**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

**Form 10-KSB**

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

**For the fiscal year ended December 31,2004**

**Commissionfile number: 000-16936**

**WorldWater Corp.**

(Name of small business issuer in its charter)

 
| **Delaware**(State or other jurisdiction of incorporation or  organization) | ** ** | **33-0123045**(I.R.S. Employer 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**

Title of each class Nameof each exchange on which registered

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

**Common Stock, $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 xNo o

**Persons who are torespond to the collection of information contained in this form are not requiredto respond unless the form displays a currently valid OMB control number.**

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]

The issuer’s revenues for its most recent fiscal yearwas $ 5,837,224.

On March 15, 2005 the aggregate market value ofthe voting stock held by non-affiliates of the  registrant was approximately $18,608,307.

As of March 15, 2005the Registrant had outstanding 81,673,863 shares of Common Stock and 611,111shares of Preferred Stock.

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

Transitional SmallBusiness Disclosure Format (check one)   Yes o   Nox

 

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**TABLE OF CONTENTS**
| **PART I.**                                                                                                                        |                                                                                              | 4      |
|-----------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|--------|
| **ITEM 1. DESCRIPTION OF  BUSINESS.**                                                                                                   |                                                                                              | 4      |
| a)                                                                                                                            | Major Customers and  Export Sales                                                                 |   | 5 |
| b)                                                                                                                            | Products                                                                                          |   | 6 |
| c)                                                                                                                            | Marketing                                                                                         |   | 6 |
| d)                                                                                                                            | Research and Development                                                                          |   | 8 |
| e)                                                                                                                            | Intellectual Property                                                                             |   | 9 |
| f)                                                                                                                            | Source and  Availability of Components                                                            |   | 9 |
| g)                                                                                                                            | Competitive  Conditions Affecting the Company                                                     |   | 9 |
| h)                                                                                                                            | Subsidiaries                                                                                      |   | 10 |
| i)                                                                                                                            | Government Regulations                                                                            |   | 10 |
| j)                                                                                                                            | Employees                                                                                         |   | 10 |
| **ITEM 2. DESCRIPTION  OF PROPERTIES**                                                                                                  |                                                                                              | 10     |
| **ITEM 3. LEGAL PROCEEDINGS**                                                                                                           |                                                                                              | 11     |
| **ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**                                                                       |                                                                                              | 11     |
| **PART II.**                                                                                                                       |                                                                                              | 11     |
| **ITEM  5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.**                                                                  |                                                                                              | 11     |
| a)                                                                                                                            | Price Range of Common  Stock                                                                      |   | 11 |
| b)                                                                                                                            | Holders of Common Stock                                                                           |   | 11 |
| c)                                                                                                                            | Dividends                                                                                         |   | 11 |
| d)                                                                                                                            | Book Value of Common  Stock                                                                       |   | 11 |
| e)                                                                                                                            | Sales  of Restricted, Registered Shares And Freely Tradable Securities During The  Fourth Quarter |   | 12 |
| f)                                                                                                                            | Preferred Stock                                                                                   |   | 12 |
| **ITEM  6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATION.**                                                                    |                                                                                              | 12     |
| **OVERVIEW**                                                                                                                            |                                                                                              | 12     |
| **CRITICAL  ACCOUNTING POLICIES AND ESTIMATES**                                                                                         |                                                                                              | 13     |
| **REVENUE RECOGNITION**                                                                                                                 |                                                                                              | 14     |
| **ALLOWANCE FOR DOUBTFUL  ACCOUNTS**                                                                                                    |                                                                                              | 14     |
| A**CCOUNTING  FOR INCOME TAXES**                                                                                                        |                                                                                              | 14     |
| **SELECTED FINANCIAL DATA**                                                                                                             |                                                                                              | 15     |
| **RESULTS OF OPERATIONS**                                                                                                               |                                                                                              | 15     |
| **COMPARISON  OF YEARS ENDED DECEMBER 31, 2004 AND 2003**                                                                               |                                                                                              | 17     |
| **LIQUIDITY AND CAPITAL  RESOURCES**                                                                                                    |                                                                                              | 19     |
| **INCOME  TAXES**                                                                                                                       |                                                                                              | 21     |
| **RECENT ACCOUNTING  PRONOUNCEMENTS**                                                                                                   |                                                                                              | 21     |
| **ITEM 7. FINANCIAL  STATEMENTS.**                                                                                                      |                                                                                              | 23     |
| **ITEM  8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**                                      |                                                                                              | 47     |
| **ITEM 8A. CONTROLS AND  PROCEDURES.**                                                                                                  |                                                                                              | 47     |
| **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     |
|                                                                                                                                         |                                                                                                   |        |  |  |

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| **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 AND REPORTS ON FORM 8-K**                                                                |   | 55 |
| **ITEM  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                          |   | 56 |

 

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**PART I.**

**ITEM 1.     DESCRIPTIONOF BUSINESS.**

WorldWater Corporation (“the Company”), doing businessas WorldWater & Power Corporation beginning in September 2004, isan international solar engineering and water management company with unique,high-powered solar electric technology providing solutions to water supply andenergy problems. The Company has developed patented solar electric systemscapable of operating pumps and motors up to 600 horsepower for irrigation,refrigeration, and water utility pumping systems. WorldWater’s proprietaryAquaMaxTM system is controlled by the Company’s patented AquaDriveTM, anelectronic board that reads and translates the output of solar electric DirectCurrent (“DC”) from solar panels, converting the flow into Alternating Current(“AC”) for delivery to the electric grid or to water pumps or any 3-phase ACmotor. The Company’s AquaMaxTM hybrid solar irrigation pumps are able to operateon solar alone or in combination with the electric grid or diesel generators.Among the advantages of the Company’s proprietary solar technology is that, inthe event of a grid outage, power can be seamlessly and automaticallytransferred to the solar electric system for continued operation withoutinterruption and without operator intervention.

WorldWater’s proprietary technology permits the use ofhigh power (above 10 hp) AC Pumps, an option previously unavailable for solarpower. AC pumps are widely available in countries throughout the world,allowing replacement pumps and parts to be supplied on a local basis. Otherforms of solar powered photovoltaic (PV) pumping systems currently availableuse less reliable and less durable DC pumps or custom AC pumps, which are morecostly and not readily available in most developing countries.

Until 2002, WorldWater’s business was focusedexclusively on helping developing countries with water and power problems, butthe Company’s sharply increased power capability, coupled with growing energyshortages in the U.S., has opened widespread and emergent domestic marketopportunities. WorldWater’s ability to operate large-scale pumps is especiallyimportant in areas where electricity is expensive and diesel considered toopolluting. California, for example, a major target market for the Company, isstriving to increase renewable energy usage in order to reduce demand on thestate’s electric utilities grid and improve the state’s air quality by grantingrebates to buyers and giving significant tax credits and other incentives forpurchasing renewable energy. In New Jersey, rebates from the electric utilitiesplus federal tax incentives for the purchase of renewable power can reduce theprice of WorldWater’s systems, including the high-powered hybrid AquaMaxTM, byin excess of 50 percent. This enables renewables in general to bettercompete against traditional energy sources in New Jersey, California and otherstates in industries such as agriculture, viniculture, and utilities.

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 irrigatehis land at little or no additional cost over what is paid currently forirrigation powered by grid electricity. Once WorldWater’s system is installed,power generated by the sun to drive irrigation equipment has limited on-goingmaintenance cost. When a farmer is not irrigating, the sun is still developingelectricity through WorldWater’s system and the power is returned to theelectrical utility for storage and later use, or for direct utility bill credit(depending upon the state). This process is called net metering and is alreadyin operation in New Jersey and California as well as more than 30 other states.By automatically switching between solar and other power sources, the AquaMaxTMenables a farmer to protect against a loss of irrigation ability even duringdaylight power shortages or blackouts.

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, under the name of WorldWater Corp., has been engagedexclusively in the solar/water power industry. In June of 2000, theCompany shareholders voted to change the state of incorporation from 

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Nevada to Delaware. TheCompany stock is publicly traded on the NASDAQ OTC Bulletin Board under thesymbol WWAT.OB.

The Company has its corporate headquarters andresearch facilities located at 55 Route 31 South in Pennington, New Jersey08534. WorldWater conducts research and designs, develops and marketsproprietary technology relating to solar energy and water engineering, includingsolar power projects and international water management consulting, at thislocation.

a)            MajorCustomers and Export Sales

The Company offers a wide range of water resourceservices worldwide, driven by its solar-powered pumping systems. Applicationsinclude irrigation, refrigeration and water utility pumping systems. Theinitial focus in the United States has been California and New Jersey becauseof energy shortages, high energy costs and attractive rebates available tocustomers from local utilities, along with tax credits from federal and stategovernments. The Company is looking to broaden its focus to other states toincrease revenues as well as continuing to submit proposals to various foreigngovernments in need of solving critical water supply and energy problems usingthe Company’s high-powered solar technology. Most recently, the Companyproposed a plan to use its proprietary solar equipment to assist in therehabilitation of the coastal communities of Sri Lanka, where the tsunami of December 26,2004 destroyed much of the coastal water resources.

In the year ended December 31,2004 equipment sales consisted of revenues from the installation of a 267,840kW(dc) solar-driven irrigation and energy system for a citrus farm and thesales of solar equipment to a constructor of a 1,132,200 kW(dc) solar energysystem being installed for a community college. In the year ended December 31,2003 equipment sales revenue was made up of revenue from the installation oftwo solar pumping and energy systems totaling 143,208 kW(dc). For the yearsended December 31, 2004 and 2003, equipment sales represented 96% and 89%respectively of total revenues. All of the Company’s revenue in 2004 and 97% ofthe its revenue in 2003 originated in the United States.

**CALIFORNIA**

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

**NEWJERSEY**

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

**INTERNATIONAL**

WorldWater has operated inthe Philippines since 1997 when the Company delivered 25 solar pumps forinstallation by the National Irrigation Authority (NIA) under a directive fromformer President Fidel V. Ramos. The Company has a Philippine marketingsubsidiary, WorldWater (Phils) Inc., and has established a localmanagement team to develop and implement business.

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In September 2003,WorldWater (Phils) inaugurated a solar-powered prepaid municipal waterdistribution system for the municipality of Ronda on the island of Cebu. Themunicipal water distribution system utilizes “smart card” technology as afinancing solution to address problems associated with the payment collectionprocess. The Ronda system uses WorldWater’s proprietary AquaCardTM debit cardsystem, which operates directly with WorldWater’s AquaMeterTM solar pumpingstations throughout the community. The project was made possible by acommercial loan from the Philippine National Bank and required no subsidies.

Winrock International contracted with WorldWater in2003 to evaluate potential water supply development and sanitation solutionsfor selected communities within the Alliance for Mindanao Off-Grid RenewableEnergy (AMORE) area in the Southern Philippines. The assessment study has beencompleted and proposals remain outstanding for project implementation.

b)            Products

**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 electrical 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 diesel generator) or simultaneously from bothsources. The hybrid operation is programmed to be completely automatic somanual intervention is not required to switch from one power source to theother.

The AquaMeterTM water meterallows consumers to buy water with prepaid electronic “smart card” technology.During each sale, the meter deducts the charge and indicates the balanceremaining on the card, which can be recharged at a designated vendor site withadditional cash payment. Designed to be tamper-proof, the meter alsodiscourages wasteful spillage. Revenue collected from the AquaCardTM is used topay for the solar water system.

