**h)**   SOURCEAND AVAILABILITY OF COMPONENTS

The solar modules used inthe Company’s systems are composed of silicon and other photovoltaic materials.Suppliers of solar modules include GE Energy LLC, Solar World (formerly ShellSolar), Kyocera, Sharp Electronics, BP Solar and RWE Schott. WorldWaterorders solar modules and related articles from several suppliers and has notentered into any exclusive term supply contracts.

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 the solar-drivenmotor or pump is the reduction in ongoing electric costs. Solar generation is ahedge against escalation in fossil fuel prices, without the negative pollutionattributes. The initial cost of acquiring a diesel pump is less than theinitial cost of a solar pump, but the ongoing incremental operating andmaintenance costs of the diesel pump are greater and, in remote areas, thesupply of fuel and spare parts are not always readily available.

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’s systems operateconventional AC powered pumps up to 600 hp.

**j)**   SUBSIDIARIES

WorldWater has an active100% domestic subsidiary, WorldWater Holdings Inc., dba Quantum Energy Groupand also owns a 90% interest in WorldWater (Phils) Inc., a Philippinecorporation.

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, 2005,the company employed 33 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/wastewater treatmentsystems integration.

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**m)**   RISKS ANDUNCERTAINTIES

*AdditionalFinancing*

The Company needsadditional financing to execute its business plan and to enhance itsintellectual property rights, respond to competitive pressures, and developcomplementary businesses or necessary technologies. The Company does not knowwhether it will be able to raise additional financing on favorable financingterms. If adequate funds are not available or are not available on acceptableterms, the Company’s ability to fund its operations and expand its salesdistribution network, or otherwise respond to competitive pressures will besignificantly limited.

*Going –ConcernOpinion On Consolidated Financial Statements*

Amper, Politziner &Mattia, P.C., the Company’s independent registered public accounting firm, hasincluded an explanatory paragraph in its report on the Company’s consolidatedfinancial statements for the years ended December 31, 2005 and 2004,raising substantial doubt about the Company’s ability to continue as agoing-concern. The inclusion of a going-concern explanatory paragraph in Amper,Politziner & Mattia, P.C.'s report on the Company’s  consolidated financial statements could havean adverse affect on the Company’s stock price and its ability to raiseadditional capital. The Company’s consolidated financial statements have beenprepared on the basis of a going-concern, which contemplates the realization ofassets and satisfaction of liabilities in the normal course of business. TheCompany has not made any adjustments to the consolidated financial statementsas a result of the outcome of the uncertainty described herein.

*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 2005, foreign contractrevenue was limited to $32,543 in the Philippines and grant revenue, funded byUSTDA, $80,160 derived from work in Sri Lanka. Unsettled political conditions,social unrest, acts of terrorism, force majeure, war or other armed conflict,exploitation or other governmental actions, inflation, exchange controls orcurrency devaluation may result in increased business risk in these regions.

*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;

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·       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 successfully defend challenges orinfringement proceedings against the Company could materially and adverselyaffect 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 becomeobsolete, it may no longer be competitive and its business and revenues couldbe materially and adversely affected.

*Technical Personnel*

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

*Government Incentives*

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

*Effective Internal Controls*

Effective internalcontrols are necessary for the Company to provide reliable financial reports.The Company has in the past discovered, and may in the future discover, areasof its internal controls that need improvement. In addition, Section 404of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate and reporton its internal controls over financial reporting and have its independentauditors annually attest to its evaluation, as well as issue their own opinionon the Company’s internal controls over financial reporting, beginning with ourAnnual Report on Form 10-KSB for 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 

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managementattention. The Company cannot be certain that these measures will ensure thatit will maintain adequate controls over its financial processes and reportingin the future. Furthermore, as the Company grows its business, its internalcontrols will become more complex and will require significantly more resourcesto ensure its internal controls remain effective.

Failure to implementrequired new or improved controls, or difficulties encountered in theirimplementation, could harm the Company’s operating results or cause the Companyto fail meet its reporting obligations. If the Company or its auditors discovera material weakness, the disclosure of that fact, even if quickly remedied,could reduce the market’s confidence in its financial statements and harm theCompany’s stock price.

**ITEM2.**                DESCRIPTION OFPROPERTIES

The Company’s executiveoffice, research and development facility is housed in a 13,270 square footsite located at 55 Route 31 South, Pennington, New Jersey 08534. This facilityis leased under an operating lease expiring June 25, 2007. The Companyalso uses a second facility in Hopewell, New Jersey for conferences, meetingsand demonstrations of its products. This facility is leased from Quentin T.Kelly, Chairman of WorldWater, on a month-to-month basis. See “Certain Relationshipsand Related Transactions.”

In September 2005,the Company acquired Quantum Energy Group in Applegate, CA which included thetransfer of their five year lease expiring April 30, 2009, with twofive-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.

**ITEM 3.**                LEGALPROCEEDINGS

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.” 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 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      |       |

 

| ** **      | ** ** | **High** | ** ** | **Low** | ** ** | **Close** | ** ** |
|-----------------|------------|----------|------------|---------|------------|-----------|------------|
| **FISCAL 2004** |       |     |       |    |       |      |       |
| First Quarter   |       | $0.34    |       | $0.10   |       | $0.31     |       |
| Second Quarter  |       | 0.49     |       | 0.26    |       | 0.41      |       |
| Third Quarter   |       | 0.41     |       | 0.22    |       | 0.28      |       |
| Fourth Quarter  |       | 0.31     |       | 0.23    |       | 0.30      |       |

 

**b)**   Holders of CommonStock

On March 31, 2006there were approximately 700 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 hasnot declared or paid any dividends on common stock. The payment by the Companyof dividends, if any, is within the discretion of the Board of Directors andwill depend on its earnings, if any, capital requirements and financialcondition, as well as other relevant factors. The Board of Directors does notintend to declare any dividends in the foreseeable future.

**d)**   Recent Sales ofUnregistered Securities

In consideration forproviding business development and financial strategic advisory services, theCompany issued 125,000 restricted common stock shares valued at $0.41 to anunaffiliated party.

**e)**   Preferred Stock

Since 2001, the Companyhas not issued Preferred Stock. As of October 1, 2004, the preferredshareholder converted 66,667 shares of Series A 7% Convertible PreferredStock into a like number of common shares. As of December 31, 2004 and2005, the Company has 611,111 shares of Series B 7% ConvertiblePreferred Stock outstanding.

The Series B 7%three-year Convertible Preferred Stock was issued at $0.90 per share in 2000.The Series B Preferred Stock proceeds were intended to be used by theCompany for the initial operating requirements of WorldWater (Phils) Inc., theCompany’s Philippine subsidiary. The conversion privilege, 

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whichexpired September 2003, was either into 10% of WorldWater (Phils) Inc. orinto 611,111 common shares of the Company.

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 on both the Series Aand Series B were accrued through September 30, 2004 at the rate of7% and shown as ‘Accretion of preferred stock dividends’ in the ConsolidatedStatement of Operations.

**ITEM6.**               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 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 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 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. WorldWater is uniquely positioned to delivera wide range 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 soon to be introduced, Mobile MaxPure.

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

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Importantly, the Companywill continue work to develop innovative new products to meet customer needs,especially using new technology to clearly differentiate fromcurrent/competitive products.

The cash raised throughthe issuance of convertible debt and private equity sales including theregistered Stock Purchase Agreement (SPA) has provided the Company with theworking capital resources needed to meet its operating activities in 2005 and2004. However, the Company’s current cash and cash equivalents will not besufficient to fund current and expected increased levels of activities throughfiscal year 2006, and, as a result, the Company is seeking to raise significantadditional financing to successfully fund the Company’s growing operations.

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.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The consolidatedfinancials are presented on the basis that the Company will continue as a going-concern.The going-concern concept contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business over a reasonablelength of time. The Company’s history of recurring losses, a working capitaldeficit, and a stockholders’ deficiency, raise substantial doubt about theCompany’s ability to continue as a going-concern. The Company continues tomarket its products domestically and internationally. However, there can be noassurances that the Company will be successful in its marketing efforts or inits ability to raise additional financing to remain a going-concern. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this going-concern uncertainty.

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

Contract revenues arerecorded when there is persuasive evidence that a binding contractualarrangement exists, the price is fixed and determinable, the Company hascommenced work on the project, and collectibility is reasonably assured.

Contract revenues arerecognized using the percentage of completion method. The percentage ofcompletion is calculated by dividing the direct labor and other direct costsincurred by the total estimated direct cost of the project. Contract value isdefined as the total value of the contract, plus the value of approved changeorders. Estimates of costs to complete are reviewed periodically and modifiedas required. Provisions are made for the full amount of anticipated losses, ona contract-by-contract basis. 

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Theseloss provisions are established in the period in which the losses are firstdetermined. Changes in estimates are also reflected in the period they becomeknown.

Revenues from equipmentsales containing acceptance provisions are recognized upon customer acceptance.Cash payments received in advance of product or service revenue are recorded ascustomer deposits.

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

**ALLOWANCEFOR DOUBTFUL 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. Thesedifferences together with net operating loss carryforwards and tax credits maybe recorded as deferred tax assets or liabilities on the balance sheet. Ajudgment must then be made of the likelihood that any deferred tax assets willbe recovered from future taxable income. To the extent that the Companydetermines that it is more likely than not that deferred tax assets will not beutilized, a valuation allowance is established. Taxable income in futureperiods significantly different from that projected may cause adjustments tothe valuation allowance that could materially increase or decrease futureincome tax expense. As of December 31, 2005 and 2004 an allowance equal to100% of the deferred tax asset was recorded.

**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, 2005 and 2004 and the balance sheet data at December 31,2005 and 2004 have been derived from the audited financial statements whichappear elsewhere in this filing. The statement of operations data presentedbelow for the year ended December 31, 2003, and the balance sheet data at December 31,2003 have been derived from the Company’s prior year’s audited financialstatements, which are not included in this filing.

| ** **                                                                | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating Results**                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                   |       | $2,031,480                                 |       | $5,837,224 |   | $1,279,573 |   |
| Gross Profit  (Loss)                                                      |       | (485,336                                   | )          | (149,085 | ) | 318,928 |   |
| Loss From  Operations                                                     |       | (5,517,240                                 | )          | (6,087,358 | ) | (3,301,020 | ) |
| Loss Applicable  To Common Stock                                          |       | (10,213,938                                | )          | (8,056,694 | ) | (3,924,774 | ) |
| Net Loss Per  Basic & Diluted Share Attributable To Common Stock |       | (0.11                                      | )          | (0.12 | ) | (0.08 | ) |
|                                                                           |            |                                            |            |  |  |  |  |  |  |

 

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| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Balance Sheet Data**                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and Cash  Equivalents                       |       | $810,792                              |       | $38,852 |   | $59,045 |   |
| Working Capital  Deficit                         |       | (1,282,316                            | )          | (2,324,752 | ) | (2,350,312 | ) |
| Total Assets                                     |       | 2,664,404                             |       | 1,790,868 |   | 221,225 |   |
| Long term  obligations—less current portion |       | 3,088,797                             |       | 2,026,589 |   | 1,665,396 |   |
| Stockholders’ Deficiency                    |       | (3,881,759                            | )          | (4,273,641 | ) | (3,941,442 | ) |
|                                                  |            |                                       |            |  |  |  |  |  |  |

 

**RESULTSOF OPERATIONS** (amounts arerounded to the nearest thousand)

*Contract**Revenue.*   Contractrevenue for 2005 amounts to $1,918,000, and represents 94% of the Company’srevenue. Revenue of $1,886,000, or 98% of the total contract revenue, wasgenerated by domestic commercial and residential projects, with the remaining$33,000 from a water systems project in the Philippines.

Commercial projects account for $1,622,000 or 86% ofdomestic contract revenue, and is made up of the following four projects:

600 kW solar energy system at NJ wastewater treatmentplant—$1,057,000

40 kW solar electric power generation system forcommercial customer in Delaware—$234,000

45 kW net-metering photovoltaic system at municipalwater authority in CA—$199,000

386 kW solar energy power generation system forcommercial buildings in CA—$132,000

Residential projects account for $264,000 or 14% ofdomestic contract revenue; $105,000 from four California projects, and $159,000from four New Jersey projects.

The Company is evaluating its Philippine strategy, anddoes not expect international contract revenue to be material in 2006.

*Grant**Revenue.**  *The Company recognized grantrevenue of $113,000 in 2005. This is composed of $80,000 from the U.S. Tradeand Development Agency (USTDA) and $33,000 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.

*Cost**of ContractRevenue.*   Cost of contract revenue consists primarily of thirdparty construction and installation expense, materials and supplies requiredfor construction and component equipment, including the solar panels, solararray, inverters, variable speed drives and meters.

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

*Gross *Profit (Loss) on Contracts.**   TheCompany generated gross losses on contracts totaling $527,000. Gross losses of$562,000 are attributable to two projects that are in loss positions; both aresolar energy systems being installed at water treatment plants, one in NewJersey and the other in California. These gross losses are offset by grossprofit of $49,000 generated by the eight residential projects the Companycompleted in 2005. All other contract activities yielded nominal gross profitsand losses, and in aggregate, amount to a gross loss of $14,000.

*Gross *Profit (Loss) on Grants.*  *Grossprofit of $42,000 was earned in connection with the Company’s grant revenue;$9,000 from the USTDA grant, and $33,000 from the NJBPU grant.

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*Marketing,**General andAdministrative Expenses.*   Marketing, general and administrativeexpenses amount to $4,448,000 in 2005, and consist primarily of salaries andrelated personnel costs, travel, professional fees, including legal andaccounting, rent, insurance, and other sales and marketing expenses. TheCompany increased the number of personnel involved in marketing and sales toinitiate sales campaigns targeted to water utilities, schools and governmentalentities, and commercial enterprises. In the fall of 2005, the Company rolledout a residential marketing program.

As a result of the acquisition of the Quantum EnergyGroup in September 2005, the Company added additional engineering andconstruction management personnel.

*Debt**Sourcing Feesand Commissions.**  *TheCompany historically has financed its operations through a combination ofconvertible debt, convertible preferred stock, and equity. To date, ongoingoperations have been a net user of capital, and this is expected to continuethrough the end of 2006. The result of having to rely on outside sources ofcapital for financing has been very costly for the Company. Significant debtsourcing fees and commissions are expected to continue to be incurred in 2006until the Company’s contract revenue and related gross profit grows to a levelthat covers, and then exceeds, operating expenses.

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

**COMPARISONOF YEARS ENDED DECEMBER 31, 2005 AND 2004** (amounts are rounded to the nearest thousand)

*Contract**Revenue.**  *Contract revenue for the year ended December 31, 2005 was$1,918,000, a decrease of $3,696,000, or 66%, from $5,614,000 for 2004. Twoprojects (a 268,000 kW solar-driven irrigation and energy system for a citrusfarm and a 1,132,000 kW solar energy system constructed for a communitycollege) represented $5,400,000 or 96% of the contract revenue in 2004. Bothprojects were completed in 2004. The absence of these two projects in 2005, hasbeen partially offset by the contract revenue generated by the new commercialand residential projects booked in 2005.

*Grant*Revenue.*  *Grantrevenue for the year ended December 31, 2005 was $113,000, a decrease of$110,000, or 49% from $223,000 for 2004. The fluctuation is a reflection of thetiming of grant awards and completion of associated tasks/milestones called forunder the grants. Grant revenue is expected to be an immaterial portion of theCompany’s revenue stream going forward into 2006.

*Cost**of ContractRevenue.**  *Thecost of contract revenue for the year ended December 31, 2005 was$2,445,000, a decrease of $3,287,000 or 57% from $5,732,000 in 2004. Thedecrease in cost of contract revenue is principally the result of lower volumein 2005 (revenue is down 66%), offset by cost overruns on two projects in 2005.

*Cost *of Grant Revenue.*  *Thecost of grant revenue for the year ended December 31, 2005 was $71,000, adecrease of $183,000 from $254,000 in 2004.

*Gross**Profit (Loss)on Contracts.**  *TheCompany generated gross losses on contracts in both 2005 and 2004. The grossloss of $527,000 in 2005, represents an increase of $410,000 or 350%, versusthe gross loss of $117,000 in 2004. Gross losses of $562,000 in 2005 areattributable to two projects that are in loss positions; both are solar energysystems being installed at water treatment plants, one in New Jersey and theother in California. These gross losses are offset by gross profit of $49,000generated by the eight residential projects the Company completed in 2005. Allother contract activities yielded nominal gross profits and losses, and inaggregate, netted to a gross loss of $14,000.

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The increased gross losses on contracts in 2005 arethe result of the Company experiencing unanticipated additional engineering,construction, and procurement costs, and the Company not replacing the positivemargin associated with the 1,132,000 kW solar energy system completed in 2004.

*Gross *Profit (Loss) from Grants.*  *TheCompany generated gross profit of $42,000 from grants in 2005, versus a grossloss of $32,000 in 2004.

*Marketing,**General andAdministrative.**  *Marketing,general and administrative expenses for the year ended December 31, 2005were $4,448,000, an increase of $626,000, or 16%, from $3,822,000 for 2004. The$626,000 increase includes higher salaries and benefits, and higher travel andoffice expenses associated with the increased headcount in 2005. The number offull-time employees increased from 19 as of December 31, 2004 to 33 as of December 31,2005. Ten of the additional 14 employees joined the Company by way of the September 2005acquisition of Quantum Energy Group. The increased expenses were partiallyoffset by lower foreign business development expense and lower salescommissions.

*Debt**Sourcing Feesand Commissions.**  *Feesand commission expenses incurred to raise debt funding in the year ended December 31,2005 were $442,000, a decrease of $1,471,000 or 77% from $1,913,000 in 2004. Thisdecrease is attributable to a decrease in fees incurred in absolute terms, andthe short-term repayment period of the significant bridge capital raised in2004 compared to 2005, resulting in fees and commissions being expensed in theperiod incurred, 2004, as compared to $698,000 being capitalized in 2005.

The Company has incurred and will continue to incursubstantial fees and commissions, including investor relations fees, in raisingconvertible debt to fund its working capital requirements until contract revenueand associate gross profits reach a level to cover operating expenses.

*Research**and DevelopmentExpenses.**  *Researchand development expenses incurred in the year ended December 31, 2005 were$142,000, a decrease of $61,000 or 30% from $203,000 in 2004. The decrease is aresult of the Company shifting resources from research and development tosupport construction project implementation. The Company has continued todevelop its intellectual property as evidenced by the filing of three patentapplications in 2005. In addition, the Company will be filing a patentapplication for its MobileMaxPureTM in the second quarter of 2006.

*Loss**from Operations.**  *In the year ended December 31,2005 the Company incurred a loss from operations of $5,517,000, a decrease of$570,000 or 9% from $6,087,000 in 2004. This reduction is a result of asignificant reduction in expensed debt sourcing fees and commissions, offset byincreased marketing, general and administrative expenses, and increased grosslosses on contracts.

*Beneficial**ConversionInterest.**  *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, 2005, the Company incurred $3,073,000 ofbeneficial conversion interest associated with the issuing of $3,600,000 (facevalue debt) convertible notes. In 2004, the Company incurred beneficialconversion interest of $856,000. The increase is attributable to an increase inthe amount of convertible debt issued in 2005 of $2,687,000 over the amountraised in 2004, and the variance in the market price of the Company’s commonstock on the various issuance dates in the two years.

*Interest**Expense.**  *Interest expense was $1,792,000 inthe year ended December 31, 2005, an increase of $470,000 or 36% from$1,322,000 in 2004. This reflects the increase in average convertible debtoutstanding during 2005 compared to 2004, and greater amortization of originalissue discount of $633,000 attributable to the value of warrants that wereattached to the convertible debt when issued, and a decrease in the averageinterest rate on borrowed funds.

*Income**Taxes.**  *The Company recognizedan income tax benefit of $201,000 and $219,000 for the years ended December 31,2005 and 2004, respectively. The Company participates in the State of 

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New Jersey’sCorporation Business Tax Benefit Certificate Transfer Program (the “Program”),which allows certain high technology and biotechnology companies to sell unusedNew Jersey net operating loss carryovers and research and development taxcredits to other New Jersey corporate taxpayers.

During 2005, the Company sold $2,207,000 and $210,000of its 2004 and 2003 New Jersey State net operating loss carryforwards, and$11,000 of its 2004 research and development tax credits, resulting in therecognition of a $201,000 tax benefit.

During 2004, the Companysold approximately $1,200,000 and $1,450,000 of its 2003 and 2002 New JerseyState net operating loss carryforwards, and $6,000 and $14,000 of its 2003 and2002 research and development tax credits, and recognized a tax benefit of$219,000.

**HISTORICALCASH FLOW ANALYSIS**

**The“Historical Cash Flows Analysis” section discusses consolidated cash flow fromoperations, investing activities and financing activities. Amounts have beenrounded to the nearest thousand.**

*Cash Flows from Operating Activities*

| ** **                             | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Net Cash Used in  Operating Activities |       | $4,305,000                  |       | $4,975,000 |   |

 

In2005, the Company had a decrease in net cash used in operating activities of$670,000 in a period when the Company had an increase in net loss of$2,186,000. An analysis of the increased loss is above in the RESULTS OFOPERATIONS and COMPARISON OF YEARS ENDED DECEMBER 31, 2005 AND 2004. Thedecrease in net cash used in operating activities in 2005, a period when theCompany’s net loss increased, is attributable to changes in non-cash chargesand from the timing of cash receipts and disbursements related to workingcapital items in 2005 shown below.

| Increases (decreases) in  non-cash charges:                                            |   |       |      |
|----------------------------------------------------------------------------------------|--------|------------|-----------|
| Beneficial conversion interest                                                         |   | $          | 2,217,000 |   |
| Amortization of interest expense                                                       |   | 633,000    |      |
| Amortization of loan origination costs                                                 |   | 498,000    |      |
| Issuance of stock in lieu of payment of interest                                       |   | 299,000    |      |
| Other                                                                                  |   | 41,000     |      |
| Issuance of warrants for services                                                      |   | (1,286,000 | )         |
| Issuance of stock for services                                                         |   | (213,000   | )         |
| Depreciation and amortization                                                          |   | (11,000    | )         |
|                                                                                   |   | 2,178,000  |      |
| Changes in timing of cash receipts and disbursements  related to working capital items |   | 678,000    |      |
|                                                                                   |   | 2,856,000  |      |
| Change in net  loss—2005 compared to 2004                                         |   | (2,186,000 | )         |
| Decrease in net  cash used in operating activities                                     |   | $          | 670,000   |   |

 

*Cash Flows from Investing Activities*

| ** **                             | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net Cash Used in  Investing Activities |       | $                                          | 36,000     |   | $ | 30,000 |   |
|                                        |            |                                            |            |  |  |  |  |

 

20

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**In 2005and 2004, investing activities included the purchase of office equipmentincluding computers for the increased workforce.**

*Cash Flows from Financing Activities*

| ** **                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net Cash Provided By  Financing Activities |       | $5,045,000                                 |       | $4,991,000 |   |

 

**In 2005and 2004, the Company financed its operations through the issuance ofconvertible debentures and the issuance of common stock as the result ofprivate sales and the exercise of warrants and stock options.**

**In2005, the Company issued $3,600,000 of 10% convertible debentures maturing in2008 generating net proceeds of $3,350,000 and issued and sold in private sales5,000,000 shares of common stock raising $1,222,000. In addition, 8,815,000shares of common stock were issued upon the exercise of warrants and stockoptions, raising $1,317,000. In conjunction with the issuance of theconvertible debentures, in 2005 the Company issued four-year warrants for thepurchase of up to 9,611,112 shares of the Company’s common stock, at an averageexercise price of $0.18 per share, which are exercisable at any time. Thesecapital infusions were reduced by the repayment of $855,000 in long-term debtand the incurrence of $419,000 in loan origination costs.**

**In2004, the Company issued $1,180,000 of 10% convertible debentures maturing in2007 and $1,000,000 of 15% convertible debentures maturing in 2005. In aprivate sale, the Company issued and sold 13,000,000 shares of common stockraising $2,440,000. In addition, 2,732,000 shares of common stock were issuedupon the exercise of warrants and stock options, raising $464,000. Thesecapital infusions were reduced by the repayment of $308,000 in long-term debt.**

**LIQUIDITY AND CAPITAL RESOURCES**

**AtDecember 31, 2005, the Company had a working capital deficit of $1,282,000 anda Stockholders’ deficiency of $3,882,000.**

**Theconsolidated financial statements included herein are presented on the basisthat the Company will continue as a going-concern. The going-concern conceptcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business over a reasonable length of time. The Company’shistory of recurring losses, a working capital deficit, and a stockholders’deficiency raise substantial doubt about the Company’s ability to continue as agoing-concern. The Company has historically financed operations and met capitalexpenditures requirements primarily through sales of capital stock and, to alesser extent, research revenues and solar system equipment sales. Managementcontinues to raise capital through the sale of common stock and additionalborrowings. Below is a table showing the potential issuable shares andavailable authorized common to be issued as of March 31, 2006, December 31,2005 and December 31, 2004.**

| ** **                             | ** ** | **As of March 31, 2006** | ** **  | **As of December 31, 2005** | ** ** | **As of December 31, 2004** | ** **  |
|----------------------------------------|------------|----------------------------------------------|-------------|-------------------------------------------------|------------|-------------------------------------------------|-------------|
| Number of authorized common shares:    |       |                                         | 200,000,000 |                                            |       |                                            | 200,000,000 |   |   |   | 160,000,000 |   |   |
| Less common shares outstanding:        |       |                                         | 132,108,000 |                                            |       |                                            | 108,787,000 |   |   |   | 79,834,000 |   |   |
| Less potential issuable common shares: |       |                                         |        |                                            |       |                                            |        |   |   |   |   |   |   |
| Warrants                               |       |                                         | 28,760,000  |                                            |       |                                            | 36,789,000  |   |   |   | 31,165,000 |   |   |
| Debt conversion rights                 |       |                                         | 10,244,000  |                                            |       |                                            | 24,333,000  |   |   |   | 25,227,000 |   |   |
| Stock options                          |       |                                         | 12,884,000  |                                            |       |                                            | 11,810,000  |   |   |   | 10,015,000 |   |   |
| Stock purchase agreement  rights       |       |                                         |        |                                            |       |                                            |        |   |   |   | 6,500,000 |   |   |
| Preferred stock  conversion rights     |       |                                         | 611,000     |                                            |       |                                            | 611,000     |   |   |   | 611,000 |   |   |
|                                   |       |                                         | 52,499,000  |                                            |       |                                            | 73,543,000  |   |   |   | 73,518,000 |   |   |
| Available common  shares to be issued: |       |                                         | 15,393,000  |                                            |       |                                            | 17,670,000  |   |   |   | 6,648,000 |   |   |

 

21

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**Management continues to market itsproducts domestically and internationally. However, there can be no assurancesthat the Company will be successful in these efforts. The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this going-concern uncertainty.**

**TheCompany needs additional financing to execute its business plan and to enhanceits intellectual property rights, respond to competitive pressures, and developcomplementary businesses or necessary technologies. The Company does not knowwhether it will be able to raise additional financing on favorable financingterms. If adequate funds are not available or are not available on acceptableterms, the Company’s ability to fund its operations and expand its salesdistribution network, or otherwise respond to competitive pressures, will besignificantly limited.**

**COMMITMENTS ANDGUARANTEES**

**TheCompany’s commitments as of December 31, 2005, for the years 2006 through 2010and thereafter as summarized below:**

| ** **                                     | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2008**  | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| ** **                                     | ** ** | **(Amount rounded in thousands)** | ** ** |
| Long-tem debt  maturities (face amount)        |       | $                                                | 769,000    |     | $          | 2,136,000 |       | $        | 1,520,000  |     | $          | 4,000          |       | $         | 4,000      |   |   | $ | — |   |   | $ | 4,433,000 |   |
| Employment  obligations                        |       | 686,000                                          |       | 203,000  |       | 120,000   |       |     |       | —   |       |           | —     |      |       | 1,009,000 |   |
| Renewable energy  credit guarantee obligations |       | 87,220                                           |       | 64,176   |       | 64,176    |       | 64,176   |       | 64,176   |       |           | 72,646     |      |       | 416,571 |   |
| Operating lease  payments                      |       | 221,000                                          |       | 143,000  |       | 54,000    |       | —   |       | —   |       |           | —     |      |       | 418,000 |   |
| Repayment of grant                             |       | 118,367                                          |       | 118,367  |       | —    |       | —   |       | —   |       |           | —     |      |       | 236,734 |   |
| Total                                          |       | $                                                | 1,763,220  |     | $          | 2,546,176 |       | $        | 1,758,176  |     | $          | 68,176         |       | $         | 68,176     |   |   | $ | 72,646 |   |   | $ | 6,276,571 |   |

 

**INCOME TAXES**

As of December 31,2005, the Company had federal and state net operating loss carryforwardstotaling approximately $28,244,000 and $9,914,000, respectively, available toreduce future taxable income and tax liabilities which expire at various datesbetween 2006 and 2025. In addition, as of December 31, 2005, the Companyhad federal research and development tax credit carryforwards of approximately$131,000 available to reduce future tax liabilities which expire at variousdates between 2009 and 2024. Under provisions of the Internal Revenue Code,substantial changes in the Company ownership may limit the amount of netoperating loss carryforwards and research and development credit carryforwards,which can be used annually to offset future taxable income and tax liabilities.Management of the Company has evaluated the positive and negative evidencebearing upon the realizability of its deferred tax assets. Management hasconsidered the Company’s history of losses and, in accordance with theapplicable accounting standards, has fully reserved the deferred tax asset asof December 31, 2005 and 2004.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In May 2005, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 154, “Accounting Changes and ErrorCorrections—replacement of APB Opinion No. 20 and FASB Statement No. 3”was issued. SFAS No. 154 changes the accounting for and reporting of achange in accounting principle by requiring retrospective application to priorperiods’ financial statements of changes in accounting principle unlessimpracticable. SFAS No. 154 is effective for accounting changes made infiscal years beginning after December 15, 2005.