**SOLAR POWER SYSTEMS**

SolPowerTM PV power systems are designed for off-grid homes,schools, health clinics, and village community centers. The systems produceelectricity for lighting, TV, radio, computers and a host of other uses. Thekey market for this power system is in developing countries where those livingoutside major cities are not connected to the electrical grid system.

SolBriteTM, WorldWater’s solar charged portablelantern, can be used virtually anywhere. A PV module charges a high-quality,maintenance-free battery, located in the base of the unit, to illuminate abright fluorescent light.

SolLiteTM WorldWater’s solar light fixture, wasdeveloped by WorldWater engineers to meet the demands of the marketplace for anaffordable light at half the price of the competition. SolLiteTM also conservesenergy, using less power while still achieving similar output.

c)            Marketing

WorldWater markets the AquaMaxTM pumping systems andother solar products worldwide to both institutional public and privatecommercial markets. Until 2002, products were primarily marketed in 

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developing nations, wherethere is a great need for electrical power and clean water. Today, the Companymarkets both internationally and domestically. The AquaMaxTM pumping systemsallow farms, water utilities and other large industrial power users in the USto take advantage of state and federal financial incentives available forsolar-powered systems while hedging against escalation in fossil fuel prices.Potential markets include agriculture, dairies, livestock farms, water utilitydistricts, wineries and food processing facilities (refrigeration pumps andcompressors).

In California, the Company has completed installationsdriving a 50 hp and a 200HP irrigation system for a cotton farm and a citrusranch respectively, a food processing system with a 350 hp compressor pumpandsupplied the equipment for 1,132,200 kW(dc) solar energy system installed at acommunity college. In New Jersey, WorldWater has completed construction of a 24kW system supplying electricity to an organic farm and has prepared bids fornumerous schools as well as utility clients. Today, the price of the WorldWatersystems being marketed in California and New Jersey range from approximately$300,000 to several million dollars. In California, WorldWater has a sales andtechnical support office in Foster City and consultants working out of SanDiego and Sacramento to service the state. WorldWater’s East Coast andInternational operations are managed from its headquarters in Pennington, NJ.

International marketing efforts are targeted toidentify specific project opportunities that have the potential for long-termgrowth and institutional financial sources that are capable and willing tofinance these projects. The massive reconstruction effort being undertaken inIraq presents unique opportunities for American contracting companies, andWorldWater has partnered with The Sandi Group, one of the largest Iraqiconstruction and logistics companies, to pursue these opportunities. WorldWaterhas also provided specific proposals to various relief agencies in support ofthe Tsunami relief effort in Southern Asia. WorldWater has formed an alliancewith the Xinhua Financial Network Limited Financial Group to explore marketopportunities in the Peoples Republic of China.

The need and price for water worldwide are growingannually. The United Nations estimates that $8 billion annually iscurrently spent in providing safe drinking water in developing countries, andthat $100 billion will be required over the next five years. The challengeof how to bring safe drinking water and electricity to rural households in needis one focus of WorldWater’s proprietary solar technology. Solar energysupplies more energy in one hour than the world uses in one year, so it is anabundant resource well suited to the dispersed communities off the electricalgrid without the negative pollution attributes of fossil fuels.

Over the last 15 years, the photovoltaic (PV) industryhas grown in revenues from $2 million to over $5 billion. By 2020,worldwide annual PV direct sales are estimated to be $27 billion andrelated sales are estimated to be more than $50 billion per year as stated bythe U.S. National Renewable Energy Laboratory Report, “Photovoltaics: Energyfor the New Millennium,” January 1, 2000. Advances in PV technology andcorresponding reduction in costs in addition to enhanced state and federalrebate programs continue to fuel the increasing demand for PV power. Greatpotential for PV technology also lies in developing countries where roughly2 billion people lack electricity and sufficient water supplies.Applications range from remote pumping, irrigation, telecommunications andlighting to complete community power systems..

Based on estimates by the United Nations DevelopmentProgram and the World Bank, the cost of bringing clean water to the2 billion people who are without access to safe drinking water will beapproximately $50 per person, or $100 billion total. Governments may beforced to reallocate their funding resources to address what the World Banksays will be a major problem of the 21st century—water shortages. WorldWater iswell positioned to cost effectively service this growing demand for sustainablepotable water supplies.

A similar size investment is needed to supplyelectricity to underdeveloped nations. For example, WorldWater’s analysis ofthe remote power markets in the Philippines alone, where only 28 of the 2,800 

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inhabited islands haveaccess to electricity, shows that a modest 10% penetration by solar powerrepresents an outstanding market opportunity.

WorldWater is marketing the AquaMaxTM pumping systemand its other solar products worldwide to both public institutions and privateenterprises.

WorldWater providessolar solutions for water and power needs by:

·       Combiningthe two technological requirements of solar engineering and water engineering,thus  enabling the Company to moreeffectively implement sustainable turnkey programs;

·       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;

·       Arrangingproject financing.

A key marketing strategy is the utilization ofalliances. WorldWater, as a water and power solutions provider, is in an idealposition to partner with major international organizations to enhance itsfinancing capabilities and with local organizations to enhance projectimplementation.

WorldWater has a longstanding relationship with theU.S-based firm Vincent Uhl Associates for hydrogeological studies and withMorehouse Engineering, a power system controls engineering firm. The companieshave successfully worked together in a number of international markets. VincentUhl Associates has located, drilled and tested new groundwater sources in theAmericas, Africa and Asia including a detailed analysis of the available waterresources in Sri Lanka and Morehouse Engineering has operated with the Companyin Africa and Pakistan.

The Company has working alliances with WinrockInternational (see above), The Sandi Group (see above), Princeton Power Systems(see below), International Center for Water Technology (see below) and theXinhua Financial Network Limited Financial Group (see above).

In addition, WorldWater works with financialinstitutions such as private investment funds, the U.S. Trade &Development Agency, the Export-Import Bank, World Bank, and USAID in theirefforts to secure safe drinking water and power in emerging nations.

Domestically, WorldWater has worked with RutgersUniversity agro-engineers and with Cumberland County College in developingsolar drip irrigation systems for use in fresh and brackish water, and with theInternational Center for Water Technology, California State University at Fresno,to explore uses of solar power in domestic irrigation.

d)            Researchand Development

A key strategy of WorldWater is to continue developinginnovative, cutting edge products to meet water and electricity needs withproprietary solar technology. The Company holds a patent on the electronicboard controller (AquaDriveTM) of the AquaMaxTM system. In 2003, the Company alsowas awarded a patent on its automatic switching technology, which enables thesystem to perform multiple functions such as water pumping and battery chargingand also to switch automatically between solar and grid-tied, diesel or batterypower sources.

In November of 2003, the Company was awarded a$300,000 Renewable Energy and Economic Development (REED) inaugural grant bythe New Jersey Board of Public Utilities to develop power electronics forcontrolling interaction between the electric grid, solar power and motors.Princeton Power 

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Systems, Princeton, NJ, isWorldWater’s subcontractor on the 18-month grant, the results of which are expectedto reduce the cost of electronic control equipment used in the AquaMaxTM.

e)            IntellectualProperty

WorldWater has obtained patents andcontinuations-in-part for its newly developed electronics systems and has filedfor protections of its patents in the Philippines. Thomas McNulty, Sr., Dr. AnandRangarajan, and Douglas Williams of WorldWater and Quentin T. Kelly, Chairmanand CEO, together with Princeton University engineers have been issued patents,all of which are assigned to WorldWater. The Company holds patents on theelectronic board controller (AquaDrive(TM)) of the AquaMax(TM) system and onthe Solar Thermal Powered Water Pump. In 2003, the Company was issued a patenton an electronic board that allows, in case of the interruption of service in anA/C grid 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. 
| **Patent Title**                           | ** ** | ** **                  | ** ** | **Domestic/  International** | ** ** | **Patent File No.** | ** ** | **Status**              | ** ** | **Expiration** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------------|------------|-------------------------|------------|----------------|------------|
| Solar Thermal  Powered Water Pump               |       | Domestic                    |       | U.S.  5,163,821              |       | Approved                      |       | December 17,  2012 |       |
| Switchable  Multiple Source Power Supply        |       | Domestic                    |       | US  6,583,522                |       | Approved                      |       | June 24,  2023     |       |
| Bias controlled  DC to AC converter and systems |       | Domestic                    |       | US  6,275,403                |       | Approved                      |       | August 14,  2021   |       |
| Bias controlled  DC to AC converter and systems |       | International-  Philippines |       | US  6,275,403 B1             |       | Pending                       |       |                    |       |
| Hybrid AC/DC                                    |       | Domestic                    |       | US  -2004 -  0095091-A1      |       | Pending                       |       |                    |       |
| No Load Motor  Cutoff Method And Apparatus      |       | Domestic                    |       | US -2004 -  10/938829        |       | Pending                       |       |                    |       |
| Smart Card Water System                         |       | International               |       |                         |       | In Process                    |       |                    |       |

 

f)             Source and Availability of Components

The solar modules used in the Company’s systems arecomposed of silicon and other photovoltaic materials. Suppliers of solarmodules include Shell Solar, Kyocera, Sharp, BP Solar and RWE Schott.WorldWater orders solar modules and related articles from several suppliers andhas not entered into any term supply contracts.

Sub-contractors currently manufacture components ofthe AquaMaxTM systems in the United States. WorldWater will continue to sourcecomponents, specifically solar modules, worldwide, based on quality and costconsiderations.

g)            Competitive Conditions Affecting the Company

The Company’s products compete with both conventionalpower generation and solar power technologies. The main competitivetechnologies are diesel and gasoline generators, and electrical grid extension.The cost of installing a solar pump may be more or less than the cost of anelectrical grid extension, depending on the particular installation. However,the life-cycle cost benefit of the solar driven motor or pump is the reductionin on-going electric costs. Solar generation is a hedge against escalation infossil fuel prices, without the negative pollution attributes. The initial costof acquiring a diesel pump is less than the initial cost of a solar pump, butthe on-going incremental operating and maintenance costs of the 

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diesel pump are greaterand, in remote areas, the supply of fuel and spare parts are not always readilyavailable.

The Company’s most commonly encountered solar pumpingcompetitor is Grundfos A/S of Denmark, a manufacturer of a large range of waterpumps, including a solar pump line. The Grundfos pumps run off a speciallywound AC motor. Aero-Environment of California has somewhat similar technologyusing limited size AC pumps. There are a number of other solar pump companies,including Solar Jack of the US, Sun Motor of Canada, Southern Cross ofAustralia, and Total Energie from Europe, which produce limited horsepower DCpumps. The Company’s systems operate conventional AC powered pumps up to 600horsepower.

h)            Subsidiaries

WorldWater Corp., 100% wholly owned inactivesubsidiaries include:

WorldWater, Inc.

WorldWater Holdings Inc.

WorldWater East Africa Ltd.

WorldWater Pakistan (Pvt.), Ltd.

WorldWater also owns a 90% interest in WorldWater(Phils), an “active” Philippine corporation.

i)             GovernmentRegulations

Compliance with federal, state, and local provisionsregarding the production and discharge of materials into the environment isexpected to have no effect on capital expenditures, earnings and competitiveposition. The Company has a program to comply fully with the U.S. ForeignCorrupt Practices Act.

j)             Employees

On December 31, 2004,the company employed 20 people on a full-time basis. The Company also hiresconsultants on an as-needed basis and has informal arrangements with two waterconsulting companies, the hydrogeological firm of Vincent Uhl Associates andMorehouse Engineering, specialists in power control, and water/wastewatertreatment systems integration.

**ITEM 2.     DESCRIPTIONOF PROPERTIES**

The Company’s executive office, research anddevelopment facility is housed in a 12,000 square foot site located at 55 Route31 South, Pennington, New Jersey 08534. This facility is leased under anoperating lease expiring June 25, 2007. The Company also uses a secondfacility in Hopewell, New Jersey for conferences, meetings and demonstrationsof its products. This facility is leased from Quentin T. Kelly, the Chairmanand Chief Executive Officer, on a month-to-month basis. See “CertainRelationships and Related Transactions”.

In July of 2004, theCompany opened a sales and technical support office in Foster City, Californiaunder a two-year lease expiring May 31, 2006. In July of 2004, theCompany closed its government liaison office in Sacramento, California.

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**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.

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

None.

**PART II.**

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

a)            PriceRange of Common 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  2003** |       |     |       |    |       |      |       |
| First Quarter    |       | $        | 0.19       |    | $          | 0.09      |       | $ | 0.13 |   |
| Second Quarter   |       | 0.21     |       | 0.13    |       | 0.19      |       |
| Third Quarter    |       | 0.26     |       | 0.12    |       | 0.19      |       |
| Fourth Quarter   |       | 0.20     |       | 0.09    |       | 0.14      |       |
|                  |            |          |            |         |            |           |            |  |  |  |

 
| ** **       | ** ** | **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)               Holdersof Common Stock

On March 15,2005 there were approximately 689 holders of record of common stock. Thisnumber does not include beneficial owners of the common stock whose shares areheld in the names of various dealers, clearing agencies, banks, brokers andother fiduciaries.

c)                Dividends

Todate, the Company has not declared or paid any dividends on common stock. Thepayment by the Company of dividends, if any, is within the discretion of theBoard of Directors and will depend on its earnings, if any, capitalrequirements and financial condition, as well as other relevant factors. TheBoard of Directors does not intend to declare any dividends in the foreseeablefuture.

d)               BookValue of Common Stock

Thebook value of WorldWater as of December 31, 2004 was a deficiency of$(4,273,641) or a deficiency of $(0.054) per share of common stock. Book valueper share is determined by dividing the 

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tangible book value of WorldWater (total tangibleassets less total liabilities) by the number of outstanding shares of commonstock.

e)                RecentSales of Unregistered Securities

Inconsideration for providing investor relations, business development, andfinancial strategic advisor services, the Company issued 560,357 restrictedcommon stock shares at prices ranging between $0.17 and $0.28. In addition,550,000 warrants were exercised and restricted stock issued at a price of $0.15per share.

f)                  PreferredStock

Since 2001, the Company has not issued Preferred Stock.As of October 1, 2004, the preferred shareholder converted 66,667 sharesof Series A 7% Convertible Preferred Stock into a like number of commonshares. As of December 31, 2004, the Company has 611,111 shares of Series B7% Convertible Preferred Stock outstanding.

The Series B 7% three-year Convertible PreferredStock was issued at $0.90 per share in 2000. The Series B Preferred Stockproceeds were intended to be used by the Company for the initial operatingrequirements of WorldWater (Phils) Inc., the Philippine subsidiary of theCompany. The conversion privilege, which expired September 2003, waseither into 10% of WorldWater (Phils) Inc. or into 611,111 common shares of theCompany.

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 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.

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

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

**OVERVIEW**

WorldWater Corp. is an international solar engineeringand water management company with unique, high-powered solar technologyproviding solutions to water supply and energy problems worldwide. Throughresearch and development, the Company created proprietary solar technologycapable of operating pumps and motors up to 600 horsepower used in irrigation,water utility pumping systems and 

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refrigeration. Thisincreased power capability, coupled with growing energy shortages in the UnitedStates, has opened domestic market opportunities that have now become the principalfocus of its business. The Company has focused its efforts on aggressivelymarketing this proprietary solar technology domestically in conjunction withits on-going international efforts. In the U.S., this includes public andprivate commercial markets, particularly in California, New Jersey and otherstates which offer incentives for renewable energy sources. The Companycontinues to seek opportunities throughout the world, including Asia, thePhilippines where it maintains a subsidiary, the Middle East (primarily Iraq),and Africa.

During 2004, the Company had two major sales ordersresulting in $5,614,362 in net revenues. In 2003, the Company also had twoequipment sales orders resulting in $1,143,302 in revenue. In the second halfof 2004 the Company strengthened its sales and marketing organization with fournew hires and is focused on expanding its domestic sales channels to takeadvantage of the recent state governmental initiatives in New York,Pennsylvania, Colorado and other states aimed at accelerating the adoption ofsolar power for commercial applications. Internationally the Company formed analliance with The Sandi Group to pursue opportunities in the reconstructionrequired in Iraq and formed an alliance with the Xinhua Financial Network Limitedto explore introduction of its products in the Peoples Republic of China.

The cash raised through the issuance of convertibledebt and private equity sales including the registered Stock Purchase Agreement(“SPA”) has provided the Company with the working capital resources to meet itsoperating activities. However, the Company’s current cash and cash equivalentswill not be sufficient to fund current and expected increase level ofactivities through fiscal year 2005, and, as a result, the Company is seekingto raise significant additional financing to successfully fund 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 consolidated financials are presented on the basisthe 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’sworking capital deficit and stockholders’ deficiency raises substantial doubtabout the Company’s ability to continue as a going-concern. The Companycontinues to market its products domestically and internationally. However,there can be no assurances that the Company will be successful in its marketingefforts or in its ability to raise additional financing to remain a goingconcern. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this going-concern uncertainty.

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Thepreparation of consolidated financial statements in accordance with generallyaccepted accounting principals requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. TheCompany bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. The Company believes the following critical accounting policiesaffect its more significant judgments and estimates used in the preparation ofits consolidated financial statements:

**REVENUE RECOGNITION**

The Company derives revenue primarily from the saleand installation of its solar pumping systems and solar energy products.Revenues are also derived to a lesser extent from government consultingprojects and from grant revenue received. Revenues are recorded when persuasiveevidence of an arrangement exists, the price is fixed and determinable,delivery has occurred or services have been rendered and when collectibility isreasonably assured.

Revenues from time and material service arrangementsare recognized using the percentage of completion method measured by labor andother costs incurred to total estimated labor and other costs required.Estimates of costs to complete are reviewed periodically and modified asrequired. Provisions are made for the full amount of anticipated losses, ifany, on all contracts in the period in which the losses are first determined.Changes in estimates are also reflected in the period they become known.

Revenues from equipment sales and installationcontracts containing acceptance provisions are recognized upon customeracceptance. Deferred contracts cost represent costs incurred on uncompletedcontracts. Cash payments received in advance of product or service revenue arerecorded as customer deposits payable. Some contracts have specifiedidentifiable multiple elements whereby upon completion of that stage ormilestone and customer acceptance is received, the applicable revenue isrecognized.

Revenues from consultingprojects are recognized as services are rendered. Grant revenues on the basisof entitlement periods are recorded as revenue when entitlement occurs.

**ALLOWANCE FOR 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 FOR INCOME TAXES**

The Company is required to estimate its income taxesin each of the jurisdictions in which it operates as part of its consolidatedfinancial statements. This involves estimating the actual current tax inaddition to assessing temporary differences resulting from differing treatmentsfor tax and financial accounting purposes. These differences together with netoperating loss carryforwards and tax credits may be recorded as deferred tax assetsor liabilities on the balance sheet. A judgment must then be made of thelikelihood that any deferred tax assets will be recovered from future taxableincome. To the extent that the Company determines that it is more likely thannot that deferred tax assets will not be utilized, a valuation allowance isestablished. Taxable income in future periods significantly different from thatprojected may cause adjustments to the valuation allowance that couldmaterially increase or decrease future income tax expense. As of December 31,2004 and 2003 an allowance equal to 100% of the deferred tax asset wasrecorded.

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**SELECTED FINANCIAL DATA**

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, 2004 and 2003 and the balance sheet data at December 31,2004 and 2003 have been derived from the audited financial statements whichappear elsewhere in this filing. The statement of operations data presentedbelow for the years ended December 31, 2002, 2001 and 2000, and thebalance sheet data at December 31, 2002, 2001 and 2000 have been derivedfrom the Company’s audited financial statements, which are not included in thisfiling.
| ** **                                                                | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| *Operating  Results*                                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Net Revenue                                                               |       | $                                          | 5,837,224  |   | $ | 1,279,573 |   | $ | 643,541 |   | $ | 241,045 |   | $ | 279,531 |   |
| Gross Profit  (Loss)                                                      |       | (149,085                                   | )          | 318,928 |   | 112,353 |   | 59,519 |   | 31,821 |   |
| Loss From  Operations                                                     |       | (6,087,358                                 | )          | (3,301,020 | ) | (2,007,536 | ) | (1,547,865 | ) | (1,958,821 | ) |
| Loss Attributable  To Common Stock                                        |       | (8,056,694                                 | )          | (3,924,774 | ) | (2,005,731 | ) | (2,494,757 | ) | (1,704,179 | ) |
| Net Loss Per  Basic & Diluted Share Attributable To Common Stock |       | (0.12                                      | )          | (0.08 | ) | (0.04 | ) | (0.07 | ) | (0.06 | ) |
|                                                                           |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| *Balance  Sheet Data*                            |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and Cash Equivalents                        |       | $                     | 38,852     |   | $ | 59,045 |   | $ | 140,574 |   | $ | 18,115 |   | $ | 67,229 |   |
| Working Capital                                  |       | (2,324,752            | )          | (2,350,312 | ) | (1,082,224 | ) | (1,001,153 | ) | (607,636 | ) |
| Total Assets                                     |       | 1,790,868             |       | 221,225 |   | 1,177,970 |   | 265,084 |   | 441,299 |   |
| Long term  obligations—less current portion |       | 1,696,232             |       | 1,665,396 |   | 349,878 |   | 61,270 |   | 20,480 |   |
| Stockholder’s Deficit                       |       | (4,273,641            | )          | (3,941,442 | ) | (1,339,968 | ) | (939,952 | ) | (254,046 | ) |
|                                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**RESULTS OF OPERATIONS**

*Equipment Sales*.   Equipmentsales consisted of revenues from the installation of a 267,840 kW(dc)solar-driven irrigation and energy system for a citrus farm and the sales ofsolar equipment to a constructor of a 1,132,200 kW(dc) solar energy systemconstructed for a community college in the year ended December 31, 2004and revenues from the installation of two solar pumping and energy systems inthe year ended December 31, 2003. For the years ended December 31,2004 and 2003, equipment sales represented 96% and 89% respectively of total revenues.

Under the equipment sales contract for the 267,840kW(dc) solar-driven irrigation and energy system the Company has guaranteed theprice of certain Renewable Energy Credits (RECs) to be generated by theinstallation during the first seven years of operation. Based on current marketindications the Company estimates its guarantee obligation may result in a lossof $393,617 which is tied to the future market and trading value of RECs tradedin California. Without the knowledge of the future value of these RECs, theCompany has recorded the estimated loss, $393,617, as a reduction of EquipmentSales revenue in the year ended December 31, 2004. Adjustments to theestimated guarantee obligation will be recognized as an adjustment of revenueover the seven year term of the guarantee obligation.

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The Company recorded no international equipment salesrevenue in the year ended December 31, 2004. In the year ended December 31,2003 the Company recorded international equipment sales revenue of $35,817. TheCompany’s capabilities and technology are being reviewed by various relieforganization including USAID, the United Nations and CARE to determine its rolein the relief efforts going on in South East Asia as a result of the December 26,2004 tsunami. The Company anticipates that international sales will begenerated in 2005 as a result of the on-going capabilities and technicalreviews.