In December 2004, the FASB issued SFAS No. 123R,“Share-Based Payment,” or SFAS 123R. SFAS 123R requires compensation costrelating to share-based payment transactions be recognized in 

22

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financial statements basedon the fair value of the equity or liability instruments issued. SFAS 123Rcovers a wide range of share-based compensation arrangements including stockoptions, restricted stock plans, performance-based awards, stock appreciationrights, and employee stock purchase plans. SFAS 123R replaces SFAS 123, andsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”SFAS 123, as originally issued in 1995, established as preferable afair-value-based method of accounting for share-based payment transactions withemployees. However, SFAS 123 permitted entities to continue to apply theguidance in APB Opinion No. 25, as long as the footnotes to financialstatements disclosed what net income would have been had the preferablefair-value-based method been used.

The Company adopted Statement 123(R) on January 1,2006. This statement applies to all awards granted after the date of adoptionand to awards modified, repurchased, or cancelled after that date. The value ofthe unvested stock options at December 31, 2005 is $882,152, of which $753,505will be expensed in 2006. The amount will be expensed in the future overthe remaining vesting period, which is two years.

On November 24, 2004, the FASB issued SFAS No. 151,“Inventory Costs,” which is an amendment to ARB No. 43, Chapter 4. Itclarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). Under this Statement,these costs should be expensed as incurred and not included in overhead.Further, SFAS No. 151 requires that allocation of fixed productionoverheads to conversion costs should be based on normal capacity of theproduction facilities. SFAS No. 151 is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. Managementbelieves the adoption of this Statement will not have a material effect on theconsolidated financial statements.

23

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**ITEM 7.**                FINANCIALSTATEMENTS.

**Report of Independent Registered Public AccountingFirm**

We have audited the accompanying consolidated balancesheets of WorldWater & Power Corp. and Subsidiaries as of December 31,2005 and 2004, and the related consolidated statements of operations, changesin stockholders’ deficiency, and cash flows for each of the years then ended. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot 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.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of WorldWater & Power Corp. and Subsidiaries as of December 31,2005 and 2004, and the results of their operations and their cash flows for theyears then ended, in conformity with U.S. generally accepted accountingprinciples.

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going-concern. As discussed in Note 1 to theconsolidated financial statements, the Company has suffered recurring lossesfrom operations and has a working capital deficiency that raise substantialdoubt about its ability to continue as a going-concern. Management’s plans inregard to these matters are also described in Note 1. The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

| /s/ AMPER,  POLITZINER, MATTIA, P.C. |   |
|--------------------------------------|--------|
| March 31, 2006                  |
| Edison, New Jersey                   |

 

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**WORLDWATER &POWER CORP. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSDECEMBER 31, 2005 AND 2004**

|                                                                                                                                                                              | ** ** | **2005**       | ** **    | **2004**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|---------------|----------------|------------|
| **Assets**                                                                                                                                                                   |       |           |          |           |       |
| **Current Assets:**                                                                                                                                                          |       |           |          |           |       |
| Cash and cash  equivalents                                                                                                                                                   |       | $              | 798,649       |           | $          | 38,852 |   |
| Restricted cash  and cash equivalents                                                                                                                                        |       | 12,143         |          | —         |       |
| Accounts  receivable, net of allowance for doubtful accounts of $53,580 and $22,388  respectively                                                                            |       | 354,739        |          | 1,590,221      |       |
| Accounts  receivable, related party                                                                                                                                          |       | 32,426         |          | —         |       |
| Inventory                                                                                                                                                                    |       | 383,722        |          | —         |       |
| Costs and  estimated earnings/losses in excess of billings                                                                                                                   |       | 466,985        |          | —         |       |
| Prepaid expenses  and deposits                                                                                                                                               |       | 109,104        |          | 70,062         |       |
| Advances to  employees                                                                                                                                                       |       | 17,282         |          | 14,033         |       |
| **Total  Current Assets**                                                                                                                                                    |       | **2,175,050**  |          | **1,713,168**  |       |
| Equipment and  Leashold Improvements, Net                                                                                                                                    |       | 50,615         |          | 58,611         |       |
| Intangible And Other Assets                                                                                                                                                  |       |           |          |           |       |
| Loan origination  costs, net                                                                                                                                                 |       | 287,688        |          | —         |       |
| Non-compete  agreement, customer list, trade name, net                                                                                                                       |       | 109,667        |          | —         |       |
| Deposits                                                                                                                                                                     |       | 41,384         |          | 19,089         |       |
| **Total  Assets**                                                                                                                                                            |       | **$**          | **2,664,404** |           | **$**      | **1,790,868** |   |
| **Liablilties and Stockholders' Deficiency**                                                                                                                                 |       |           |          |           |       |
| **Current Liabilities:**                                                                                                                                                     |       |           |          |           |       |
| Accounts payable  and accrued expenses                                                                                                                                       |       | $              | 2,288,607     |           | $          | 2,558,135 |   |
| Long-term debt and  notes payable, current portion                                                                                                                           |       | 769,180        |          | 1,235,714      |       |
| Notes payable,  related parties                                                                                                                                              |       | 35,748         |          | 123,013        |       |
| Accrued losses on  construction in progress                                                                                                                                  |       | 155,090        |          | —         |       |
| Billings in excess  of costs and estimated earnings/losses                                                                                                                   |       | 31,802         |          | —         |       |
| REC guarantee  liability, current portion                                                                                                                                    |       | 87,220         |          | 63,260         |       |
| Customer deposits                                                                                                                                                            |       | 89,719         |          | 57,798         |       |
| **Total  Current Liabilities**                                                                                                                                               |       | **3,457,366**  |          | **4,037,920**  |       |
| Long-term debt and  notes payable                                                                                                                                            |       | 2,759,446      |          | 1,605,526      |       |
| Long-term debt,  related parties                                                                                                                                             |       | —         |          | 90,706         |       |
| REC guarantee  liability, net of current portion                                                                                                                             |       | 329,351        |          | 330,357        |       |
| **Total  Liabilities**                                                                                                                                                       |       | **6,546,163**  |          | **6,064,509**  |       |
| **Commitments  and contingencies**                                                                                                                                           |       | —         |          | —         |       |
| **Stockholders' Deficiency:**                                                                                                                                                |       |           |          |           |       |
| Preferred Stock 7%  Convertible $.01 par value authorized 10,000,000; issued and outstanding:                                                                                |       |           |          |           |       |
| Series B 611,111  shares liquidation preference $550,000 as of December 31, 2005 and 2004                                                                                    |       | 6,111          |          | 6,111          |       |
| Common Stock,  $.001 par value; authorized 200,000,000; 108,786,940 issued and outstanding  at December 31, 2005 and 79,834,341 issued and outstanding at December 31,  2004 |       | 108,787        |          | 79,834         |       |
| Additional paid-in  capital                                                                                                                                                  |       | 33,893,104     |          | 23,401,472     |       |
| Deferred  compensation                                                                                                                                                       |       | (45,000        | )             | (75,000        | )          |
| Accumulated other  comprehensive (loss)                                                                                                                                      |       | (845           | )             | (56,080        | )          |
| Accumulated  deficit                                                                                                                                                         |       | (37,843,916    | )             | (27,629,978    | )          |
| **Total  Stockholders' Deficiency**                                                                                                                                          |       | **(3,881,759** | **)**         | **(4,273,641** | **)**      |
| **Total  Liabilities and Stockholders' Deficiency**                                                                                                                          |       | **$**          | **2,664,404** | ** **     | **$**      | **1,790,868** | ** ** |

 

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

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**WORLDWATER & POWER CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004**
|                                                                       | ** ** | **2005**    | ** **  | **2004**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| Revenues:                                                             |       |        |        |       |       |
| Contract                                                              |       | $           | 1,918,420   |       | $          | 5,614,362 |   |
| Grant                                                                 |       | 113,060     |        | 222,862    |       |
| Total                                                                 |       | 2,031,480   |        | 5,837,224  |       |
| Cost of Revenues:                                                     |       |        |        |       |       |
| Contract                                                              |       | 2,445,441   |        | 5,731,841  |       |
| Grant                                                                 |       | 71,375      |        | 254,468    |       |
| Total                                                                 |       | 2,516,816   |        | 5,986,309  |       |
| Gross Profit  (Loss):                                                 |       |        |        |       |       |
| Contract                                                              |       | (527,021    | )           | (117,479   | )          |
| Grant                                                                 |       | 41,685      |        | (31,606    | )          |
| Total                                                                 |       | (485,336    | )           | (149,085   | )          |
| Operating  Expenses:                                                  |       |        |        |       |       |
| Marketing, general and administrative expenses                        |       | 4,447,767   |        | 3,821,978  |       |
| Debt sourcing fees and commissions                                    |       | 441,956     |        | 1,913,071  |       |
| Research and development expense                                      |       | 142,182     |        | 203,224    |       |
| Total Expenses                                                        |       | 5,031,905   |        | 5,938,273  |       |
| Loss from  Operations                                                 |       | (5,517,241  | )           | (6,087,358 | )          |
| Other (Expense)  Income                                               |       |        |        |       |       |
| Beneficial conversion interest                                        |       | (3,072,963  | )           | (855,738   | )          |
| Interest expense, net                                                 |       | (1,792,000  | )           | (1,322,484 | )          |
| Other income, net                                                     |       | (32,687     | )           | 18,380     |       |
| Total Other (Expense) Income, Net                                     |       | (4,897,650  | )           | (2,159,842 | )          |
| Loss before  income taxes (benefit)                                   |       | (10,414,891 | )           | (8,247,200 | )          |
| Benefit from sale of NJ net operating losses and NJ  Research Credits |       | 200,953     |        | 219,381    |       |
| Net loss                                                              |       | (10,213,938 | )           | (8,027,819 | )          |
| Accretion of preferred stock dividends                                |       | —      |        | (28,875    | )          |
| Net Loss  Applicable to Common Shareholders                           |       | $           | (10,213,938 | )          | $          | (8,056,694 | ) |
| Net loss applicable per Common Share (basic and  diluted):            |       | $           | (0.11       | )          | $          | (0.12 | ) |
| Weighted Average  Common Shares Outstanding used in                   |       |        |        |       |       |
| Per Share  Calculation:                                               |       | 93,767,378  |        | 65,360,690 |       |

 

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

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**WORLDWATER &POWER CORP. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004**

| ** **                                                                    | ** ** | **2005**       | ** **  | **2004**       | ** ** |
|-------------------------------------------------------------------------------|------------|----------------|-------------|----------------|------------|
| **Cash Flows from Operating Activities:**                                     |       |           |        |           |       |
| Net loss                                                                      |       | $              | (10,213,938 | )              | $          | (8,027,819 | ) |
| Adjustments to reconcile net loss to net cash used  in operating  activities: |       |           |        |           |       |
| Issuance of warrants and  options for services                                |       | 99,722         |        | 1,386,015      |       |
| Beneficial conversion  feature of convertible notes                           |       | 3,072,963      |        | 855,738        |       |
| Amortization of interest  expense                                             |       | 1,417,460      |        | 784,772        |       |
| Issuance of stock for  service                                                |       | 111,550        |        | 324,668        |       |
| Amortization of  intangibles and loan origination costs                       |       | 498,214        |        | —         |       |
| Depreciation and  amortization                                                |       | 27,897         |        | 38,507         |       |
| Issuance of stock in  lieu of interest                                        |       | 371,087        |        | 72,108         |       |
| Amortization of deferred  compensation                                        |       | 30,000         |        | 30,000         |       |
| Loss/ (Gain) on  disposal of assets                                           |       | 39,118         |        | (2,200         | )          |
| Changes in assets and liabilities:                                            |       |           |        |           |       |
| Restrcted cash and cash  equivalents                                          |       | (12,143        | )           | —         |       |
| Accounts receivable                                                           |       | 1,235,482      |        | (1,541,120     | )          |
| Accounts receivable—related  parties                                     |       | (32,426        | )           | —         |       |
| Inventory                                                                     |       | (381,272       | )           | —         |       |
| Costs and estimated  earnings/losses in excess of billings                    |       | (466,985       | )           | —         |       |
| Prepaid expenses and  deposits                                                |       | (61,337        | )           | (55,322        | )          |
| Advances to employees                                                         |       | (3,049         | )           | —         |       |
| Accounts payable and  other accrued expenses                                  |       | (275,619       | )           | 842,981        |       |
| Accrued losses on  construction in progress                                   |       | 155,090        |        | —         |       |
| Billings in excess of  costs and estimated earnings/losses                    |       | 31,802         |        |           |       |
| Renewable energy credits  guarantee liability                                 |       | 22,954         |        | 393,617        |       |
| Customer deposits                                                             |       | 28,921         |        | (76,717        | )          |
| **Net  Cash (Used in) Operating Activities**                                  | ** ** | **(4,304,509** | **)**       | **(4,974,772** | **)**      |
| **Cash Flows from Investing Activities:**                                     |       |           |        |           |       |
| Purchase of equipment  and leasehold improvements                             |       | (35,872        | )           | (31,899        | )          |
| Proceeds from sale of  vehicle                                                |       | —         |        | 2,200          |       |
| **Net  Cash Used in Investing Activities**                                    | ** ** | **(35,872**    | **)**       | **(29,699**    | **)**      |
| **Cash Flows from Financing Activities:**                                     |       |           |        |           |       |
| Proceeds from issuance  of debt, notes payable and warrants                   |       | 3,780,000      |        | 2,395,153      |       |
| Proceeds from exercise  of warrants and stock options                         |       | 1,316,955      |        | 464,003        |       |
| Proceeds from issuance  of common stock                                       |       | 1,222,222      |        | 2,440,000      |       |
| Payments on long-term  debt                                                   |       | (855,402       | )           | (308,194       | )          |
| Increase in loan  origination costs                                           |       | (418,832       | )           | —         |       |
| **Net  Cash Provided by Financing Activities**                                | ** ** | **5,044,943**  | ** **  | **4,990,962**  | ** ** |
| Net effect of currency  translation on cash                                   |       | 55,235         |        | (6,684         | )          |
| **Net  Increase (Decrease) in cash and cash equivalents**                     |       | 759,797        |        | (20,193        | )          |
| **Cash  and cash equivalents at beginning of year**                           | ** ** | **38,852**     | ** **  | **59,045**     | ** ** |
| **Cash and cash equivalents at end of year**                                  | ** ** | **$**          | **798,649** | ** **     | **$**      | **38,852** | ** ** |

 

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

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**WORLDWATER & POWER CORP. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ DEFICIENCY**