*Grant Revenue.  *Grantrevenue consists of revenues from state and federal governmental agencies usedto fund the Company’s ongoing research, development and testing of new productsand technologies. The Company recognizes research as services are rendered. During2004, the Company completed one multi-year research contract. In the fourthquarter of 2003 the Company was awarded a grant in which work commenced in 2004and will extend into the first half of 2005. In the third quarter of 2004 theCompany was award a grant which will extend into  2005.

*Cost of Equipment Sales.  *Costof equipment sales consists primarily of third party construction andinstallation expense, materials and supplies required for construction andcomponent equipment including the solar panels, solar array, inverters,variable speed drives and meters. In addition, commissions earned and warrantyexpense is included in the cost of equipment sales.

Following completion of the 267,840 kW solar-drivenirrigation and energy system the Company initiated an intensive review of allcosts incurred to determine what steps should be taken to reduce unexpectedcosts in order to generate a viable gross margin on future projects. Keyfindings from the review included: a) complete detail engineering prior tostart of field construction; b) infusion of discipline in the sourcing andprocurement of components; and c) greater involvement of existing engineeringpersonnel from the beginning of contract discussions through projectcompletion.

*Cost of Grant Revenue.  *Costof grant revenue consists primarily of third party subcontracted costs incurredfor consulting expenses and prototype costs. The Company expenses internalresearch engineering and development costs as incurred, see Research andDevelopment expense below.

*Marketing, general and administrative expenses*.   Marketing,general and administrative expenses consist primarily of salaries and relatedpersonnel costs, travel, professional fees, including legal and accounting,rent, insurance, and other sales and marketing expenses. The Company increasedthe number of persons directly involved in the marketing and sales of itsinstallation during the second half of 2004. The Company expects to expend anincrease in absolute dollars in 2005as the Company increases its sales efforts,hires or retains on a commission basis additional sales personnel, andinitiates additional marketing campaigns beyond the agricultural sector whichin 2003 and 2004 was the primary focus of the Company’s domestic marketingefforts.

*Debt sourcing fees and commissions.  *TheCompany historically has financed its operations through a combination ofconvertible debt, convertible preferred stock, and equity. To date on-goingoperations have been a net user of capital and is expected to continue to be anet user of capital through at least the first half of 2005. The result ofhaving to rely on outside sources of capital for financing has been very costlyfor the Company. Debt sourcing fees and commissions are expected to be incurredin 2005 until the Company’s revenue of equipment sales grows to a level wheregross profit can cover operating expenses.

*Research and development expense.  *Researchand development expense consists primarily of internal personnel salary andrelated personnel costs and prototype costs incurred to improve the design ofthe Company’s installations and expand the Company’s product line. Research anddevelopment is critical to the Company’s strategic objectives of enhancing itstechnology to meet the requirements of its expanding target customers. TheCompany expects to maintain, if not increase, its current level of expenditurefor research and development going forward.

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**COMPARISONOF YEARS ENDED DECEMBER 31, 2004 AND 2003**

*Revenues.  *Equipment salesfor the year ended December 31, 2004 were $5,614,362, an increase of$4,471,060, or 391 % from $1,143,302 for the same period in 2003. The increasein equipment sales was due to the Company being the supplier of panels andassociated solar equipment components to a 1,132,200 kW(dc) solar energy systemconstructed at a community college in California and the installation of a267,840 kW solar-driven irrigation and energy system at a citrus farm inCalifornia. Grant revenue for the year ended December 31, 2004 were$222,862, an increase of $86,591, or 64%, from $136,271 for the same period in2003. The increase in grant revenue recognized was primarily attributable tothe Company’s research grant from the Board of Public Utilities of the State ofNew Jersey for which work and associated revenue was recognized beginning inthe first quarter of 2004 and will continue through the first half of 2005.

Under the equipment sales contract for the 267,840kW(dc) solar-driven irrigation and energy system the Company has guaranteed theprice of certain Renewable Energy Credits (RECs) to be generated by theinstallation during the first seven years of operation. Based on current marketindications the Company estimates its guarantee obligation may result in a lossof $393,617 which is tied to the future market and trading value of RECs tradedin California. Without the knowledge of the future value of these RECs, theCompany has recorded the estimated loss, $393,617, as a reduction of EquipmentSales revenue in the year ended December 31, 2004. Adjustments to theestimated guarantee obligation will be recorded as an adjustment of revenueover the seven year term of the guarantee obligation.

*Cost of Goods Sold.  *TheCompany’s cost of equipment sales for the year ended December 31, 2004 was$5,731,841, anincrease of $4,890,715or581% from $841,126 for the same period in 2003. This increase is directlyattributable to the Company’s completion of larger projects in 2004  compared to two in 2003 resulting in theinstallation of 1,400,040 kW(dc) watts of solar energy in 2004 compared to143,208 kW(dc) during the same period in 2003. The cost of grant revenuefor the year ended December 31, 2004 was $254,468an increase of $134,949, or 113% from$119,519 during the same period in 2003.

*Gross Profit(Loss).  *TheCompany’s gross loss for the year ended December 31, 2004 was $149,085.****In2003 the Company had a gross profit of $318,928. The Company’s decline in grossprofit is attributable to: the Company’s installation of the267,840 kWsolar-driven irrigation and energy system where: (a) unanticipatedadditional engineering and construction costs totaling approximately $416,000;and (b) a  contingent guaranteeliability of $393,617associatedwith the Company’s guarantee of the future value of Renewable Energy Credits(RECs) has been recorded. In addition, the Company acted as a supplier ofpanels and associated solar equipment components for a 1,400,040 kW(dc) wattssolar energy being constructed by a third party constructor. The Company’sproprietary technology was not involved and therefore earned a lower grossmargin.

The Company had a gross loss of $31,606 on grantrevenue for the year ended December 31, 2004 whereas in the same period in2003 the Company had a gross profit of $16,752.

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*Marketing,General and Administrative.  *Marketing, general andadministrative expenses for the year ended December 31, 2004 were$3,821,978 an increase of $1,241,569or 48%, from $2,580,409for the same periodin 2003. Below is a table breaking down the increase by expense categoriesbetween the year ended December 31, 2004 and 2003:

**Expense Differences Between Year-EndedDecember 31, 2004 and 2003**
| Increase in:                                            |   |    |      |
|---------------------------------------------------------|--------|---------|-----------|
| Personnel cost including salaries, benefits and  travel |   | $       | 589,827   |   |
| Foreign business development representation             |   | 298,500 |      |
| Sales commissions                                       |   | 127,078 |      |
| Legal and accounting                                    |   | 104,702 |      |
| Office expenses                                         |   | 84,470  |      |
| Advertising                                             |   | 44,308  |      |
| Worldwater (Phils) operating expenses                   |   | 22,603  |      |
| Decrease in:                                            |   |    |      |
| Charge for the allowance of doubtful accounts           |   | (35,671 | )         |
| Total                                                   |   | $       | 1,235,817 |   |

 

*Debt Sourcing Fees And Commissions.  *Feesand commissions incurred to raise debt in the year ended December 31, 2004were $1,913,071 an increase of $1,379,104or 258% from $533,967in same period in 2003. The Companyhas incurred, will continue to incur substantial fees and commissions,including investor relations fees, raising convertible debt to fund its workingcapital requirements until equipment sales and associate gross profits reach alevel to cover operating expenses.

*Research and Development.  *Researchand development expenses in the year ended December 31, 2004 were$203,224, a decrease of $302,348 or 60% from $505,572 in the same period in2003.

*Loss from Operations.  *Inthe years ended December 31, 2004 and 2003 the Company incurred a lossfrom operations of $6,087,358, an increase of $2,786,338 or 84% from $3,301,020in the same period in 2003..

*Interest Expense.  *Interestexpense was $2,178,222inthe year ended December 31, 2004 an increase of $1,592,968or272% from $585,254in the same period in 2003. Thisreflects: a) the increase in convertible debt outstanding during the respectiveperiods; b) an increase in beneficial conversion interest recorded in 2004verses 2003 of  $650,405 and c) greateramortization of original issue discount of $161,973 attributable to the valueof warrants that were attached to the convertible debt when issued in 2003 and2004.

*Income Taxes.  *TheCompany recognized an  income taxbenefit  of $ 219,381for the year ended December 31,2004 and no benefit or expense ended in 2003. The Company participates in theState of New Jersey’s Corporation Business Tax Benefit Certificate TransferProgram (the “Program”), which allows certain high technology and biotechnologycompanies to transfer unused New Jersey net operating loss carryovers andresearch and development tax credits to other New Jersey corporation businesstaxpayers. In 2004 the Company’s application was accepted by the New JerseyEconomic Development Authority (the “EDA”) to participate in the program fortax losses incurred in 2003 and 2002. During2004 the Company sold approximately $1,200,000 and $1,450,000 of its 2003 and2002 New Jersey State net operating loss carryforwards and $6,020 and $14,418of its 2003 and 2002 research and development tax credits and recognized a taxbenefit of $219,381. The Company did not participate in the program in 2003.

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**LIQUIDITY AND CAPITAL RESOURCES**

At December 31, 2004, the Company had a networking capital deficiency $(2,324,752) and a Stockholders’ deficiency of$(4,273,641).

The consolidated financials include herein arepresented on the basis that the Company will continue as a going-concern. Thegoing-concern concept contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business over a reasonablelengthof time. The Company’sworking capital deficit and stockholders’ deficiency raises substantial doubtabout the Company’s ability to continue as a going-concern. The Company hashistorically financed operations and met capital expenditures requirementsprimarily through sales of capital stock and, to a lesser extent, researchrevenues and solar system equipment sales. Management continues to raisecapital through the sale of common stock and additional borrowings. Inaddition, management is continuing to market company products domestically andinternationally. However, there can be no assurances that the Company will besuccessful in these efforts. The consolidated financial statements do notinclude any adjustments that might result from the outcome of thisgoing-concern uncertainty.

The Company needs additional financing to execute itsbusiness plan and to respond to business contingencies such as the need toenhance its intellectual property rights, respond to competitive pressures, anddevelop complementary businesses or necessary technologies. The Company doesnot know whether it will be able to raise additional financing on favorablefinancing terms. If adequate funds are not available or are not available onacceptable terms, the Company’s ability to fund its operations and expand itssales distribution network, or otherwise respond to competitive pressures willbe significantly limited.

*Cash Used in Operating Activities.  *TheCompany used $4,974,772 in its operating activities in the year ended December 31,2004, an increase of $2,985,391or 150% from $1,989,381 used in the same periodin 2003.  The increase is attributable toincreased domestic sales efforts principally in California and New Jersey whichrequired the addition of personnel and the unanticipated cost over runs on the267,840 kW(dc) solar-driven irrigation and energy system installation andincreased costs incurred to obtain equity and debt funding.

*Cash Used in Investing Activities*.   Thecash used in investing activities in the year ended December 31, 2004 was$29,699, an increase of $12,305 or 71% from $17,394 invested in 2003. Expenditureswere principally for computers and office furniture and fixtures associatedwith additional personnel.

*Cash Provided By Financing Activities.  *TheCompany financed its operations through the issuance of convertible debenturesand the issuance of common stock as the result of sales and exercise of optionsand warrants in the years ended December 31, 2004 and 2003. The cashprovided by financing activities in the year ended December 31, 2004 was$4,990,962****an increase of $3,030,398 or 155%, from $1,960,564 for thesame period in 2003. In 2004, the Company issued three-year convertible noteshaving a face amount of $1,180,000 and $1,000,000 in convertible notes maturingOctober 1, 2005 to institutional and accredited investors.  During 2003, the Company issued three-yearconvertible notes totaling $1,775,000 and notes payable of $868,003 toinstitutional and accredited investors. The three-year notes bear interest at10% per annum payable semi-annually in either cash or common stock of theCompany, at the election of the holder, and are convertible into common stockof the Company at $0.15 per share into an aggregate of 14,217,000 shares as of December 31,2004. The convertible debt maturing October 1, 2005 bears interest at therate of 15% per annum payable monthly and is convertible, at the election ofthe Company provided the issued shares are tradable, into common stock of theCompany into a maximum of 10,000,000 shares under thirty (30) percent discountto then current market price of the Company’s stock with a cap of $0.40 pershare and a floor of $0.10 per share.   The conversion feature of the convertiblenotes issued in 2004 resulted in the recording of beneficial conversioninterest, a non-cash operating charge, of $855,738an increase of $650,405 or 317 %, from$205,333 for the same period in 2003.

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Inconjunction with the issuance of the three year convertible notes detachablewarrants having a term of five years were issued in 2004 and 2003 resulting ina discount on the debt and a charge to additional paid in capital of $593,900and $587,693 in 2004 and 2003, respectively:
| **Exercise Price per Share** | ** ** | ** ** | ** ** | **Detachable  Warrants Issued  2004** | ** ** | **Detachable  Warrants  Issued 2003** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| $0.30                                       |       |       | 5,638,667  |                                       |       | 7,839,001                                  |       |
|   0.20                            |       |       |       |                                       |       | 89,333                                     |       |
|   0.15                            |       |       |       |                                       |       | 89,333                                     |       |

 

During 2004 and 2003, the Company made payments onnotes payable and long-term debt of $308,194 and $697,439, respectively.

The Company generated cash through the sale of commonstock of $2,440,000, including $2,290,000 of stock sold under the SPA describedbelow, and had warrants and options exercised which resulted in        proceeds of $464,003in 2004. During thesame period in 2003, the Company generated $15,000 in cash through exercise ofwarrants and options.

InApril, 2004, the Company entered into a SPA with SBI Brightline VIII LLC (“thePurchaser”). In 2004, subject to the terms of the SPA, the Company issued andsold to the Purchaser 12,000,000 shares of common stock and issued 3,600,000detachable 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 week period leading up to April 1, 2004, the effective date ofthe SPA, was generally greater than the price per share for Tranche No. 1  shares that  were sold under the SPA;however, the average closing  price  during March 2004 was slightly more than$0.20 per share and the average share  price  of all of the shares to be sold under the SPAis slightly greater  than  $0.21 per  share.

The SPA expired on December 31, 2004. The Companyhas permitted the Purchaser to purchase shares under the terms of the expiredSPA in the first quarter of 2005. The Purchaser is not obligated to purchasenor is the Company obligated to sell the remaining stock of third Tranche. TheCompany cannot make any assurances that the remaining stock of the thirdTranche will be acquired by the Purchaser.

In the first quarter 2005, the Company issued and soldto the Purchaser 740,741 shares of common stock at a price of $0.27 per shareas the initial installment of the third Tranche resulting in equity proceeds of$200,000. In conjunction with the sale of the stock, the Company issued 222,222unregistered warrants at a price of $0.27 per share included in the thirdTranche shown above. The Company cannot make any assurances that the remainingstock of the third Tranche will be acquired by the Purchaser.

The Company currently does not have any specialpurpose entities or off-balance sheet financing arrangements.

20

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Thefollowing table summarizes the Company’s contractual obligations as of December 31,2004 and the effect such obligations are projected to have on its liquidity andcash flow in future periods:
| ** ** | ** ** | **Operating  Lease Payments** | ** ** | **Employment  Payments** | ** ** | **Total** | ** ** |
|------------|------------|------------------------------------|------------|--------------------------|------------|-----------|------------|
| 2005       |       |                               | $          | 159,944                  |       |      |       | $ | 433,500 |   |   | $ | 593,444 |   |
| 2006       |       |                               | 140,337    |                     |       |      | 346,000    |   |   | 486,337 |   |
| 2007       |       |                               | 64,773     |                     |       |      | —     |   |   | 64,773 |   |
| Total      |       |                               | $          | 365,054                  |       |      |       | $ | 779,500 |   |   | $ | 1,144,554 |   |

 

**INCOME TAXES**

As of December 31,2004, the Company had federal and state net operating loss carryforwardstotaling approximately $20,991,800 and $1,934,000, respectively, available toreduce future taxable income and tax liabilities which expire at various datesbetween 2005 and 2024. In addition, as of December 31, 2004, the Companyhad federal and state research and development tax credit carryforwards ofapproximately $180,600and $20,000, respectively, available to reduce future taxliabilities which expire at various dates between 2009 and 2024. Underprovisions of the Internal Revenue Code, substantial changes in the Company ownershipmay limit the amount of net operating loss carryforwards and research anddevelopment credit carryforwards, which can be used annually to offset futuretaxable income and tax liabilities. Management of the Company has evaluated thepositive and negative evidence bearing upon the realizability of its deferredtax assets. Management has considered the Company’s history of losses and, inaccordance with the applicable accounting standards, has fully reserved thedeferred tax asset as of December 31, 2004 and 2003.

**RECENT ACCOUNTING PRONOUNCEMENTS**

**In December 2004, the FASBissued SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APBOpinion No. 29”. The guidance in APB Opinion No. 29, Accounting forNonmonetary Transactions, is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. This Statement amends Opinion 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange. This has no impact on the Company.**

In December 2004, the FASB issued SFAS No. 123(R),“Share-Based Payment,” which is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation”. SFAS 123(R) requires that the compensationcost relating to share-based payment transactions be recognized in financialstatements. The compensation cost will be measured based on the fair value ofthe equity or liability instruments issued. The Statement is effective as ofthe beginning of the first interim or annual period beginning after December 15,2005 for public entities that file as small business issuers, such as theCompany.

In September 2004, the FASB’s Emerging Issue TaskForce (“EITF”) reached a consensus on EITF Issue No. 04-08, theEffect of Contingently Convertible Instruments on Diluted Earnings per Share. Thetask force reached a conclusion that contingently convertible instrumentsshould be included in diluted earnings per share computations, if dilutive,regardless of whether the market price trigger or other contingent feature hasbeen met.

In April 2004, the Emerging Issues Task Forceissued Statement No. 03-06 (“EITF 03-06”), “ParticipatingSecurities and the Two-Class Method Under FASB Statement No. 128,Earnings Per Share.” EITF 03-06 addresses a number of questions regardingthe computation of earnings per share by 

21

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companies that have issuedsecurities other than common stock that contractually entitle the holder toparticipate in dividends and earnings of the company when, and if, it declaresdividends on its common stock. The issue also provides further guidance inapplying the two-class method of calculating earnings per share, clarifyingwhat constitutes a participating security and how to apply the two-class methodof computing earnings per share once it is determined that a security isparticipating, including how to allocate undistributed earnings to such asecurity. EITF 03-06 is effective for fiscal periods beginning after March 31,2004. The adoption of this statement did not have a material impact on theCompany’s financial position or results of operations.

In December, 2003, the Staff of the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (SAB104), “Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition inFinancial Statements.” SAB 104’s primary purpose is to rescind the accountingguidance contained in SAB 101 related to multiple-element revenue arrangementsthat was superseded as a result of the issuance of EITF 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104rescinds the SEC’s related “Revenue Recognition in Financial StatementsFrequently Asked Questions and Answers” issued with SAB 101 that had beencodified in SEC Topic 13, “Revenue Recognition.” While the wording of SAB 104has changed to reflect the issuance of EITF 00-21, the revenuerecognition principles of SAB 101 remain largely unchanged by the issuance ofSAB 104, which was effective upon issuance. The adoption of SAB 104 did nothave a material effect on the Company’s financial position or results ofoperations.

In May 15, 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”. SFAS 150 establishes standards for classifying andmeasuring as liabilities certain financial instruments that embody obligationsof the issuer and have characteristics of both liabilities and equity. SFAS 150represents a significant change in practice in the accounting for a number offinancial instruments; including mandatory redeemable equity instruments andcertain equity derivatives that frequently are used in connection with sharerepurchase programs. The Company currently does not have any such instruments.SFAS 150 is effective for all financial instruments created or modified after May 31,2003. There was no impact from the adoption of this statement.

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.SFAS No. 149 clarifies under what circumstances a contract with an initialnet investment meets the characteristics of a derivative as discussed inStatement No. 133. It also specifies when a derivative contains afinancing component that warrants special reporting in the ConsolidatedStatement of Cash Flows. SFAS No. 149 amends certain other existingpronouncements in order to improve consistency in reporting these types oftransactions. The new guidance is effective for contracts entered into ormodified after June 30, 2003, and for hedging relationships designatedafter June 30, 2003. The adoption of this standard did not have a materialimpact on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation (“FIN”)No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) and, in December 2003,issued a revision to that interpretation (“FIN 46R”). FIN 46R replaces FIN 46and addresses consolidation by business enterprises of variable interestentities that possess certain characteristics. A Variable Interest Entity (“VIE”)is defined as (a) an ownership, contractual or monetary interest in anentity where the ability to influence financial decisions is not proportionalto the investment interest, or (b) an entity lacking the invested capitalsufficient to fund future activities without the support of a third party. FIN46R establishes standards for determining under what circumstances VIEs shouldbe consolidated with their primary beneficiary, including those to which theusual condition for consolidation does not apply. The adoption of FIN 46R didnot have a material impact on the Company’s financial position or results ofoperations.

 

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**ITEM 7.**                FINANCIALSTATEMENTS.

**Reportof Independent Registered Public Accounting Firm**

We have audited the accompanying balance sheets ofWorldWater Corp. and Subsidiaries as of December 2004 and 2003, and therelated statements of operations, changes in stockholders’ equity (deficiency),and cash flows for each of the years ended December 31, 2004 and 2003. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour 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. 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 financial statements referred toabove present fairly, in all material respects, the financial position ofWorldWater Corp. and Subsidiaries as of December 31, 2004 and 2003, andthe results of their operations and their cash flows for the years then ended,in conformity with U.S. generally accepted accounting principles.