**FORTHE YEARS ENDED DECEMBER 31, 2005 AND 2004**

|                                                     | ** ** | ** **            | ** ** | ** **               | ** ** | ** **           | ** ** | ** **           | ** ** | **Additional** | ** ** | **Additional**  | ** ** | ** **               | ** ** | ** **  | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|----------------------|------------|----------------------|------------|----------------|------------|-----------------|------------|--------------------------|------------|-------------|------------|------------------------|------------|------------|------------|
| ** **                                          | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Paid-In  Capital** | ** ** | **Paid-In  Capital** | ** ** | **Deferred**   | ** ** | **Accumulated** | ** ** | **Other  Comprehensive** | ** ** | ** **  | ** ** |
| ** **                                          | ** ** | **Shares**            | ** ** | **Par Value**       | ** ** | **Shares**           | ** ** | **Par Value**   | ** ** | **(Common)**   | ** ** | **(Preferred)** | ** ** | **Compensation**         | ** ** | **Deficit** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2003                    |       | 52,506,720            |       |                     | 52,506     |                 |       | 677,778              |       |           | 6,778      |            |       | $                        | 15,146,565 |        |       | $                      | 580,389    |       |       |   | $ | (105,000 | ) |   |   | $ | (19,573,284 | ) |   |   | $ | (49,396 | ) |   | $ | (3,941,442 | ) |
| Preferred  Stock                                    |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accretion  of dividends                             |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | 28,875     |                   |       |       | —     |   |   |   | (28,875 | ) |   |   | — |   |   | — |   |
| Conversion of  preferred to common stock            |       | 66,667                |       |                     | 67         |                 |       | (66,667              | )          |           | (667       | )               |       | 59,933                   |       |        | (59,333    | )                      |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   |
| Payment  of dividend in common stock                |       | 61,889                |       |                     | 62         |                 |       | —               |       |           | —     |            |       | 12,538                   |       |        | (12,600    | )                      |       |       | —     |   |   |   | — |   |   |   | — |   |   | — |   |
| Beneficial  conversion feature of convertible notes |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 855,738                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 855,738 |   |
| Conversion  of convertible notes                    |       | 9,699,999             |       |                     | 9,700      |                 |       | —               |       |           | —     |            |       | 1,335,300                |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 1,345,000 |   |
| Issuance  of common stock:                          |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Under  SPA                                          |       | 12,000,000            |       |                     | 12,000     |                 |       | —               |       |           | —     |            |       | 2,278,000                |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 2,290,000 |   |
| Restricted stock  under private placement           |       | 1,000,000             |       |                     | 1,000      |                 |       | —               |       |           | —     |            |       | 149,000                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 150,000 |   |
| Exercise  of warrants                               |       | 2,095,667             |       |                     | 2,096      |                 |       | —               |       |           | —     |            |       | 354,254                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 356,350 |   |
| For services                                        |       | 1,506,357             |       |                     | 1,506      |                 |       | —               |       |           | —     |            |       | 323,074                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 324,580 |   |
| Exercise  of options                                |       | 635,836               |       |                     | 636        |                 |       | —               |       |           | —     |            |       | 107,017                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 107,653 |   |
| In lieu of payment  of interest                     |       | 261,206               |       |                     | 261        |                 |       | —               |       |           | —     |            |       | 71,847                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 72,108 |   |
| Detachable  warrants granted with:                  |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debt                                    |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 593,900                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 593,900 |   |
| Restricted  stock                                   |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 80,400                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 80,400 |   |
| Common stock under  SPA                             |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 481,444                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 481,444 |   |
| Warrants  granted for:                              |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Services arranging  financing                       |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 643,600                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 643,600 |   |
| Business  development services                      |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 270,000                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 270,000 |   |
| Extensions of  short-term loans                     |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 46,000                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 46,000 |   |
| Options  granted in lieu of interest                |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 55,531                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 55,531 |   |
| Amortization of  Deferred compensation              |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | 30,000     |   |   |   | — |   |   |   | — |   |   | 30,000 |   |
| Comprehensive  loss:                                |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                            |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | —     |   |   |   | (8,027,819 | ) |   |   | — |   |   | (8,027,819 | ) |
| Other  comprehensive expense—                  |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Currency  translation adjustment                    |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | (6,684 | ) |   | (6,684 | ) |
| Total  comprehensive loss                           |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | (8,034,503 | ) |
| Balance,  December 31, 2004                    |       | 79,834,341            |       |                     | 79,834     |                 |       | 611,111              |       |           | 6,111      |            |       | 22,864,141               |       |        | 537,331    |                   |       |       | (75,000    | ) |   |   | (27,629,978 | ) |   |   | (56,080 | ) |   | (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 lieu  of payment of interest                     |       | 1,495,837             |       |                     | 1,496      |                 |       | —               |       |           | —     |            |       | 369,590                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 371,086 |   |
| Purchase of  Quantum Energy Net Assets              |       | 750,000               |       |                     | 750        |                 |       | —               |       |           | —     |            |       | 239,250                  |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | 240,000 |   |
| Warrants  granted for commissions on financing      |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | 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                                            |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | —     |   |   |   | (10,213,938 | ) |   |   | — |   |   | $ | (10,213,938 | ) |
| Other  comprehensive expense—                  |       |                  |       |                     |       |                 |       |                 |       |           |       |            |       |                     |       |        |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Currency  translation adjustment                    |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | 55,235 |   |   | 55,235 |   |
| Total  comprehensive loss                           |       | —                |       |                     | —     |                 |       | —               |       |           | —     |            |       | —                   |       |        | —     |                   |       |       | —     |   |   |   | — |   |   |   | — |   |   | $ | (10,158,703 | ) |
|                                                     |            |                       |            |                          |            |                      |            |                      |            |                |            |                 |            |                          |            |             |            |                        |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Balance, December 31, 2005 |   | 108,786,940 |   |   | $ | 108,787 |   |   | 611,111 |   |   | $ | 6,111 |   |   | $ | 33,355,773 |   |   | $ | 537,331 |   |   |   | $ | (45,000 | ) |   |   | $ | (37,843,916 | ) |   |   | $ | (845 | ) |   | $ | (3,881,759 | ) |
|---------------------------------|--------|-------------|--------|--------|---|---------|--------|--------|---------|--------|--------|---|-------|--------|--------|---|------------|--------|--------|---|---------|--------|--------|--------|---|---------|---|--------|--------|---|-------------|---|--------|--------|---|------|---|--------|---|------------|---|

 

The Notes to Condensed 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**

At December 31, 2005,WorldWater & Power Corp. (“WorldWater/Company”) had a working capital deficitof $1,282,316 and a Stockholders’ deficiency of $3,881,759.

These consolidated financials are presented on thebasis that the Company will continue as a going-concern. The going-concernconcept contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business over a reasonable length of time.The Company’s history of recurring losses, working capital deficit, andstockholders’ deficiency raise substantial doubt about the Company’s ability tocontinue as a going-concern. The Company has historically financed operationsand met capital expenditures requirements primarily through sales of capitalstock and, to a lesser extent, research and product revenues and solar systemequipment sales. Management continues to raise capital through the sale ofcommon stock and additional borrowings. In addition, management is continuingto market its products domestically and internationally. However, there can beno assurances that the company will be successful in these efforts. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this going-concern uncertainty.

The Company needsadditional financing to execute its business plan to enhance its intellectualproperty rights, respond to competitive pressures, and develop complementarybusinesses or necessary technologies. The Company does not know whether it willbe able to raise additional financing on favorable financing terms. If adequatefunds are not available or are not available on acceptable terms, the Company’sability to fund its operations and expand sales distribution network, orotherwise respond to competitive pressures will be significantly limited.

**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. WorldWater 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 soon to be introduced, MobileMaxPureTM.

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Informationwith respect to the Company’s geographic segments for the years ended December 31,2005 and 2004 is presented below:

| ** **    | ** ** | **Revenue** | ** ** | **Long-lived Assets** | ** ** |
|---------------|------------|-------------|------------|----------------------------|------------|
| ** **    | ** ** | **2005**    | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $           | 1,998,937  |                       | $          | 5,837,224 |   | $ | 50,615 |   | $ | 58,611 |   |
| Philippines   |       | 32,543      |       | —                     |       | — |   | — |   |
| Total         |       | $           | 2,031,480  |                       | $          | 5,837,224 |   | $ | 50,615 |   | $ | 58,611 |   |

 

**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, foreigncurrency translation, depreciation, taxes, the guaranty liability for the valueof Renewable Energy Credits, loses on uncompleted contracts and the value ofshares issued. Although these estimates are based on management’s bestknowledge of current events and actions that the company may undertake in thefuture, actual results may be different from the estimates.

*Foreign CurrencyTranslation*

Assets and liabilities ofthe Company’s active non-U.S. subsidiary, WorldWater (Phils) Inc., whichoperates in the local currency of the Philippines, are translated to U.S.dollars at exchange rates in effect at the balance sheet date with theresulting translation adjustment recorded in other comprehensive income. Incomeand expense accounts are translated at average exchange rates during the year.

*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, 2005 and 2004.

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*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 December 31, 2005,26% of the receivables, including related party receivables, were from tworesidential customers and two water utility customers and 56% were rebates owedby state agencies administering clean energy initiatives generated from thesale of solar equipment installed in the United States of which 40% had, beencollected during the first quarter of 2006. 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 2 customers accounting for 64%of revenue in the year ended December 31, 2005 and two customersaccounting for 96% of revenue in the year ended December 31, 2004. TheCompany had no amounts receivable from its 2 major customers in 2005 as ofDecember 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 has guaranteedthe price of certain Renewable Energy Certificates (RECs) to be generated bythe installation during the first seven years of operation. Based on currentmarket indications, the Company estimates its guarantee obligation may resultin a potential loss of $452,907 which is tied to the future market and tradingvalue of RECs traded in California. Without the knowledge of the future valueof these RECs, the Company recorded as reductions of Contract Revenue:estimated losses of $393,617 in the year ended December 31, 2004 and$59,290 in the year ended December 31, 2005. Adjustments to the estimatedguarantee obligation will be recognized as an adjustment of revenue over theseven year term of the respective guarantee obligations. 

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Product Warranty

The Companyprovides for the estimated cost of product warranties at the time revenue isrecognized. Since the Company has a limited operating history, adjustments infuture periods may be required as its installations mature. The following tablesummarizes the activity regarding the Company’s warranty accrual:

| Balance,  December 31, 2003           |   | $       | 27,206  |   |
|--------------------------------------------|--------|---------|---------|--------|
| Accruals for warranties issued during 2004 |   | 79,794  |    |
| Utilization of  warranty reserve           |   | —  |    |
| 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 |   |

 

The product warranty accrual is included in AccountsPayable and Accrued Expenses in the Company’s Consolidated Balance Sheet.

*Comprehensive Loss*

Statement of FinancialAccounting Standards (SFAS) No. 130, “Reporting Comprehensive Income”establishes standards for reporting and presentation of comprehensive loss andits components in a full set of financial statements. Comprehensive lossconsists of net loss and foreign currency translation and is presented in theconsolidated statements of stockholders’ 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-contract basis.These loss provisions are established in the period in which the losses arefirst determined. Changes in estimates are also reflected in the period theybecome 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.

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*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*

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

*Cash and 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. Uponretirement or disposal, the asset cost and related accumulated depreciation areremoved from the accounts and the net amounts, less any proceeds, are chargedor credited 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 $42,472 and $85,106 for the yearsending December 31, 2005 and 2004, respectively.

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*Stock-BasedCompensation*

The Company applies theintrinsic value-based method of accounting prescribed by Accounting Principles Board,or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations, in accounting for its fixed stock option plans. Assuch, compensation expense for grants to employees or members of the Board ofDirectors would be recorded on the date of grant only if the current marketprice of the Company’s stock exceeded the exercise price. SFAS No. 123, “Accountingfor Stock-Based Compensation,” or SFAS 123, as amended by SFAS No. 148 (“Accountingfor Stock-Based Compensation—Transition and Disclosure”), establishesaccounting and disclosure requirements using a fair-value-based method ofaccounting for stock-based employee compensation plans. As permitted under SFAS123, the Company has elected to continue to apply the intrinsic value-basedmethod of accounting described above and has adopted the disclosurerequirements of SFAS 123, as amended.

If the exercise price ofemployee or director stock options is less than the fair value of theunderlying stock on the grant date, the Company amortizes such differences toexpense over the vesting period of the options. Options or stock awards issuedto non-employees and consultants are recorded at fair value as determined inaccordance with SFAS 123 and EITF No. 96-18, “Accounting for EquityInstruments That are Issued to Other Than Employee for Acquiring, or inConjunction with Selling, Goods or Services,” and expensed over the relatedvesting period.

Thefollowing table illustrates the effect on net income and net income per shareas if the fair-value-based method under SFAS 123 had been applied. Optionforfeitures are accounted for as they occurred and no amounts of compensationexpense have been capitalized into inventory or other assets, but instead areconsidered period expenses in the pro forma amounts.

| ** **                                                                                                                              | ** ** | **2005**     | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|
| Net loss, as  reported                                                                                                                  |       | $(10,213,939 | )          | $(8,027,819 | )          |
| Add: Stock based employee compensation expense  included in reported net loss, net of related tax effects                               |       | 30,000       |       | 30,000      |       |
| Deduct: Stock based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | (840,210     | )          | (874,076    | )          |
| Pro forma net loss                                                                                                                      |       | $(11,024,149 | )          | $(8,871,895 | )          |
| Loss per share:                                                                                                                         |       |         |       |        |       |
| Basic and Diluted—as reported                                                                                                      |       | $(0.11       | )          | $(0.12      | )          |
| Basic and Diluted—pro  forma                                                                                                       |       | $(0.12       | )          | $(0.14      | )          |

 

TheCompany estimates the fair value using the Black-Scholes option pricing basedon the following assumptions:

| ** **                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Expected term  until exercised, years                     |       | 10       |       | 10       |       |
| Expected stock  price volatility, average                 |       | 49       | %          | 60       | %          |
| Risk-free  interest rate, zero coupon U.S. Treasury Notes |       | 4        | %          | 4        | %          |
| Expected dividend  yield                                  |       | 0        | %          | 0        | %          |
| Weighted-average fair  value per option                   |       | $0.26    |       | $0.19    |       |

 

*Equity Security Transactions*

The Board of Directors hasestablished the fair value of common stock based upon quoted market pricesexisting at the dates such equity transactions occurred.

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*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 31,2005 and 2004 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, 2005 and 2004,respectively:

| ** **                         | ** ** | **As of   December 31.2005** | ** ** | **As of  December 31, 2004** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Warrants                           |       |                                        | 36,789,366 |                                        |       |   | 31,165,000 |   |   |
| Debt conversion  rights            |       |                                        | 24,332,581 |                                        |       |   | 25,227,000 |   |   |
| Stock options                      |       |                                        | 11,810,392 |                                        |       |   | 10,015,000 |   |   |
| Preferred stock  conversion rights |       |                                        | 611,111    |                                        |       |   | 6,500,000 |   |   |
| Total                              |       |                                        | 73,543,450 |                                        |       |   | 72,907,000 |   |   |

 

*Recent Accounting Pronouncements*

In May 2005, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 154, “AccountingChanges and Error Corrections—replacement of APB Opinion No. 20 and FASB StatementNo. 3” was issued. SFAS No. 154 changes the accounting for andreporting of a change in accounting principle by requiring retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple unless impracticable. SFAS No. 154 is effective for accountingchanges made in fiscal years beginning after December 15, 2005.