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 23, 2005Edison, New Jersey

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**WORLDWATER CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003**
| ** **                                                                                                                                                 | ** ** | **2004**       | ** **    | **2003**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|---------------|----------------|------------|
| **Assets**                                                                                                                                                 | ** ** | ** **     | ** **    | ** **     | ** ** |
| **Current Assets:**                                                                                                                                        |       |           |          |           |       |
| Cash and cash equivalents                                                                                                                                  |       | $              | 38,852        |           | $          | 59,045 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $47,759 and $22,647 as of December 31, 2004 and 2003,  respectively                   |       | 1,590,221      |          | 49,101         |       |
| Deferred contract costs                                                                                                                                    |       | —         |          | 8,872          |       |
| Prepaid expenses                                                                                                                                           |       | 70,062         |          | 13,141         |       |
| Advances to employees                                                                                                                                      |       | 14,033         |          | 16,800         |       |
| **Total Current Assets**                                                                                                                                   | ** ** | **1,713,168**  | ** **    | **146,959**    | ** ** |
| Equipment and leashold improvements, Net                                                                                                                   |       | 58,611         |          | 65,219         |       |
| Deposits                                                                                                                                                   |       | 19,089         |          | 9,047          |       |
| **Total  Assets**                                                                                                                                          | ** ** | **$**          | **1,790,868** | ** **     | **$**      | **221,225** | ** ** |
| **Liablilties and Stockholders’ (Deficiency)**                                                                                                        |       |           |          |           |       |
| **Current Liabilities:**                                                                                                                                   |       |           |          |           |       |
| Accounts payable and accrued expenses                                                                                                                      |       | $              | 2,558,135     |           | $          | 1,715,152 |   |
| Long-term debt and notes payable, current portion                                                                                                          |       | 1,235,714      |          | 384,901        |       |
| Notes payable, related parties                                                                                                                             |       | 123,013        |          | 262,703        |       |
| REC guarantee liability, current portion                                                                                                                   |       | 63,260         |          | —         |       |
| Customer deposits                                                                                                                                          |       | 57,798         |          | 134,515        |       |
| **Total Current Liabilities**                                                                                                                              | ** ** | **4,037,920**  | ** **    | **2,497,271**  | ** ** |
| Long-term debt                                                                                                                                             |       | 1,605,526      |          | 1,582,502      |       |
| REC guarantee liability, net of current portion                                                                                                            |       | 330,357        |          | —         |       |
| Long-term debt, related parties                                                                                                                            |       | 90,706         |          | 82,894         |       |
| **Total Liabilities**                                                                                                                                      | ** ** | **6,064,509**  | ** **    | **4,162,667**  | ** ** |
| **Commitments and contingencies**                                                                                                                          |       | —         |          | —         |       |
| **Stockholders’ (Deficiency):**                                                                                                                       | ** ** | ** **     | ** **    | ** **     | ** ** |
| Preferred Stock 7% Convertible $.01 par value  authorized 10,000,000; issued and outstanding:                                                              |       |           |          |           |       |
| Series A -0 and 66,667 shares liquidation  preference $60,000 as of December 31, 2004 and 2003                                                   |       | —         |          | 667            |       |
| Series B 611,111 shares liquidation preference  $550,000 as of December 31, 2004 and 2003                                                        |       | 6,111          |          | 6,111          |       |
| Common Stock, $.001 par value; authorized  160,000,000; issued and outstanding 79,834,341 and 52,506,720 at  December 31, 2004 and 2003, respectively |       | 79,834         |          | 52,507         |       |
| Additional paid-in capital                                                                                                                                 |       | 23,401,472     |          | 15,726,953     |       |
| Deferred compensation                                                                                                                                      |       | (75,000        | )             | (105,000       | )          |
| Accumulated other comprehensive (loss)                                                                                                                     |       | (56,080        | )             | (49,396        | )          |
| Accumulated deficit                                                                                                                                        |       | (27,629,978    | )             | (19,573,284    | )          |
| **Total Stockholders’ (Deficiency)**                                                                                                                  | ** ** | **(4,273,641** | **)**         | **(3,941,442** | **)**      |
| **Total Liabilities and  Stockholders’ (Deficiency)**                                                                                                 | ** ** | **$**          | **1,790,868** | ** **     | **$**      | **221,225** | ** ** |

 

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

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**WORLDWATER CORP.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

** **
| ** **                                                                     | ** ** | **2004**       | ** **     | **2003**       | ** ** |
|--------------------------------------------------------------------------------|------------|----------------|----------------|----------------|------------|
| **Revenue:**                                                                   |       |           |           |           |       |
| Equipment sales                                                                |       | $              | 5,614,362      |           | $          | 1,143,302 |   |
| Grant revenue                                                                  |       | 222,862        |           | 136,271        |       |
| **Total**                                                                      | ** ** | **5,837,224**  | ** **     | **1,279,573**  | ** ** |
| **Cost of goods sold:**                                                        |       |           |           |           |       |
| Cost of equipment sales                                                        |       | 5,731,841      |           | 841,126        |       |
| Cost of grant revenue                                                          |       | 254,468        |           | 119,519        |       |
| ** **                                                                     | ** ** | **5,986,309**  | ** **     | **960,645**    | ** ** |
| **Gross  (Loss) Profit**                                                       | ** ** | **(149,085**   | **)**          | **318,928**    | ** ** |
| **Operating  Expenses:**                                                       |       |           |           |           |       |
| Marketing, general and administrative expenses                                 |       | 3,821,978      |           | 2,580,409      |       |
| Debt sourcing fees and commissions                                             |       | 1,913,071      |           | 533,967        |       |
| Research and development expense                                               |       | 203,224        |           | 505,572        |       |
| **Total Expenses**                                                             | ** ** | **5,938,273**  | ** **     | **3,619,948**  | ** ** |
| **Loss  from Operations**                                                      | ** ** | **(6,087,358** | **)**          | **(3,301,020** | **)**      |
| **Other  (Expense) Income**                                                    | ** ** | ** **     | ** **     | ** **     | ** ** |
| Interest expense, net                                                          |       | (2,178,222     | )              | (585,254       | )          |
| Other income, net                                                              |       | 18,380         |           | —         |       |
| **Total Other (Expense) Income, Net**                                          | ** ** | **(2,159,842** | **)**          | **(585,254**   | **)**      |
| **Loss  before income taxes**                                                  | ** ** | **(8,247,200** | **)**          | **(3,886,274** | **)**      |
| Benefit from sale of NJ net operating losses and NJ  Research Credits          |       | 219,381        |           | —         |       |
| **Net  loss**                                                                  | ** ** | **(8,027,819** | **)**          | **(3,886,274** | **)**      |
| Accretion of preferred stock dividends                                         |       | (28,875        | )              | (38,500        | )          |
| **Net  Loss Applicable to Common Shareholders**                                | ** ** | **$**          | **(8,056,694** | **)**          | **$**      | **(3,924,774** | **)** |
| **Net loss applicable per Common  Share (basic and diluted):**                 | ** ** | **$**          | **(0.12**      | **)**          | **$**      | **(0.08** | **)** |
| **Weighted Average Common Shares  Outstanding used in Per Share Calculation:** | ** ** | **65,360,690** | ** **     | **51,008,306** | ** ** |

 

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

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**WORLDWATER CORP.AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
| ** **                                                                  | ** ** | **2004**       | ** ** | **2003**       | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| **Cash Flows from Operating  Activities:**                                  | ** ** | ** **     | ** ** | ** **     | ** ** |
| Net loss before accretion of preferred dividends                            |       | $              | (8,027,819 | )              | $          | (3,886,274 | ) |
| Adjustments to  reconcile net loss tonet cash used in operating activities: |       |           |       |           |       |
| Issuance of warrants and options for services                               |       | 1,386,015      |       | 188,217        |       |
| Beneficial conversion feature of convertible notes                          |       | 855,738        |       | 205,333        |       |
| Amortization of interest expense                                            |       | 784,772        |       | 137,706        |       |
| Issuance of stock for service                                               |       | 324,668        |       | 233,875        |       |
| Depreciation and amortization                                               |       | 38,507         |       | 35,262         |       |
| Issuance of stock in lieu of interest                                       |       | 72,108         |       | —         |       |
| Issuance of warrants for loan consideration                                 |       | —         |       | 56,608         |       |
| Amortization of deferred compensation                                       |       | 30,000         |       | 30,000         |       |
| (Gain) / Loss on sale of vehicle                                            |       | (2,200         | )          | —         |       |
| Bad debts                                                                   |       | —         |       | 13,667         |       |
| Changes in assets  and liabilities:                                         |       |           |       |           |       |
| Accounts receivable                                                         |       | (1,541,120     | )          | 220,404        |       |
| Inventory                                                                   |       | —         |       | 61,862         |       |
| Deferred contract costs                                                     |       | 8,872          |       | 574,771        |       |
| Prepaid expenses and other assets                                           |       | (64,194        | )          | (13,356        | )          |
| Accounts payable and other accrued expenses                                 |       | 842,981        |       | 261,201        |       |
| Customer deposits                                                           |       | (76,717        | )          | (108,657       | )          |
| Renewable energy credits guarantee liability                                |       | 393,617        |       | —         |       |
| **Net Cash (Used in) Operating Activities**                                 | ** ** | **(4,974,772** | **)**      | **(1,989,381** | **)**      |
| **Cash  Flows from Investing Activities:**                                  | ** ** | ** **     | ** ** | ** **     | ** ** |
| Purchase of equipment and leasehold improvements                            |       | (31,899        | )          | (11,894        | )          |
| Proceeds from sale of vehicle                                               |       | 2,200          |       | —         |       |
| Deposits                                                                    |       | —         |       | (5,500         | )          |
| **Net Cash Provided by (Used in) Investing  Activities**                    | ** ** | **(29,699**    | **)**      | **(17,394**    | **)**      |
| **Cash  Flows from Financing Activities:**                                  | ** ** | ** **     | ** ** | ** **     | ** ** |
| Proceeds from issuance of common stock                                      |       | 2,440,000      |       | —         |       |
| Proceeds from issuance of debt, notes payable and  warrants                 |       | 2,395,153      |       | 2,643,003      |       |
| Proceeds from exercise of warrants and stock options                        |       | 464,003        |       | 15,000         |       |
| Payments on long-term debt                                                  |       | (308,194       | )          | (697,439       | )          |
| **Net Cash Provided by Financing Activities**                               | ** ** | **4,990,962**  | ** ** | **1,960,564**  | ** ** |
| Net effect of currency translation on cash                                  |       | (6,684         | )          | (35,318        | )          |
| Net Increase (Decrease) in Cash                                             |       | (20,193        | )          | (81,529        | )          |
| **Cash and cash equivalents at Beginning of Year**                          | ** ** | **59,045**     | ** ** | **140,574**    | ** ** |
| **Cash  and cash equivalents at End of Year**                               | ** ** | **$**          | **38,852** | ** **     | **$**      | **59,045** | ** ** |

 

 