In December 2004, theFASB issued SFAS No. 123R, “Share-Based Payment,” or SFAS 123R. SFAS 123Rrequires compensation cost relating to share-based payment transactions berecognized in financial statements based on the fair value of the equity orliability instruments issued. SFAS 123R covers a wide range of share-basedcompensation arrangements including stock options, restricted stock plans,performance-based awards, stock appreciation rights, and employee stockpurchase plans. SFAS 123R replaces SFAS 123, and supersedes APB Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS 123, as originally issued in1995, established as preferable a fair-value-based method of accounting forshare-based payment transactions with employees. However, SFAS 123 permittedentities to continue to apply the guidance in APB Opinion No. 25, as longas the footnotes to financial statements disclosed what net income would havebeen had the preferable fair-value-based method been used.

The pro forma disclosuresincluded in the Company’s consolidated financial statements for 2005 and priorperiods, as previously permitted under SFAS No. 123, will no longer be analternative for financial statement recognition.

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 at December 31,2005 is approximately $882,152, of which $753,505 will be expensed in 2006. Theamount will be expensed in the future over the remaining vesting period, whichis two years.

On November 24, 2004,the FASB issued SFAS No. 151, “Inventory Costs,” which is an amendment to ARB No.43, Chapter 4. It clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage). Underthis Statement, these costs should be expensed as incurred and not included inoverhead. Further, SFAS No. 151 requires that allocation of fixedproduction overheads to conversion costs should be based on normal capacity ofthe production facilities. SFAS No. 151 is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. 

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Managementbelieves the adoption of this Statement will not have a material effect on theconsolidated financial statements.

*Reclassifications*

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

**Note (4)   Business Acquisition**

On September 1, 2005,the Company acquired, through its wholly-owned subsidiary, WorldWater HoldingsInc., assets of MJD Solutions, Inc., a Nevada Corporation doing businessas Quantum Energy Group for 750,000 shares (valued at $240,000) of the Company’scommon stock. The results of MJD Solutions, Inc. operations have beenincluded in the consolidated financial statements since that date.

Quantum Energy Group, asolar energy, construction and project management company, are licensed contractorsin the State of California and will assist the Company in the design andinstallation of its commercial and institutional solar installations.

The Company has accountedfor this acquisition using the purchase method of accounting. Accordingly, thepurchase price has been allocated based upon the estimated fair value of theassets and liabilities acquired.

Assetsacquired and liabilities assumed are as follows:

| Fair value of  assets purchased (primarily inventory and fixed assets) |   | $        | 38,233 |   |
|------------------------------------------------------------------------|--------|----------|--------|--------|
| Intangible assets                                                      |   | 221,500  |   |
|                                                                   |   | 259,733  |   |
| Fair value of liabilites assumed                                       |   | (19,733  | )      |
| Common stock of  Company issued                                        |   | (240,000 | )      |
| Net cash paid                                                          |   | $        | — |   |

 

Of the $221,500 of theacquired intangible net assets, $120,000 was assigned to a non-competeagreement and will be charged to operations over the term of the agreement (3years) and $98,500 was assigned to customer contracts which was charged tooperations in the fourth quarter of 2005, as the contracts were completed. Thepro forma effect of the acquired company was deemed immaterial to theCompany with the exception of revenue, which was approximately $450,000 for theperiod January 1, 2005 through August 31, 2005.

**Note (5)   Contracts**

| ** **                                                                                                      | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                              | ** ** | **       2004       ** | ** ** |
| Costs incurred on  contracts                                                                                    |       | $                                     | 2,442,477  |   |   | $ | — |   |   |
| Estimated  earnings, less foreseeable losses                                                                    |       | (527,021                              | )          |   | — |   |   |
|                                                                                                            |       | 1,915,456                             |       |   | — |   |   |
| Billings to date                                                                                                |       | (1,480,273                            | )          |   |   |   |   |
| Net costs and  estimate earnings/losses in excess of billings                                                   |       | $                                     | 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                                                      |       | $                                     | 466,985    |   |   | $ | — |   |   |
| Billings in excess of costs and estimated  earnings/losses                                                      |       | (31,802                               | )          |   | — |   |   |
|                                                                                                            |       | $                                     | 435,183    |   |   | $ | — |   |   |

 

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**Note (6)   Equipmentand Leasehold Improvements**

Equipmentand leasehold improvements consist of the following at December 31, 2005and 2004:

| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Office furniture  and equipment                 |       | $        | 122,205    |     | $          | 115,225 |   |
| Vehicles                                        |       | 79,634   |       | 92,307   |       |
| Computers                                       |       | 64,719   |       | 59,221   |       |
| Test equipment  and assembly fixtures           |       | 34,903   |       | 38,334   |       |
| Leasehold  improvements                         |       | 7,171    |       | 8,123    |       |
|                                            |       | 308,632  |       | 313,210  |       |
| Less accumulated  depreciation and amortization |       | (258,017 | )          | (254,599 | )          |
| Equipment and leasehold  improvements, net      |       | $        | 50,615     |     | $          | 58,611 |   |

 

**Note (7)   Intangible Assets**

Intangibleassets are listed below as of December 31, 2005 and the associatedamortization for the year ended December 31, 2005. The Company did nothave capitalized intangible assets as of December 31, 2004.

| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2005**                              | ** ** | **       2004       ** | ** ** |
| Loan origination  costs                             |       | $                                     | 661,634    |   | $ | — |   |
| Accumulated  amortization                           |       | (373,946                              | )          | — |   |
| Loan origination costs, net                         |       | $                                     | 287,688    |   | $ | — |   |
| Non-compete agreement, customer list and trade name |       | $                                     | 123,000    |   | $ | — |   |
| Accumulated  amortization                           |       | (13,333                               | )          | — |   |
| Non-compete agreement, net                          |       | $                                     | 109,667    |   | $ | — |   |
| Purchased customer contracts                        |       | $                                     | 98,500     |   | $ | — |   |
| Accumulated  amortization                           |       | (98,500                               | )          | — |   |
| Purchased  customer contracts, net                  |       | $                                     | —     |   | $ | — |   |

 

**Note (8)**   AccountsPayable and Accrued Expenses

Accountspayable and accrued expenses consist of the following at December 31, 2005and 2004:

| ** **                              | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| Accounts  payable—contracts        |       | $854,397   |       | $627,081   |       |
| Accounts  payable—other            |       | 761,809    |       | 805,984    |       |
| Accrued salaries                        |       | 250,085    |       | 475,478    |       |
| Accrued interest                        |       | 226,446    |       | 402,467    |       |
| Accrued warranty  reserve               |       | 109,387    |       | 107,000    |       |
| Accrued sales  commission               |       | 56,991     |       | 88,023     |       |
| Accrued payroll  taxes and withholdings |       | 13,127     |       | 41,792     |       |
| Other accrued  expenses                 |       | 16,365     |       | 10,310     |       |
| Total                                   |       | $2,288,607 |       | $2,558,135 |       |

 

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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 of the Camofi SPA agreement entered inJuly, 2005, Camofi acquired:

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

·  Warrants to purchase an aggregate of 1,277,778shares of common stock of the Company at an exercise price of $.22 per shareassociated with the sale of common stock. 

·  A $3,250,000 principal amount 10% convertiblenote due July 21, 2008 (“July 21, 2008 Note”) for a purchase price of$3,000,000, which was convertible into 18,055,556 shares of the Company’scommon stock at closing (see Long-Term Debt and Notes Payable Note); and

·  Warrants to purchase an aggregate of 9,027,778shares of common stock of the Company at an exercise price of $.18 per shareassociated with the July 21, 2008 Note issuance.

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

Long-termdebt (including convertible debt) and notes payable consist of the followinguncollateralized loans outstanding at December 31, 2005 and 2004:

|                  | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** | ** **       | ** ** | **Option**         | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **      | ** ** | ** ** | ** ** |
|------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------|------------|------------|------------|
| ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** | ** **       | ** ** | **to Pay**    | ** ** | ** **        | ** ** | ** **         | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** | ** **       | ** ** | **Interest**       | ** ** | ** **        | ** ** | **Potential**      | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **       | ** ** | ** **      | ** ** | ** **        | ** ** | ** **    | ** ** | ** **       | ** ** | **in either** | ** ** | **Conversion**    | ** ** | **Number of** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004**         | ** ** |
| ** **       | ** ** | ** **      | ** ** | **Stated**        | ** ** | **Effective** | ** ** | ** **       | ** ** | **Common**         | ** ** | **Price of** | ** ** | **Shares**         | ** ** | ** **            | ** ** | **Net**                       | ** ** | ** **      | ** ** | **Net**    | ** ** |
| **Maturity**     | ** ** | **Holders**     | ** ** | **Interest**      | ** ** | **Interest**  | ** ** | **Interest**     | ** ** | **Stock**          | ** ** | **Common**        | ** ** | **Upon**           | ** ** | **Face**              | ** ** | **Amount**                    | ** ** | **Face**        | ** ** | **Amount** | ** ** |
| **Date**         | ** ** | ** **      | ** ** | **of Loans** | ** ** | **Rate**      | ** ** | **Rate**         | ** ** | **Period**         | ** ** | **or Cash**  | ** ** | **Stock**          | ** ** | **Conversion**        | ** ** | **Amount**                    | ** ** | **Outstanding** | ** ** | **Amount** | ** ** | **Outstanding** | ** ** |
| Paid-off 4th Qtr |       | Foreign  Credit |       | 18%               |       | 18%           |       | Monthly          |       |               | Yes        |              |       |               | 30%        |                  |       | —                        |       | $               | —     |       |       | $ | — |   |   | $ | 1,000,000 |   |   | $ | 1,000,000 |   |   |
|                  |       | Unions          |       |              |       |          |       |             |       |               |       |              |       |               | Discount   |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | to         |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | Market of  |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | with Cap   |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | $0.40 and  |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | floor of   |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | $0.10 per  |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | share at   |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | option of  |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               | Company    |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| 2006             |       | Funds &     |       | 10%               |       | 19-30%        |       | Semi-Annual      |       |               | Yes        |              |       |               | $0.150     |                  |       | 1,566,667                     |       | 235,000         |       |       | 218,522    |   |   | 1,220,000 |   |   | 932,164 |   |   |
|             |       | Qualified       |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       | Individual      |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       | Investors       |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| 2007             |       | Funds &     |       | 10%               |       | 19-30%        |       | Semi-Annual      |       |               | Yes        |              |       |               | $0.150     |                  |       | 1,783,667                     |       | 267,550         |       |       | 230,842    |   |   | 912,550 |   |   | 648,223 |   |   |
|                  |       | Qualified       |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       | Individual      |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       | Investors       |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| 2008             |       | Funds &     |       | 10%               |       | 19-30%        |       | Majority         |       |               | Yes        |              |       |               | $0.178     |                  |       | 20,638,889                    |       | 3,675,000       |       |       | 2,823,287  |   |   |   |   |   |   |   |   |
|             |       | Qualified       |       |              |       |          |       | Monthly          |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       | Individual      |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       | Investors       |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| On Demand        |       | Qualified       |       | 0% to 10%         |       | 0% to 15%     |       | Majority         |       |               | No         |              |       |               | N/A        |                  |       | N/A                           |       | 3,000           |       |       | 3,000      |   |   | 83,000 |   |   | 83,000 |   |   |
|                  |       | Individuals     |       |              |       |          |       | Monthly  &   |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       | Semi-Annual      |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| On Demand        |       | Qualified       |       | 10%               |       | 10%           |       | Maturity         |       |               | No         |              |       |               | $0.400     |                  |       | 132,500                       |       | 53,000          |       |       | 53,000     |   |   | 53,000 |   |   | 53,000 |   |   |
|             |       | Individual      |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       | Investors       |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| Stated Maturity  |       | Qualified       |       | 8%                |       | 8%            |       | Maturity         |       |               | No         |              |       |               | $0.400     |                  |       | 125,000                       |       | 50,000          |       |       | 50,000     |   |   | 50,000 |   |   | 50,000 |   |   |
| Date 1997        |       | Individual      |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       | Investor        |       |              |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| Not Stated       |       | Qualified       |       | Not               |       | 4.50%         |       | Not stated       |       |               | N/A        |              |       |               | $0.495     |                  |       | 85,859                        |       | 42,500          |       |       | 42,500     |   |   | 42,500 |   |   | 42,500 |   |   |
|             |       | Individual      |       | stated—      |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       | Investors       |       | imputed           |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       |            |       | at  4.5%          |       |          |       |             |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
| 2010             |       | Financial       |       | 8%                |       |          |       | Monthly          |       |               | No         |              |       |               | N/A        |                  |       | N/A                           |       | 107,475         |       |       | 107,475    |   |   | 32,353 |   |   | 32,353 |   |   |
|                  |       | Institution     |       |              |       |          |       | principal  & |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       | interest         |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|                  |       |            |       |              |       |          |       | payments         |       |               |       |              |       |               |       |                  |       |                          |       |            |       |       |       |   |   |   |   |   |   |   |   |
|             |       |            |       |              |       |          |       |             |       |               |       |              |       |               | Total      |                  |       | 24,332,581                    |       | $               | 4,433,525  |       |       | 3,528,626 |   |   | $ | 3,393,403 |   |   | 2,841,240 |   |   |
|                  |       |            |       |              |       |          |       |             |       |               |       |              |       |               |       |                  | ** ** | **Less current portion** |       |            |       |       | 769,180    |   |   |   |   |   | 1,235,714 |   |   |
| ** **       |       |            |       |              |       |          |       |             |       |               |       |              |       |               |       |                  | ** ** | **Long-term portion**    |       |            |       |       | $          | 2,759,446 |   |   |   |   |   | $ | 1,605,526 |   |   |
|                  |            |                 |            |                   |            |               |            |                  |            |                    |            |                   |            |                    |            |                       |            |                               |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In conjunction with the Brightline SPA described inthe Securities Purchase Agreements Note, the Company entered into a Term Loanwith HIT Credit Union and Hong Kong League Central Credit Union (the “Lenders”)and SBI Advisors, LLC as agent for the Lenders for $800,000 in April, 2004. Afinancing fee of $80,000 was paid to the Lenders.  The financial advisor to the lenders, SBI Advisors,LLC, received five-year warrants to purchase 600,000 common stock sharesexercisable at $0.30 as placement agent for the Term Loan. The Company recordedan expense of $138,000  in 2004 as aresult of the issuance of these warrants. 

In the third quarter of 2004, the Term Loan wasamended to allow for borrowings up to $1,000,000 and amounts borrowed to berepaid and re-borrowed from time to time, the interest rate was lowered from18% to 15% and the maturity date was extended to October 31, 2005. In December 2004,the Term Loan 

39

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was amended to allow forthe Company, at its sole option, provided the shares issued are tradable, toconvert a portion or all of the Term Loan outstanding into common stock of theCompany at a discount of 30% to then current market price of the stock,provided the conversion price cannot be below $0.10 per share and higher than$0.40 per share. As a result of the addition of the conversion feature to theterms of the Term Loan, the Company recorded a beneficial conversion expense of$428,571 in the fourth quarter of 2004.

As a condition to obtaining an extension of thematurity date of the term loan  fromOctober 31, 2005 to July 31, 2006, in July, 2005, the Company paiddown $400,000 in principal resulting in $600,000 of principal remainingoutstanding and agreed to increase the annual interest rate to 18% from 15%.The extension in maturity was a condition to closing the Camofi SPA describedin Securities Purchase Agreements Note.