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

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**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ DEFICIENCYFOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
| ** **                                         | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | ** **  | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|----------------------------------|------------|----------------------------------|------------|--------------|------------|-----------------|------------|-----------------------------------------------|------------|-------------|------------|
| ** **                                         | ** ** | **Shares**            | ** ** | **Par Value**       | ** ** | **Shares**                       | ** ** | **Par Value**               | ** ** | **(Common)** | ** ** | **(Preferred)** | ** ** | **Compensation**                              | ** ** | **Deficit** | ** ** | **(Loss)** | ** ** | **Total** | ** ** |
| Balance, December 31, 2002                         |       |                  | 50,365,052 |                     |       |                             | $50,364    |                             |       | 677,778      |       |            | $6,778     |                                          |       | $13,858,589 |       |   | $541,889 |   |   |   | $(135,000 | ) |   | $(15,648,510 | ) |   | $(14,078 | ) |   | $ | (1,339,968 | ) |
| Preferred Stock—accretion of dividends        |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | —      |       |   | 38,500 |   |   |   | — |   |   | (38,500 | ) |   | — |   |   | 1— |   |
| Beneficial conversion feature of convertible notes |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | 205,333     |       |   | — |   |   |   | — |   |   | — |   |   | — |   |   | 205,333 |   |
| Conversion of convertible notes                    |       |                  | 500,000    |                     |       |                             | 500        |                             |       | —       |       |            | —     |                                          |       | 59,500      |       |   | — |   |   |   | — |   |   | — |   |   | — |   |   | 60,000 |   |
| Issuance of common  stock:                         |       |                  |       |                     |       |                             |       |                             |       |         |       |            |       |                                          |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| For services                                       |       |                  | 1,541,668  |                     |       |                             | 1,542      |                             |       | —       |       |            | —     |                                          |       | 232,333     |       |   | — |   |   |   | — |   |   | — |   |   | — |   |   | 233,875 |   |
| Exercise of options                                |       |                  | 100,000    |                     |       |                             | 100        |                             |       | —       |       |            | —     |                                          |       | 14,900      |       |   | — |   |   |   | — |   |   | — |   |   | — |   |   | 15,000 |   |
| Detachable warrants granted with convertible debt  |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | 587,693     |       |   | — |   |   |   | — |   |   | — |   |   | — |   |   | 587,693 |   |
| Warrants granted for commissions on financing      |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | 188,217     |       |   | — |   |   |   | — |   |   | — |   |   | — |   |   | 188,217 |   |
| Amortization of deferred compensation              |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | —      |       |   | — |   |   |   | 30,000 |   |   | — |   |   | — |   |   | 30,000 |   |
| Comprehensive  loss:                               |       |                  |       |                     |       |                             |       |                             |       |         |       |            |       |                                          |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                           |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | —      |       |   | — |   |   |   | — |   |   | (3,886,274 | ) |   | — |   |   | (3,886,274 | ) |
| Other comprehensive expense—                  |       |                  |       |                     |       |                             |       |                             |       |         |       |            |       |                                          |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Currency translation adjustment                    |       |                  | —     |                     |       |                             | —     |                             |       | —       |       |            | —     |                                          |       | —      |       |   | — |   |   |   | — |   |   | — |   |   | (35,318 | ) |   | (35,318 | ) |
| Total comprehensive loss                           |       |                  |       |                     |       |                             |       |                             |       |         |       |            |       |                                          |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (3,921,592 | ) |
| 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 | ) |

 

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

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**WORLDWATER CORP. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note (1)   Liquidity**

At December 31, 2004, WorldWater Corp. (the “Company”)had a working capital deficiency of $(2,324,752) and a Stockholders’ deficiencyof $(4,273,641).

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 working capital deficit and stockholders’ deficiency raisessubstantial doubt about the Company’s ability to continue as a going-concern.The Company has historically financed operations and met capital expendituresrequirements primarily through sales of capital stock and, to a lesser extent,research and product revenues and solar system equipment sales. Managementcontinues to raise capital through the sale of common stock and additionalborrowings. In addition, management is continuing to market their productsdomestically and internationally. However, there can be no assurances that thecompany will be successful in these efforts. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis going-concern uncertainty.

The Company needsadditional financing to execute its business plan and to respond to businesscontingencies such as the need to enhance its intellectual property rights,respond to competitive pressures, and develop complementary businesses ornecessary technologies. The Company does not know whether it will be able toraise additional financing on favorable financing terms. If adequate funds arenot available or are not available on acceptable terms, the Company’s abilityto fund its operations and expand sales distribution network, or otherwiserespond to competitive pressures will be significantly limited.

**Note (2)   Natureof the Business**

The Company, doing business as WorldWater &Power Corporation, operates in one business segment focused on applying solarenergy to drive motors traditionally driven by alternating current (AC) byconversion of direct current (DC) power produced by solar photovoltaic cellswith an historical emphasis being water delivery solutions provider. TheCompany has developed proprietary electrical conversion technology and designedand constructed solar-powered water management solutions both internationallyand domestically. The Company has performed solar energy and water managementadvisory consulting services for and served as supplier of implementationequipment to governmental entities worldwide and commercial enterprisesdomestically.

Informationwith respect to the Company’s geographic segments for the years ended December 31,2004 and 2003 is presented below:
| ** **    | ** ** | **Revenue** | ** ** | **Long-lived Assets** | ** ** |
|---------------|------------|-------------|------------|----------------------------|------------|
| ** **    | ** ** | **2004**    | ** ** | **2003**                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States |       | $           | 5,837,224  |                       | $          | 1,243,756 |   | $ | 58,611 |   | $ | 58,712 |   |
| Philippines   |       |        |       | 35,817                     |       |   |   | 6,507 |   |
| Total         |       | $           | 5,837,224  |                       | $          | 1,279,573 |   | $ | 58,611 |   | $ | 65,219 |   |

 

**Note(3)   Summary of Significant Accounting Policies**

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

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**Principlesof Consolidation**

The consolidated financial statements include theaccounts of the Company’s subsidiary, WorldWater (Phils) Inc. and certain otherinactive subsidiaries. All significant intercompany accounts and transactionshave been eliminated in consolidation.

The Company’swholly-owned inactive subsidiaries include:

WorldWater, Inc.,a Delaware Corporation

WorldWaterHoldings Inc., a Delaware Corporation

WorldWaterEast Africa Ltd., a Tanzanian Corporation

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

**Use of Estimates in Preparation ofFinancial Statements**

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, and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.   Estimatesare used for, but not limited to, foreign currency translation, depreciation,taxes, the guaranty liability for the value of Renewable Energy Credits, andthe value of shares issued. Although these estimates are based on management’sbest knowledge of current events and actions that the company may undertake inthe future, actual results may be different from the estimates.

**ForeignCurrency Translation**

Assets and liabilities ofthe Company’s active non-U.S. subsidiary, WorldWater (Phils) Corp., 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.

**FairValue of Financial Instruments**

The carrying value ofmarketable securities, accounts receivable, accounts payable, and accruedexpenses approximate their respective fair values due to their shortmaturities. The fair value of the Company’s notes payable and debt areestimated based on the current rates offered to the Company for debt of thesame remaining maturities and similar terms. See ”Guarantor Agreements” belowfor disclosures regarding the fair value of the of the Company’s exposure forRenewable Energy Credits (“RECs”) which have been accrued on the Balance Sheetas of December 31, 2004.

**Concentration of Credit Risk andSignificant 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, 2004,such receivables were primarily from two customers of solar equipment installedin the United States and were collected during the first quarter of 2005. Onecustomer accounted for approximately 69% of total accounts receivable and thesecond customer accounted for approximately 28% as of December 31, 2004.The Company does not require collateral or other security against accountsreceivable; however, it maintains reserves for potential credit lossesand such losses have historically been withinmanagement’s expectations. The Company had two customers which accounted for96% and 87% of revenue for the years ended December 31, 2004 and 2003,respectively.

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**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 accounting requirements for the initial recognition ofguarantees are applicable on a prospective basis for guarantees issued ormodified after December 31, 2002. The following is a summary of theCompany’s agreements that have been determined to fall within the scope of FIN No. 45.

*Renewable EnergyCredit Guarantee (RECs)*

Under the equipment salescontract for the 267,840 kW(dc) solar-driven irrigation and energy system theCompany has guaranteed the price of certain Renewable Energy Credits (RECs) tobe generated by the installation during the first seven years of operation. Basedon current market indications the Company estimates its guarantee obligationmay result in a loss of $393,617 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 has recorded the estimated loss, $393,617, as areduction of Equipment Sales revenue in the year ended December 31, 2004. Adjustmentsto the estimated guarantee obligation will be recognized as an adjustment ofrevenue over the seven year term of the guarantee obligation.

*Product Warranty*

TheCompany provides for the estimated cost of product warranties at the timerevenue is recognized.. Since the Company has a limited operating history,adjustments in future periods may be required as its installations mature. Thefollowing table summarizes the activity regarding the Company’s warrantyaccrual:
| Balance,  December 31, 2002           |   | $      | 5,868   |   |
|--------------------------------------------|--------|--------|---------|--------|
| Accruals for warranties issued during 2003 |   | 21,338 |    |
| Utilization of warranty reserve            |   | — |    |
| Balance,  December 31, 2003           |   | 27,206 |    |
| Accruals for warranties issued during 2004 |   | 79,794 |    |
| Utilization of warranty reserve            |   | — |    |
| Balance,  December 31, 2004           |   | $      | 107,000 |   |

 

**ComprehensiveLoss**

Statement of Financial Accounting Standards (SFAS) No. 130,“Reporting Comprehensive Income” establishes standards for reporting andpresentation of comprehensive loss and its components in a full set offinancial statements. Comprehensive loss consists of net loss and foreigncurrency translation and is presented in the consolidated statements ofstockholders’ deficiency. SFAS No.130 requires only additional disclosures inthe financial statements; it does not affect the Company’s financial positionor results of operations.

**RevenueRecognition**

The Company derives revenue primarily from the saleand installation of its solar pumping systems and solar energy products.Revenues are also derived to a lesser extent from government consulting 

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projects and from grant revenuereceived. Revenues are recorded when persuasive evidence of an arrangementexists, the price is fixed and determinable, delivery has occurred or serviceshave been rendered and when collectibility is reasonably assured.

Revenues from time and material service arrangementsare recognized using the percentage of completion method measured by labor andother costs incurred to total estimated labor and other costs required.Estimates of costs to complete are reviewed periodically and modified asrequired. Provisions are made for the full amount of anticipated losses, ifany, on all contracts in the period in which the losses are first determined.Changes in estimates are also reflected in the period they become known.

Revenues from equipment sales and installationcontracts containing acceptance provisions are recognized upon customeracceptance. Deferred contracts cost represent costs incurred on uncompletedcontracts. Cash payments received in advance of product or service revenue arerecorded as customer deposits payable. Some contracts have specifiedidentifiable multiple elements whereby upon completion of that stage ormilestone and customer acceptance is received, the applicable revenue isrecognized.

Revenues from consultingprojects are recognized as services are rendered. Grant revenues on the basisof entitlement periods are recorded as revenue when entitlement occurs.

**Allowancefor Doubtful Accounts**

The Company maintainsallowances for doubtful accounts for estimated losses resulting from the inabilityof its customers to make required payments. If the financial condition of itscustomers were to deteriorate, such that their ability to make payments wasimpaired, additional allowances could be required.

**Accountingfor Income Taxes**

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

**Cashand Cash Equivalents**

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. Asof December 31, 2003 and 2004, the Company had no net inventory on itsbalance sheet.

**Equipment and LeaseholdImprovements**

Equipment and leasehold improvements are carried atcost, less accumulated depreciation and amortization are depreciated andamortization 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:leasehold improvements, the shorter of 7 years or the life of the lease. Upon 

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retirement or disposal,the asset cost and related accumulated depreciation are removed from theaccounts and the net amount, less any proceeds, is charged or credited toincome.

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

**Researchand Development**

Research and developmentcosts are expensed as incurred.

**AdvertisingCosts**

Advertising costs areexpensed as incurred and were approximately $85,106 and $16,496 for the yearsending December 31, 2004 and 2003, respectively.

**Stock-BasedCompensation**

The Company granted options for a fixed number ofshares to directors, officers, employees and consultants with the exerciseprice equal to the fair value of shares at the date of grant. The Companyaccounts for stock option grants in accordance with APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, and, accordingly recognizes no compensationexpense for the stock option grants. The Company has adopted the disclosureprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation”,which permits entities to provide pro forma net income (loss) disclosure forstock-based compensation as if the fair-value method had been applied.