The Company had the option to convert the principalamount of the Term Loan, and all accrued and unpaid interest may be repaid inshares of the Company’s common stock, provided such shares are registered underthe Securities Act of 1933, as amended. The conversion price at which commonstock is issuable to the Lenders is the average closing price of the Company’scommon stock for the 10 trading days immediately preceding the date of thenotice of conversion, less a thirty percent (30%) discount; provided, that inno event will the conversion price be greater than $0.30 or less than $0.10 pershare.  In addition, September, 2005and November, 2005, the Company exercised its option and converted theremaining balance of $600,000 of the Term Loan in two installments ($300,000each) into two blocks of 1,000,000 shares of the Company’s stock therebyretiring the Term Loan.

In conjunction with the Camofi SPA, described in theSecurities Purchase Agreements Note, in July, 2005, the Company entered intothe July 21, 2008 Note, a $3,250,000 principal amount 10% convertible notedue July 21, 2008, for total proceeds of $3,000,000, which was convertibleinto 18,055,556 shares of the Company’s common stock.  The July 21, 2008 Note is convertibleinto the Company’s common stock at a price equal to the lesser of (i) thevolume-weighted average stock price for the 10 trading days prior toconversion, and (ii) $0.18 per share; provided that the conversion priceshall not exceed the closing price on the day prior to conversion. The Companyis paying a premium of $250,000 which will be amortized over the three yearterm of the July 21, 2008 Note. Repayment of the July 21, 2008 Note and payment of associatedinterest can be made in cash or in registered shares of common stock of theCompany, or a combination of both, at the option of the Company, in equalprincipal installments of $154,762 commencing November 2006 and endingJuly 2008. The Investor has the option to convert all or any part of theoutstanding principal to common stock of the Company.  In the first quarter of 2006 the note holderexercised its option to convert $2,500,000 of the outstanding principal into13,888,890 common shares of the Company.  The Company’s obligations under the July 21, 2008 Note are securedby a first lien security interest on the Company’s assets.

In addition to the July 21, 2008 Note, theCompany entered into Convertible Notes, $250,000 with an investment fund and$100,000 with a private investor in July, 2005. The Convertible Notes bear 10% interest which at the option of theCompany can be paid in cash or in shares of the common stock of the Company, ora combination of both.  The Holders havethe option to convert all or any part of the outstanding principal into commonstock of the Company at a conversion price of $0.18 per share. In the fourthquarter of 2005 the investment fund Holder converted $125,000 of theiroutstanding principal into 694,444 common shares of the Company.

In conjunction with the issuance of the July 21,2008 Note and the Convertible Notes in July 2005, the Company issuedfour-year warrants for the purchase of up to 9,611,112 shares of the Company’scommon stock, at an average exercise price of $0.18 per share, which areexercisable at any time by the Investor and Holders. In the first quarter of2006 a Holder of the Convertible Notes exercised all of their warrants.

40

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The Company recorded a discount to the July 21,2008 Note and the Convertible Notes of $3,072,963 that represented thebeneficial conversion feature of the July 21, 2008 Note and 1,447,308 thatrepresented the discount allocated to the warrants issued in conjunction withthe debt issuance. The discount represented by the beneficial conversionfeature of the notes was expensed in 2005. The fair value of the warrants wasdetermined using the Black-Scholes option pricing model. The discount relatingto the warrants on the note was allocated from the gross proceeds and wasrecorded as additional paid-in capital and is being amortized to interestexpense over the term of the Convertible Notes. Should the notes be convertedor paid off prior to the repayment terms, the amortization of the warrantdiscount will be accelerated on a pro-rata basis.

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

| 2006  |   | $         | 769,180   |   |
|-------|--------|-----------|-----------|--------|
| 2007  |   | 2,135,930 |      |
| 2008  |   | 1,520,433 |      |
| 2009  |   | 3,840     |      |
| 2010  |   | 4,142     |      |
| Total |   | $         | 4,433,525 |   |

 

**Note (11)   RelatedParty Transactions**

*Notes Payable*

TheCompany had outstanding notes payable owed to directors, officers and employeesof the Company as of December 31, 2005 and 2004 as follows:

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                    |       | $        | 3,000      |     | $          | 98,706 |   |
| Officers and  employees                      |       | 32,748   |       | 115,013  |       |
| Total                                        |       | 35,748   |       | 213,719  |       |
| Less current  maturities                     |       | (35,748  | )          | (123,013 | )          |
| Total long term note  payable, related party |       | $        | —     |     | $          | 90,706 |   |

 

Notes payable to directors,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 $36,000and $39,000 in 2005 and 2004, respectively, plus utilities and maintenance, seeCommitments note.

Included in accrued salescommissions as of December 31, 2005 is $ 46,919 owed the Chairman under amanagement services fee agreement which expired December 31, 2005 callingfor a management services/sales incentive fee equal to one-half percent (0.5%)of the Company’s gross product revenues less any related product returns,rebates, allowances, freight charges, tariffs and sales taxes, not to exceed$250,000 per annum.

**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 

41

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services were valued at$60,000 and recorded in the financial statements. In October 2004, theshares of Series A Preferred Stock were converted into 66,667 shares ofcommon 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.

**Note (13)   CommonStock Transactions**

Commonstock transactions during the twelve months ended December 31, 2005consisted of the following:

| ** **                                                                                              | ** ** | ** **  | ** ** | **Price Per** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------|------------|
| ** **                                                                                              | ** ** | **Shares**  | ** ** | **Share**          | ** ** |
| Shares Issued and  Outstanding December 31, 2004                                                   |       | 79,834,341  |       |               |       |   |   |
| Conversion of  Convertible Loans totaling $1,340,000                                                    |       | 12,530,017  |       |               | $          | 0.18 |   |   |
| Warrants  exercised                                                                                     |       | 7,384,946   |       |               | $          | 0.22 |   |   |
| Shares sold under  Stock Purchase Agreements                                                            |       | 5,000,001   |       |               | $          | 0.24 |   |   |
| Shares issued in  lieu of payment of cash for interest                                                  |       | 1,495,837   |       |               | $          | 0.25 |   |   |
| Stock options exercised                                                                                 |       | 1,430,382   |       |               | $          | 0.22 |   |   |
| Shares issued to  purchase Quantum Energy Net Assets                                                    |       | 750,000     |       |               | $          | 0.32 |   |   |
| Shares issued as  compensation for public relations, business development and for the purchase  of RECs |       | 361,416     |       |               | $          | 0.31 |   |   |
| Shares issued  during the year ended December 31, 2005                                             |       | 28,952,599  |       |               | $          | 0.21 |   |   |
| Shares issued and  Outstanding December 31, 2005                                                        |       | 108,786,940 |       |               |       |   |   |

 

**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 41%; risk free interest rate of 4% and an average termof 4 years. The relative fair value of the warrants resulted in non-cashexpenses charges of $1,985,000 and $30,000 for the years endedDecember 31, 2005 and 2004. All warrants are exercisable.

42

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Warranttransactions consisted of the following during the twelve months ended December 31,2005:

|                                                                                                          | ** ** | **Exercisable** | ** ** | ** **           | ** **    |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|---------------|
| ** **                                                                                                    | ** ** | **Warrants**    | ** ** | **Stock Price** | ** **    |
| Warrants  Outstanding As of December 31, 2004                                                            |       | 31,164,631      |       | $                    | 0.15 to $0.50 |   |
| Detachable  warrants issued in conjunction with the issuance of $3,600,000 in Notes  Payable                  |       | 9,611,112       |       | $                    | 0.18          |   |
| Detachable  warrants issued in conjunction with the issuance of $1,222,222 of registered  common stock shares |       | 1,500,223       |       | $                    | 0.23          |   |
| Warrants issued  in consideration for extentsions of short-term loans by a Director and  Shareholders         |       | 318,363         |       | $                    | 0.25          |   |
| Warrants granted  on commissions as debt and equity financings                                                |       | 2,171,637       |       | $                    | 0.19          |   |
| Warrants for  services                                                                                        |       | 425,000         |       | $                    | 0.35          |   |
| Exercise of  Warrants (capital addition included in the Stock Transactions Note)                              |       | (7,384,946      | )          | $                    | 0.22          |   |
| Expiration of  Outstanding Warrants                                                                           |       | (1,016,654      | )          |                 |          |
|                                                                                                          |       | 5,624,735       |       |                 |          |
| Warrants Outstanding As  of December 31, 2005                                                            |       | 36,789,366      |       | $                    | 0.15 to $0.50 |   |

 

Warrantsoutstanding expire as follows:

| ** ** | ** ** | **Warrants** | ** ** | **Strike**   | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| **Year**   | ** ** | ** **   | ** ** | **Expiring** | ** ** | **Price** | ** ** |
| 2006       |       | 974,500      |       | $            | 0.15-0.30  |   |
| 2007       |       | 2,885,666    |       | 0.15-0.50    |       |
| 2008       |       | 6,968,615    |       | 0.15-0.37    |       |
| 2009       |       | 25,960,585   |       | 0.15-0.40    |       |
| ** ** |       | 36,789,366   |       |         |       |
|            |            |              |            |              |            |  |  |  |

 

**Note (15)   IncomeTaxes**

Incometax benefit for the years ended December 31, 2005 and 2004 were asfollows:

| ** **                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Federal:                                                        |       |     |       |     |       |
| Current                                                         |       | $        | —     |     | $          | — |   |
| Deferred                                                        |       | —   |       | —   |       |
|                                                            |       | $        | —     |     | $          | — |   |
| State:                                                          |       |     |       |     |       |
| Current                                                         |       | $        | —     |     | $          | — |   |
| Deferred                                                        |       | —   |       | —   |       |
| Benefit from sale of net operating losses and  research credits |       | (200,953 | )          | (219,381 | )          |
|                                                            |       | $        | (200,953   | )        | $          | (219,381 | ) |

 

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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, 2005 and 2004:

| ** **                                                                 | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Income tax  benefit at US federal statutory tax rate                       |       | $         | (3,541,000 | )         | $          | (2,676,000 | ) |
| State income  taxes, net of federal tax effect                             |       | (426,800  | )          | (281,900  | )          |
| Permanent items                                                            |       | 1,098,200 |       | 1,062,296 |       |
| Change in deferred  tax asset valuation allowance                          |       | 2,869,600 |       | 1,895,604 |       |
| Benefit from sale  of New Jersey net operating losses and research credits |       | (200,953  | )          | (219,381  | )          |
|                                                                       |       | $         | (200,953   | )         | $          | (219,381 | ) |

 

As of December 31,2005, the Company had federal and state net operating loss carryforwardstotaling approximately $28,244,200 and $9,913,900, respectively, available toreduce future taxable income and tax liabilities which expire at various datesbetween 2006 and 2025. In addition, as of December 31, 2005, 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 2025. 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      ** | ** ** |
| 2006         |       | 402,700                                         |       | —                                                         |       | — |   |   | — |   |   |
| 2007         |       | 251,100                                         |       | —                                                         |       | — |   |   | — |   |   |
| 2008         |       | 641,300                                         |       | —                                                         |       | — |   |   | — |   |   |
| 2009         |       | 887,900                                         |       | —                                                         |       | 19,600 |   |   | — |   |   |
| 2010         |       | 912,400                                         |       | —                                                         |       | 15,200 |   |   | — |   |   |
| 2011         |       | 981,200                                         |       | 2,567,000                                                      |       | 15,400 |   |   |   |   |   |
| 2012         |       | —                                          |       | 7,346,900                                                      |       | — |   |   | — |   |   |
| 2016         |       | —                                          |       | —                                                         |       | — |   |   | — |   |   |
| 2017         |       | 1,263,200                                       |       | —                                                         |       | 12,900 |   |   | — |   |   |
| 2018         |       | 1,337,700                                       |       | —                                                         |       | 20,400 |   |   | — |   |   |
| 2019         |       | 660,000                                         |       | —                                                         |       | 16,100 |   |   | — |   |   |
| 2020         |       | 1,746,200                                       |       | —                                                         |       | 17,700 |   |   | — |   |   |
| 2021         |       | 1,455,000                                       |       | —                                                         |       | 16,500 |   |   | — |   |   |
| 2022         |       | 1,830,900                                       |       | —                                                         |       | 8,100 |   |   | — |   |   |
| 2023         |       | 3,753,700                                       |       | —                                                         |       | 18,700 |   |   | — |   |   |
| 2024         |       | 4,774,000                                       |       | —                                                         |       | 20,000 |   |   | — |   |   |
| 2025         |       | 7,346,900                                       |       | —                                                         |       | — |   |   | — |   |   |
|         |       | $                                               | 28,244,200 |                                                           | $9,913,900 |   | $ | 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, 2005 and 2004:

| ** **                                 | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|--------------------------------------------|------------|-------------|------------|------------|------------|
| Gross deferred  tax assets                 |       |        |       |       |       |
| Net operating loss carryforwards           |       | $           | 10,108,500 |       | $          | 7,173,000 |   |
| Warranty reserve                           |       | 43,900      |       | 64,600     |       |
| Accrued expenses and deferred compensation |       | 122,800     |       | 168,000    |       |
|                                       |       | 10,275,200  |       | 7,405,600  |       |
| Gross deferred tax liabilities             |       |        |       |       |       |
| Deferred tax valuation allowance           |       | (10,275,200 | )          | (7,405,600 | )          |
|                                       |       | $           | —     |       | $          | — |   |

 

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 DevelopmentAuthority (the “EDA”) to participate in the Program for the years 2004 and2003, and the applications were approved. The EDA then issued certificatescertifying the Company’s eligibility to participate in the Program for theseyears.

During 2005, the Company sold approximately $2,207,000and $210,000 of its 2004 and 2003 New Jersey State net operating losscarryforwards, and $10,800 of its 2004 research and development tax credits,resulting in the recognition of a $200,953 tax benefit.

During 2004, the Companysold approximately $1,200,000 and $1,450,000 of its 2003 and 2002 New JerseyState net operating loss carryforwards, and $6,020 and $14,418 of its 2003 and2002 research and development tax credits, and recognized a tax benefit of$219,381.

**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 2004 with the approval of the Board of Directors andstockholders to increase the amount of available shares under the plan to amaximum of 15,000,000 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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The following is a summaryof stock option activity:

| ** **                                   | ** ** | ** ** | ** ** | **Weighted-Average**    | ** ** |
|----------------------------------------------|------------|------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Balance,  December 31, 2003             |       | 6,130,907  |       |                    | $          | 0.22 |   |   |
| Granted                                      |       | 5,271,586  |       |                    | 0.27       |   |   |
| Cancelled                                    |       | (635,836   | )          |                    | 0.16       |   |   |
| Exercised                                    |       | (751,332   | )          |                    | 0.19       |   |   |
| 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 |   |   |
| Options  Exercisable, December 31, 2005 |       | 8,552,227  |       |                    | $          | 0.24 |   |   |

 

Summarizedinformation about stock options outstanding is as follows:

| **Range of  Exercise Prices** | ** ** | ** ** | ** ** | **Options  Outstanding  as of  December 31, 2005** | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Average  Exercise  Price** | ** ** | **Options  Exercisable as of  December 31, 2005** | ** ** | **Average  Exercise  Price of  Exercisable  Options** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| $0.15                                   |       |       | 3,381,773  |                                                              |       |                                      | 6.1        | yrs.                         |       |                                                                  | $          | 0.15                                                       |       |   |   | 3,381,773 |   |   |   | $ | 0.15 |   |   |
| 0.22-0.30                               |       |       | 3,826,526  |                                                              |       |                                      | 8.4        |                         |       |                                                                  | 0.27       |                                                       |       |   | 2,826,526 |   |   |   | 0.27 |   |   |
| 0.31-0.40                               |       |       | 4,427,093  |                                                              |       |                                      | 7.6        |                         |       |                                                                  | 0.32       |                                                       |       |   | 2,168,928 |   |   |   | 0.33 |   |   |
| 0.45-0.59                               |       |       | 175,000    |                                                              |       |                                      | 0.4        |                         |       |                                                                  | 0.51       |                                                       |       |   | 175,000 |   |   |   | 0.51 |   |   |
| Total                                   |       |       | 11,810,392 |                                                              |       |                                      |       |                         |       |                                                                  | $          | 0.27                                                       |       |   |   | 8,552,227 |   |   |   | $ | 0.24 |   |   |

 

**Restricted Stock Agreement**

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.

The balance of unearnedcompensation related to the restricted shares as of December 31, 2005 was$45,000. Compensation expense recognized in each of the years ended December 31,2005 and 2004 was $30,000.

**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, 2005, theCompany has not made any contributions to the plan.

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**Note (18)   Commitmentsand Guarantees**

TheCompany’s commitments as of December 31, 2005, for the years 2006 through 2010and thereafter are estimated below: 

| **Amounts rounded in thousands** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008**  | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Long-tem debt  maturities (face amount)         |       | $        | 769,000    |     | $          | 2,136,000 |       | $        | 1,520,000  |     | $          | 4,000          |       | $         | 4,000      |   |   | $ | — |   |   | $ | 4,433,000 |   |
| Employment  obligations                         |       | 686,000  |       | 203,000  |       | 120,000   |       | —   |       | —   |       |           | —     |      |       | 1,009,000 |   |
| Renewable energy  credit guarantee  obligations |       | 87,220   |       | 64,176   |       | 64,176    |       | 64,176   |       | 64,176   |       |           | 72,646     |      |       | 416,571 |   |
| Operating lease  payments                       |       | 221,000  |       | 143,000  |       | 54,000    |       | —   |       | —   |       |           | —     |      |       | 418,000 |   |
| Repayment of grant                              |       | 118,367  |       | 118,367  |       | —    |       | —   |       | —   |       |           | —     |      |       | 236,734 |   |
| Total                                           |       | $        | 1,763,220  |     | $          | 2,546,176 |       | $        | 1,758,176  |     | $          | 68,176         |       | $         | 68,176     |   |   | $ | 72,646 |   |   | $ | 6,276,571 |   |

 

*Operating Leases*

The Company’s executiveoffice, research and development facility is housed in a leased 13,270 squarefoot site located at 55 Route 31 South, Pennington, New Jersey. The operatinglease expires June 25, 2007. In addition the Company has leased officespace through May 31, 2006 in Foster City, California which has beenshutdown with the acquisition of the Quantum Energy Group. The Quantum EnergyGroup has leased office space in Applegate, California. The Applegate Officeoperating lease expires in April 30, 2009. The Company also leases officeand testing facilities in Hopewell, New Jersey for conferences, meetings anddemonstrations of its products. This facility is leased from the Chairman, asdocumented in his employment agreement.

*Employment Agreements*

**TheCompany has entered into employment agreements with its Chairman, ChiefFinancial Officer and certain key employees of the Company which have remainingterms extending through January 1, 2007. Employment benefits include autoallowances, participation in Company health insurance coverage, and, in thecase of the Chairman, maintenance of a whole life insurance policy whosebeneficiary is the Chairman’s spouse.**

Effective January 23,2006, the Company entered into an employment agreement with the Chief ExecutiveOfficer with a term which expires January 23, 2007.  Annual compensation under the agreement is$96,000 and includes an initial grant of 1,000,000 stock options vesting overthe term of the employment agreement.

**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 

| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Cash paid during  the year for interest |       | $        | 242,154    |     | $          | 86,757 |   |
|                                         |            |          |            |          |            |  |  |

 

**Note (21)**   SubsequentEvents

In the quarter endingMarch 31, 2006, the Company issued 23,321,000 shares of common stock asthe result of warrants and stock options being exercised, loans being convertedand the Company issuing common stock for services and in lieu of the payment ofinterest. The exercise of warrants and common stock options resulted in theinfusion of $1,677,949 in new capital 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 of disclosure controls andprocedures

*Limitations OnEffectiveness of Controls*

The Company believes that a control system, no matterhow well designed and operated, cannot provide absolute assurance that theobjectives of the control system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, if any,within a company have been detected. The Company’s disclosure controls andprocedures are designed to provide a reasonable assurance of achieving theirobjectives.

The Company’s management, with the participation ofour Chief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of the Company’s disclosure controls and procedures as of December 31,2005. Based on this evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures aregenerally effective for gathering, analyzing and disclosing the informationthat 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. Such evaluation did not identify any change in the yearended December 31, 2005 that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting; however, there are two areas of material weakness of concern.

In connection with its audit of, and in the issuanceof its report on the Company’s financial statements for the year ended December 31,2005, Amper, Politziner & Mattia, P.C. delivered a letter to the AuditCommittee of our Board of Directors and the Company’s management thatidentifies certain items that it considers to be material weaknesses in theeffectiveness of the Company’s internal controls pursuant to standardsestablished by the Public Company Accounting Oversight Board. A “materialweakness” is a reportable condition in which the design or operation of one ormore of the specific control components has a defect or defects that could havea material adverse effect on an organization’s ability to record, process, summarizeand report financial data in the financial statements in a timely manner.

These material weaknesses are: (1) limitedresources in the accounting function which: a) limit the level of monitoringand oversight within the accounting function which may restrict the Company’sability to gather, analyze and report information relative to the financialstatement assertions in a timely matter; b) limit the documentation of andreview of the selection and application of generally accepted accounting principlesto significant non-routine complex transactions; and c) limit the ability toobtain optimum segregation of duties required to meeting the Company’scontinued growth and increased public reporting demands. (2) lack ofadequate controls within the accounting software used by the Company toproperly handle the accounting functions of a public company.

The Company believes, asstated above, the limited number of projects completed in the year ended 2005, andthe 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 31,2005 and did not affect the results of this period or any prior period.

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*Mitigation StepsBeing Implemented By The Company*

To address the issue of limited resources in theaccounting function, the Company has retained in 2005 additional externalaccounting professional consultants with a depth of accounting, auditing andpublic company reporting expertise to augment the Company’s existing resourcesin the preparation of the required periodic financial reports of the Companywith a primary emphasis on developing an effective quarterly and annual reviewclosing procedures, including researching and selecting the appropriateaccounting for and disclosure of significant non-routine complex transactions.

In January 2005, the Company upgraded the versionof accounting software. The software has controls built-in to mitigate internalcontrol risk which the Company began utilizing upon the completion of the auditof its 2004 annual financial statements, and has utilized it through fiscal2005.

b) Changes in internal controls.

None.

**PART III.**

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

Thefollowing table sets forth the names, ages and positions of the executiveofficers and directors of the Company as of December 31, 2005. Theirrespective backgrounds are described following the table:

| **NAME**                   | ** ** | ** ** | ** ** | **AGE**                                                                    | ** ** | **POSITION WITH THE COMPANY** |
|----------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|-------------------------------|
| Quentin T. Kelly           |       | 71         |       | Chairman                                                                   |
| Dr. Anand  Rangarajan |       | 56         |       | Executive Vice President                                                   |
| Peter I. Ferguson          |       | 62         |       | Vice President                                                             |
| James S. Brown             |       | 50         |       | Executive Vice  President, Chief Financial Officer and Corporate Secretary |
| Joseph Cygler              |       | 70         |       | Director                                                                   |
| Dr. Davinder Sethi    |       | 58         |       | Director                                                                   |
| Lange Schermerhorn         |       | 65         |       | Director                                                                   |

 

Quentin T. Kelly founded WorldWater, Inc. in 1984as a consulting and R&D company and has been Chairman since then and ChiefExecutive Officer through January 23, 2006 when James S. Farrin wasappointed CEO. Mr. Kelly was previously Director of Information Servicesand Assistant to the President of Westinghouse Electric Corporation from 1965to 1971, and subsequently became President of Kelly-JordanEnterprises, Inc., a leisure products company from 1971 to 1975, and thenPresident of Pressurized Products, Inc., manufacturers and internationalmarketers of specialized water systems and products, from 1976 to 1984.Mr. Kelly is an alumnus of Kenyon College and holds three U.S. patentsrelating to water systems. He has many years’ experience in internationalbusiness relating to water and power needs in the developing world. He hasworked on water supply and solar power projects with governments and several ofthe international assistance agencies (USAID, UNDP and UNICEF) and more than adozen governments and private contractors throughout the world.

James  S. Farrin, Chief Executive Officer, heldexecutive positions with several Fortune 500 companies, including eight yearswith Colgate-Palmolive, in both the US and overseas subsidiaries. He was thePresident/CEO of WorldWater in 1999-2000. He has an MBA from Stanford Universityand a BA from Princeton University.

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Dr. Anand Rangarajan, Executive Vice President,has been employed by the Company since 1998. He is a solar and water pumpspecialist with more than 20 years’ experience in all aspects of the solarelectric business and has pioneered the development of several proprietarysolar water pumping systems, products and markets. His systems have beeninstalled in over 20 countries. He holds a Ph.D. in Engineering from theUniversity of Wisconsin.

Peter I. Ferguson, Vice President of Administration,joined WorldWater in 1989. He previously served as a vice president and generalmanagement executive and accountant for companies in New York and New Jersey.He graduated from Rutgers University with a degree in accounting andmanagement.

James S. Brown, Executive Vice President, ChiefFinancial Officer and Secretary, joined WorldWater 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 a Director of the Company sinceJanuary 1997, and a former Vice President of Marketing and ExecutiveVice-President. He has been Chief Executive Officer of the CE&O Group, anorganization assisting companies in operations management, since 1986.Previously he was an executive at Kepner-Tregoe, Inc., an internationalbusiness consulting firm, from 1976 to 1986, an executive with HoneywellInformation Systems from 1964 to 1976, and a marketing representative withInternational Business Machines from 1961 to 1964. Mr. Cygler has a BS inEngineering from the U.S. Military Academy at West Point.

Dr. Davinder Sethi has served as a Director since2000. He is an independent advisor in the fields of information technology andfinance. Previously, Dr. Sethi served as Vice Chairman and Chief FinancialOfficer of Entrada Networks, Inc. and in various capacities prior to November2001. He has served as Chairman and Chief Executive Officer of iPing, Inc.,and was a Director and Senior Advisor to Barclays de Zoete Wedd. In addition, Dr. Sethispent seven years at Bell Laboratories in operations research andcommunications network planning and seven years in corporate finance atAT&T. Dr. Sethi holds a Ph.D. and M.S. in Operations Research,Economics and Statistics from the University of California, Berkeley, and is agraduate of the Executive Management Program at Penn State.

Lange Schermerhorn has served as a Director since2001. She is a retired U.S. Ambassador to Djibouti, is an economist who hasspent 30 years in the Foreign Service and has covered the globe as a seniorforeign officer in such places as Brussels, where she was Deputy Chief ofMission, with specific emphasis on economics relating to NATO and EU. She hasalso had significant Foreign Service experience in East Africa, Sri Lanka,Vietnam, Tehran, London and Washington D.C. Ms. Schermerhorn’s educationand related experience include Mt. Holyoke College (B.A. 1961), HarvardBusiness School, and National War College.

The Board of Directors has a standing Audit Committeeand a standing Compensation Committee. The Audit Committee and CompensationCommittee met following the end of each of the fiscal quarters in 2004 and2005.

Messrs. Cygler, Sethi and Schermerhorn comprisethe Audit Committee. The Audit Committee operates under a formal writtencharter. The Audit Committee makes recommendations concerning the engagement ofindependent public accountants, reviews with the independent accountants theresults of the audit engagement, approves professional services provided by theaccountants including the scope of non-audit services, if any, and reviews theadequacy of our internal accounting controls.

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Messrs. Cygler, Sethi and Schermerhorn comprisethe Compensation Committee. The Compensation Committee makes recommendations tothe Board regarding the executive and employee compensation programs of ourcompany.

The Company has a staggered Board of Directors andeach of the Directors serves a two year term or until their successors areelected or appointed. All officers are appointed by and serve at the discretionof the Board of Directors, although, Messrs. Kelly and Brown have enteredinto employment agreements. See “Management—Employment Agreements.” There areno family relationships between any of our directors or officers.

The Company has adopted awritten Code of Ethics that applies to all of our directors, officers andemployees. A copy of our Code of Ethics is available on our website atwww.worldwater.com  and print copies areavailable to any shareholder who requests a copy. Any amendment to the Code ofEthics or any waiver of the Code of Ethics will be disclosed on our website atwww.worldwater.com promptly following the date of such amendment or waiver.

**ITEM 10.**         EXECUTIVECOMPENSATION

**SUMMARY COMPENSATION 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 2005. The “NamedExecutive Officers” are:

| ** **                                   | ** ** | ** **                   | ** ** | **LONG TERM   COMPENSATION   AWARDS** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **ANNUAL COMPENSATION** | ** ** | **SECURITIES**                                       | ** ** | ** ** | ** ** |
| **NAME AND PRINCIPAL  POSITION**   | ** ** | **FISCAL  YEAR**             | ** ** | **SALARY**                                           | ** ** | **BONUS**  | ** ** | **UNDERLYING   OPTIONS (#)** | ** ** | **ALL OTHER  COMPENSATION** | ** ** |
| Quentin T. Kelly                             |       |                         | 2005       |                                                 |       |       | $          | 170,000 |   |   |   | $ | — |   |   |   | $ | 120,000.00 |   |   |   | $ | 46,000 | (1) |   |
| Chairman &  Chief Executive Officer |       |                         |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| James S. Brown                               |       |                         | 2005       |                                                 |       |       | 150,000    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Executive Vice  President & Chief   |       |                         |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial Officer                            |       |                         |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dr. Anand  Rangarajan                   |       |                         | 2005       |                                                 |       |       | 121,250    |   |   |   | 7,230 |   |   |   | — |   |   |   | — |   |   |
| Executive Vice  President                    |       |                         |       |                                                 |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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(1)    Representsthe premium paid for a life insurance policy, the beneficiary of which isMr. Kelly’s wife.

**AggregatedOption ExercisesFor Fiscal Year Ended December 31, 2005And Year-End Option Values(1)**

| ** **                 | ** ** | **Shares  Acquired** | ** ** | **Value**            | ** ** | **Number of  Securities Underlying  Unexercised Options  at Fiscal Year-End(2)** | ** ** | **Value of Unexercised  In-the-Money  Options at Fiscal  Year-End ($)(3)** | ** ** |
|----------------------------|------------|----------------------|------------|----------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Name**                   | ** ** | ** **           | ** ** | **on Exercise** | ** ** | **Realized ($)**                                                                                     | ** ** | **Exercisable**                                                                                     | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Quentin T. Kelly           |       |                 | —     |                 |       |                                                                                                      | —     |                                                                                                |       | 1,827,975 |   |   | 120,000 |   |   |   | 260,656 |   |   |   | 1,200 |   |   |
| Dr. Anand  Rangarajan |       |                 | —     |                 |       |                                                                                                      | —     |                                                                                                |       | 614,000 |   |   | 500,000 |   |   |   | 55,560 |   |   |   | 20,000 |   |   |
| James S. Brown             |       |                 | 35,714     |                 |       |                                                                                                      | —     |                                                                                                |       | 464,286 |   |   | 500,000 |   |   |   | 8,571 |   |   |   | 20,000 |   |   |
|                            |            |                      |            |                      |            |                                                                                                           |            |                                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          No stock appreciationrights are held by the named Executive Officer.

(2)          The total number ofunexercised options held as of December 30, 2005, separated between thoseoptions that were exercisable and those options that were not exercisable onthat date.

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(3)   For allunexercised options held as of December 30, 2005, the aggregate dollarvalue of the excess of the market value of the stock underlying those optionsover the exercise price of those unexercised options. As required, the priceused to calculate these figures was the closing sale price of the common stockat year’s end, which was $0.32 per share on December 30, 2005.

**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.

**Employment Contracts**

On January 1, 2002, the Company entered into afive-year employment agreement with Mr. Kelly. Adjusted compensation underthe agreement is $170,000 annual salary, $1,200 per month auto allowance and$3,000 (as amended) per month to cover rental offices in Hopewell, New Jersey.Between July 1, 2002 and September 30, 2004, Mr. Kelly agreed toa reduced salary which resulted in an unpaid accrued salary of which $151,450remained outstanding as of December 31, 2005. Mr. Kelly participatesin the Company “fringe benefits” including health coverage and the maintenanceof a whole life policy. The benefits continue if employment is terminatedwithout cause or by reason of death or disability to Mr. Kelly or hisestate for the remaining term of the agreement or a period of 24 months,whichever is longer. Bonus and participation in the Stock Option Plan are basedupon the discretion of the Compensation Committee of the Board of Directors.Effective December 30,2005, Mr. Kelly was granted 120,000 stockoptions, vesting in equal installments of 10,000 shares per month in calendaryear 2005, at an exercise price of $0.31, the fair market value at the date ofthe grant.

In July 2002, Mr. Kelly was granted1,000,000 shares of restricted stock, 400,000 of which remain unvested as of December 31,2005. The balance of unearned compensation related to these restricted sharesas of December 31, 2005 was $45,000. Total compensation expense recognizedwas $30,000 in each of the years ended December 31, 2005 and 2004.

Included in accrued sales commissions as of December 31,2005 is $46,919 owed to Mr. Kelly under a Management Services FeeAgreement expired on December 31, 2005, 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 May 24, 2004, the Company entered into anemployment agreement with the Executive Vice President, Chief Financial Officerand Corporate Secretary with a term which expires December 31, 2006. Annualcompensation under the agreement is $150,000 and included an initial grant of250,000 stock options vesting over the term of the employment agreement.

Effective January 23, 2006, the Company entered intoan employment agreement with the Chief Executive Officer with a term whichexpires January 23, 2007. Annual compensation under the agreement is $96,000and includes an initial grant of 1,000,000 stock options vesting over the termof the employment agreement.

As of December 31,2005, the Company has unpaid salaries of $250,085, including $151,450 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 March 31, 2006 by all persons knownto 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.

| **Name and Address of Beneficial Owner(1)**                                       | ** ** | ** ** | ** ** | **Number of Shares  Beneficially  Owned(1)** | ** ** | **Percent  of Class** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|----------------------------|------------|
| CAMOFI Master LDC  C/O Centrecourt Asset Management  830 Third Avenue, 14th Floor  New York, NY 10022 |       | 14,472,223 | (2)        |                                                   | 9.9        | %                          |       |
| Quentin T. Kelly  Pennington Business Park  55 Route 31 South  Pennington, New Jersey 08534                |       | 5,434,975  | (3)        |                                                   | 4          | %                          |       |
| Joseph Cygler  Pennington Business Park  55 Route 31 South  Pennington, New Jersey 08534                   |       | 500,000    | (4)        |                                                   | *          | %                          |       |
| Dr. Davinder Sethi  Pennington Business Park  55 Route 31 South  Pennington, New Jersey 08534         |       | 557,500    | (5)        |                                                   | *          | %                          |       |
| Lange Schermerhorn  Pennington Business Park  55 Route 31 South  Pennington, New Jersey 08534              |       | 200,000    | (6)        |                                                   | *          | %                          |       |
| All Directors and  Officers  as a group (9 persons)                                                        |       | 12,421,088 |       |                                                   | 8.6        | %                          |       |

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*       Less than1%

(1)   Forpurposes of this table, a person or group of persons is deemed to have “beneficialownership” of any shares of common stock that such person has the right toacquire within 60 days of March 31, 2006. For purposes of computing thepercentage of outstanding shares of common stock held by each person or groupof persons named above, any security which such person or persons has or havethe right to acquire within such a date is deemed to be outstanding but is notdeemed to be outstanding for the purpose of computing the percentage ownershipof any other person. Except community property laws, the Company believes,based on information supplied by such persons, that the persons named in thistable have sole voting and investment power with respect to all shares ofcommon stock which they beneficially own.

(2)   This amount includes 10,305,556 sharesissuable upon the exercise of warrants outstanding and 4,166,667 sharesissuable upon conversion of a convertible note as of March 31, 2006. Thepercentage beneficially owned by Camofi Master LDC that is issued andoutstanding, however, cannot exceed, at 

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any time, 9.9% of theissued and outstanding common stock, according to the terms of the warrants andconvertible notes, which restrict the exercise of conversion rights, if uponexercise, Camofi would beneficially own more than 9.9% of the issued andoutstanding common stock, immediately after giving effect to such conversion.

(3)   This amountincludes 866,060 shares owned by his wife, CFK Limited Partnership and QTKLimited Partnership which were formed for the benefit of Mr. Kelly’s children,and options and warrants to purchase 1,947,975 shares outstanding as of March 31,2006.

(4)   This amountincludes options to purchase 220,000 shares outstanding as of March 31,2006.

(5)   This amountrepresents options and warrants to purchase 557,500 shares outstanding as of March 31,2006.

(6)   This amount represents options to purchase 200,000 sharesoutstanding as of March 31, 2006.

**ITEM 12.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

TheCompany had outstanding notes payable owed to directors, officers and employeesof the Company as of December 31, 2005 and 2004 as follows:

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                    |       | $        | 3,000      |     | $          | 98,706 |   |
| Officers and  employees                      |       | 32,748   |       | 115,013  |       |
| Total                                        |       | 35,748   |       | 213,719  |       |
| Less current  maturities                     |       | (35,748  | )          | (123,013 | )          |
| Total long term note  payable, related party |       | $        | —     |     | $          | 90,706 |   |

 

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 $36,000and $39,000 in 2005 and 2004, respectively, plus utilities and maintenance; seeCommitments note.

Included in accrued sales commissions as of December 31,2005 is $ 46,919 owed the Chairman under a management services fee agreementwhich expired December 31, 2005 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.

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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 Company’s Form SB-2  filed with the Securities and Exchange Commission on January 3, 2003  (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 Company’s Form SB-2  filed with the Securities and Exchange Commission on January 3, 2003  (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 Company’s Form SB-2 filed with the Securities and Exchange  Commission on January 3, 2003 (No. 333-102348).                               |
| 3.1                    |       | Certificate of  Incorporation. Incorporated by reference to Exhibit 4.1 to Company’s  Form S-8 dated July 23, 2001 filed with the Securities and  Exchange Commission on August 1, 2001 (No. 333-66484).                                                                                                    |
| 3.2                    |       | Certificate of  Amendment of Certificate of Incorporation. Incorporated by reference to  Exhibit 3.2 to Company’s Form SB-2 filed with the Securities  and Exchange Commission on January 3, 2003 (No. 333-102348).                                                                                              |
| 3.3                    |       | Amended and  Restated By-laws of WorldWater Incorporated by reference to Exhibit 4.2  to Company’s Form S-8 dated July 23, 2001 filed with the Securities  and Exchange Commission on August 1, 2001 (No. 333-66484).                                                                                       |
| 3.4                    |       | Certificate of  Amendment of Certificate of Incorporation dated July 7, 2005.                                                                                                                                                                                                                                                        |
| 10.1                   |       | Securities  Purchase Agreement between WorldWater Corp. and SBI Brightline VIII LLCdated  April 1, 2004. Incorporated by reference to Exhibit 10.1 to 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 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  Company’s Form SB-2 filed with the Securities and Exchange  Commission on July 30, 2004 (File No. 333-115561).                                |
| 10.5                   |       | Forms of Warrant  Purchase Agreements between WorldWater and certain Selling Stockholders.  Incorporated by reference to Exhibit 10.5 to Company’s Form SB-2  filed with the Securities and Exchange Commission on February 11, 2005  (No. 333-122756).                                                          |
| 10.6                   |       | Form of  Registration Rights Agreement between WorldWater and certain Selling  Stockholders. Incorporated by reference to Exhibit 10.60 to Company’s  Form SB-2 filed with the Securities and Exchange Commission on  February 11, 2005 (No. 333-122756).                                                   |
| 10.7                   |       | Amendment to Quentin T. Kelly Employment Agreement  dated July 1, 2002. Incorporated by reference to Exhibit 10.11 to  Company’s Form SB-2 filed with the Securities and Exchange                                                                                                                                     |

 

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| Exhibit    Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Description** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
|                   |       | Commission on  January 3, 2003 (No. 333-102348).                                                                                                                                                                                                                                                                                                                                      |
| 10.8                   |       | Restricted Stock  Agreement for Quentin T. Kelly dated July 1, 2002. Incorporated by  reference to Exhibit 10.12 to Company’s Form SB-2 filed with  the Securities and Exchange Commission on January 3, 2003 (No. 333-102348).                                                                                                                                   |
| 10.9                   |       | Quentin T. Kelly  Employment Agreement dated January 1, 2002. Incorporated by reference to  Exhibit 10.10 to Company’s Form SB-2 filed with the  Securities and Exchange Commission on January 3, 2003 (No. 333-102348).                                                                                                                                          |
| 10.10                  |       | James S. Brown  Employment Agreement dated May 24, 2004. Incorporated by reference to  Exhibit 10.10 to Company’s Form SB-2 filed with the  Securities and Exchange Commission on February 11, 2005 (No. 333-122756).                                                                                                                                             |
| 10.11                  |       | James S. Farrin  Employment Agreement dated January 23, 2006.                                                                                                                                                                                                                                                                                                                              |
| 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 Company’s  Form 8-K filed with the Securities and Exchange Commission on July 28,  2005.                                                  |
| 10.13                  |       | 10% Senior Secured  Convertible Note due July 21, 2008 in the principal amount of $3,250,000  issued by WorldWater & Power Corp., a Delaware corporation, on July 21,  2005 to CAMOFI Master LDC or its registered assigns, as Holder. Incorporated  by reference to 10.2 to Company’s Form 8-K filed with the Securities and  Exchange Commission on July 28, 2005.              |
| 10.14                  |       | 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 Company’s Form 8-K filed with the Securities and  Exchange Commission on July 28, 2005.                                                                                              |
| 10.15                  |       | Security Agreement dated  as of July 21, 2005 among WorldWater & Power Corp., a Delaware  corporation, all of the Subsidiaries of WorldWater & Power Corp., as the  Debtors and CAMOFI Master LDC, as the Secured Party. Incorporated by  reference to 10.4 to Company’s Form 8-K filed with the Securities and  Exchange Commission on July 28, 2005.                        |
| 10.16                  |       | 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 Company’s Form 8-K filed with the  Securities and Exchange Commission on July 28, 2005.              |
| 10.17                  |       | 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 Company’s Form 8-K filed with the  Securities and Exchange Commission on July 28, 2005.              |
| 10.18                  |       | 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 Company’s Form SB-2 filed with the Securities and Exchange  Commission on October 21, 2005 (No. 33-0123045). |
| 10.19                  |       | 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 Company’s Form SB-2 filed with the Securities and Exchange  Commission on October 21, 2005 (No. 33-0123045). |

 

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**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The Company’s Board ofDirectors reviews and approves audit and permissible non-audit servicesperformed by its independent accountants, as well as the fees charged for suchservices. In its review of non-audit service fees and its appointment of Amper,Politziner & Mattia P.C. as the Company’s independent accountants, theBoard of Directors considered whether the provision of such services iscompatible with maintaining independence. All of the services provided and feescharged by Amper, Politziner & Mattia P.C. in 2005 were approved bythe Audit Committee of the Board of Directors.

AUDIT FEES

The aggregate fees billedto us by the independent auditors, Amper, Politziner &  MattiaP.C., for professional services rendered in connection with our QuarterlyReports on Form 10-QSB and for the audits of our financial statementsincluded in this Annual Report on Form 10-KSB for the years ended December 31,2005 and 2004 were $85,500 and $75,000, respectively.

AUDIT RELATED FEES

The aggregate fees billedto us by Amper, Politziner & Mattia, P.C. for assurance and relatedservices that are reasonably related to the performance of the audit and reviewof our financial statements that are not already reported in the paragraphimmediately above totaled approximately $22,500 and $15,000 for the years endedDecember 31, 2005 and 2004, respectively. These costs primarily related toservices provided in connection with the filing of registration statements.

TAX FEES

There were no tax feesbilled by our independent auditors during 2005 and 2004.

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 14, 2006 |
| * *                                   |   | Quentin T. Kelly,*Chairman*                                       |   |   |   |   |
| By:                                        |   | /s/ JAMES  S. BROWN                                               |   |   |   | April 14, 2006 |
| * *                                   |   | James S. Brown*Executive Vice President/  ChiefFinancial Officer* |   |   |   |   |

 

Pursuantto the requirements 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                                   |       | April 14, 2006 |
| Quentin  T. Kelly            |          |                                       |       |                |
| /s/ JAMES S. BROWN           |          | Executive Vice  President, Chief Financial |       | April 14, 2006 |
| James  Brown                 |          | Officer                                    |       |                |
| /s/ JOSEPH CYGLER            |          | Director                                   |       | April 14, 2006 |
| Joseph  Cygler               |          |                                       |       |                |
| /s/ Dr. DAVINDER  SETHI |          | Director                                   |       | April 14, 2006 |
| Dr. Davinder  Sethi     |          |                                       |       |                |
| /s/ LANGE  SCHERMERHORN      |          | Director                                   |       | April 14, 2006 |
| Lange  Schermerhorn          |          |                                       |       |                |

 

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**EXHIBIT INDEX**

| 3.4   |   | Certificate of Amendment of Certificate of  Incorporation dated July 7, 2005.                                                                                   |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11 |   | James S. Farrin  Employment Agreement dated January 23, 2006.                                                                                              |
| 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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