Accordingly,no compensation cost has been recognized for the stock option plans because theexercise price of employee stock options equals the market prices of theunderlying stock on the date of grant. Had compensation cost been determinedbased on the fair value at the grant date for awards in the years ended December 31,2004 and 2003,respectively, consistent with the provisions of SFAS No. 123,the Company’s net loss and loss per share would have been reduced to the proforma amounts indicated below.
| ** **                                                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net loss, as  reported                                                                                                                  |       | $        | (8,056,694 | )        | $          | (3,924,774 | ) |
| 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 |       | (874,076 | )          | (43,407  | )          |
| Pro forma net  loss                                                                                                                     |       | $        | (8,900,770 | )        | $          | (3,938,181 | ) |
| Loss per share:                                                                                                                         |       |     |       |     |       |
| Basic and Diluted—as reported                                                                                                      |       | $        | (0.12      | )        | $          | (0.08 | ) |
| Basic and Diluted—pro  forma                                                                                                       |       | $        | (0.14      | )        | $          | (0.08 | ) |

 

Transactions with non-employeesand consultants, in which goods or services are considered received for theissuance for equity instruments, are accounted for under the fair value methoddefined in SFAS No. 123.

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The Company used theBlack-Scholes model to value the stock options that it granted. The assumptionsthat the Company used to estimate the fair value of the options and theweighted-average estimated fair value of an option on the date of the grant areas follows:
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Term, years                                               |       | 10       |       | 10       |       |
| Volatility,  average                                      |       | 60       | %          | 45       | %          |
| Risk-free  interest rate, zero coupon U.S. Treasury Notes |       | 4        | %          | 3        | %          |
| Dividend yield                                            |       | 0        | %          | 0        | %          |
| Weighted-average fair  value per option                   |       | $0.19    |       | $0.15    |       |

 

Equity Security Transactions

The Board of Directors has established the fair valueof common stock based upon quoted market prices existing at the dates suchequity transactions occurred.

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 31,2004 and 2003 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, 2004:
| **Potential Issuable Shares** | ** ** | ** ** | ** ** | **As of December 31, 2004** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------|------------|
| Warrants                                |       |       | 31,164,631 |                                            |       |
| Debt conversion  rights                 |       |       | 24,560,359 |                                            |       |
| Stock options                           |       |       | 10,015,325 |                                            |       |
| Stock Purchase  Agreement rights        |       |       | 6,500,000  |                                            |       |
| Preferred stock  conversion rights      |       |       | 611,111    |                                            |       |
| Total                                   |       |       | 72,851,426 |                                            |       |

 

Recent Accounting Pronouncements

In December  2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29”. Theguidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions,is based on the principle that exchanges of nonmonetary assets should bemeasured based on the fair value of the assets exchanged. The guidance in thatOpinion, however, included certain exceptions to that principle. This Statementamends Opinion 29 to eliminate the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. Thishas no impact on the Company.

In December 2004, the FASB issued SFAS No. 123(R),“Share-Based Payment,” which is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation”. SFAS 123(R) requires that the compensationcost relating to share-based payment transactions be recognized in financialstatements. The compensation cost will be measured based on the fair value ofthe equity or liability instruments issued. 

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The Statement is effectiveas of the beginning of the first interim or annual period beginning after December 15,2005 for public entities that file as small business issuers, such as theCompany.

In September 2004, the FASB’s Emerging Issue TaskForce (“EITF”) reached a consensus on EITF Issue No. 04-08, the Effect ofContingently Convertible Instruments on Diluted Earnings per Share. The taskforce reached a conclusion that contingently convertible instruments should beincluded in diluted earnings per share computations, if dilutive, regardless ofwhether the market price trigger or other contingent feature has been met.

In April 2004, the Emerging Issues Task Forceissued Statement No. 03-06 (“EITF 03-06”), “Participating Securities andthe Two-Class Method Under FASB Statement No. 128, Earnings PerShare.” EITF 03-06 addresses a number of questions regarding the computation ofearnings per share by companies that have issued securities other than commonstock that contractually entitle the holder to participate in dividends andearnings of the company when, and if, it declares dividends on its commonstock. The issue also provides further guidance in applying the two-classmethod of calculating earnings per share, clarifying what constitutes aparticipating security and how to apply the two-class method of computingearnings per share once it is determined that a security is participating,including how to allocate undistributed earnings to such a security. EITF 03-06is effective for fiscal periods beginning after March 31, 2004. Theadoption of this statement did not have a material impact on the Company’sfinancial position or results of operations.

In December, 2003, the Staff of the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (SAB104), “Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition inFinancial Statements.” SAB 104’s primary purpose is to rescind the accountingguidance contained in SAB 101 related to multiple-element revenue arrangementsthat was superseded as a result of the issuance of EITF 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables.” Additionally, SAB 104rescinds the SEC’s related “Revenue Recognition in Financial StatementsFrequently Asked Questions and Answers” issued with SAB 101 that had beencodified in SEC Topic 13, “Revenue Recognition.” While the wording of SAB 104has changed to reflect the issuance of EITF 00-21, the revenue recognitionprinciples of SAB 101 remain largely unchanged by the issuance of SAB 104,which was effective upon issuance. The adoption of SAB 104 did not have amaterial effect on the Company’s financial position or results of operations.

In May , 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”. SFAS 150 establishes standards for classifying andmeasuring as liabilities certain financial instruments that embody obligationsof the issuer and have characteristics of both liabilities and equity. SFAS 150represents a significant change in practice in the accounting for a number of financialinstruments; including mandatory redeemable equity instruments and certainequity derivatives that frequently are used in connection with share repurchaseprograms. The Company currently does not have any such instruments. SFAS 150 iseffective for all financial instruments created or modified after May 31,2003. There was no impact from the adoption of this statement.

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.SFAS No. 149 clarifies under what circumstances a contract with an initialnet investment meets the characteristics of a derivative as discussed inStatement No. 133. It also specifies when a derivative contains afinancing component that warrants special reporting in the ConsolidatedStatement of Cash Flows. SFAS No. 149 amends certain other existingpronouncements in order to improve consistency in reporting these types oftransactions. The new guidance is effective for contracts entered into ormodified after June 30, 2003, and for hedging relationships designatedafter June 30, 2003. The adoption of this standard did not have a materialimpact on the Company’s consolidated financial statements.

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In January 2003, the FASB issued Interpretation (“FIN”)No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) and, in December 2003,issued a revision to that interpretation (“FIN 46R”). FIN 46R replaces FIN46 and addresses consolidation by business enterprises of variable interestentities that possess certain characteristics. A Variable Interest Entity (“VIE”)is defined as (a) an ownership, contractual or monetary interest in anentity where the ability to influence financial decisions is not proportionalto the investment interest, or (b) an entity lacking the invested capitalsufficient to fund future activities without the support of a third party. FIN46R establishes standards for determining under what circumstances VIEs shouldbe consolidated with their primary beneficiary, including those to which theusual condition for consolidation does not apply. The adoption of FIN 46R didnot have a material impact on the Company’s financial position or results ofoperations.

Reclassifications

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

**Note(4)   Equipment and Leasehold Improvements**

Equipmentand leasehold improvements consist of the following at December 31, 2004and 2003:
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Office furniture  and equipment                 |       | $        | 115,225    |     | $          | 106,158 |   |
| Vehicles                                        |       | 92,307   |       | 99,956   |       |
| Computers                                       |       | 59,221   |       | 40,278   |       |
| Test equipment  and assembly fixtures           |       | 38,334   |       | 34,140   |       |
| Leasehold  improvements                         |       | 8,123    |       | 8,123    |       |
|                                            |       | 313,210  |       | 288,655  |       |
| Less accumulated  depreciation and amortization |       | (254,599 | )          | (223,436 | )          |
| Equipment and leasehold  improvements, net      |       | $        | 58,611     |     | $          | 65,219 |   |

 

**Note(5)   Accounts Payable and Accrued Expenses**

Accountspayable and accrued expenses consist of the following at December 31, 2004and 2003:
| ** **                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Accounts payable—other             |       | $        | 805,984    |     | $          | 745,986 |   |
| Accounts payable—equipment  sales  |       | 627,081  |       | —   |       |
| Accrued salaries                        |       | 475,478  |       | 447,880  |       |
| Accrued interest                        |       | 402,467  |       | 266,123  |       |
| Accrued warranty  reserve               |       | 107,000  |       | 27,206   |       |
| Accrued sales  commission               |       | 88,023   |       | 105,000  |       |
| Accrued payroll  taxes and withholdings |       | 41,792   |       | 80,466   |       |
| Accrued  consulting                     |       | —   |       | 24,000   |       |
| Other accrued  expenses                 |       | 10,310   |       | 18,491   |       |
| Total                                   |       | $        | 2,558,135  |     | $          | 1,715,152 |   |

 

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**Note(6)   Securities Purchase Agreement**

In April 2004, the Company entered into asecurities purchase Agreement (SPA) with SBI Brightline VIII LLC (“Purchaser”)calling for the sale of common stock and issuance of warrants as shown in thetable 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 week period leading up to April 1, 2004, the effective date ofthe SPA was generally greater than the price per share for the Tranche No. 1shares that were sold under the SPA; however, the average closing price during March 2004was slightly more than $0.20 per share and the average share price of all ofthe shares to be sold under the SPA is slightly greater than $0.21 per share.

The SPA expired on December 31, 2004. The Companyhas permitted the Purchaser to purchase shares under the terms of the expiredSPA in the first quarter of 2005. The Purchaser is not obligated to purchasenor is the Company obligated to sell the remaining stock of third Tranche. TheCompany cannot make any assurances that the remaining stock of the thirdTranche will be acquired by the Purchaser.

In the first quarter 2005the Company issued and sold to the Purchaser 740,741 shares of common stock ata price of $0.27 per share as the initial installment of the third Trancheresulting in equity proceeds of $200,000. In conjunction with the sale of thestock, the Company issued 222,222 unregistered warrants at a price of $0.27 pershare included in the third Tranche shown above.

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**Note (7)   Long-Term Debt and Notes Payable**

Long-term debt(including convertible debt) and notes payable consist of the followinguncollateralized loans outstanding at December 31, 2004 and 2003: 
|                           | ** ** | **Holders**                      | ** ** | **Stated**       | ** ** | **Effective**      | ** ** | ** **                   | ** ** | **Interest  Payment  At Option  of Holder—  Common** | ** ** | **Conversion  Price of** | ** ** | **Potential  Number of**                             | ** ** | **Beneficial  Conversion  Expense** | ** **                      | **As of December 31, 2004** | ** ** | **As of December 31, 2003** | ** ** |
|---------------------------|------------|----------------------------------|------------|------------------|------------|--------------------|------------|------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------|---------------------------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| **Maturity Date**    | ** ** | ** **                       | ** ** | **of  Loans**    | ** ** | **Interest  Rate** | ** ** | **Interest  Rate**           | ** ** | **Interest  Period**                                                | ** ** | **Stock  or Cash**       | ** ** | **Common  Stock**                                         | ** ** | **Shares Upon  Conversion**    | ** **                      | **Recorded  in 2004**                      | ** ** | **Face  Amount**                                | ** ** | **Net Amount  Outstanding** | ** ** | **Face  Amount** | ** ** | **Net Amount  Outstanding** | ** ** |
| October 1, 2005           |       | Foreign                          |       | 15%              |       | 15%                |       | Monthly                      |       |                                                                | Yes        |                          |       | 30%  Discount to                                          |       |                                | 10,000,000                      |                                            |       |                                            | $          | 428,571 |   |   | 1,000,000 |   |   | 1,000,000 |   |   | — |   |   | — |   |   |
|                           |       | Credit  Unions                   |       |             |       |               |       |                         |       |                                                                |       |                          |       | Market  with Cap  of $0.40 and  floor of $0.10  per share |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2006                      |       | Funds &                      |       | 10%              |       | 19-30%             |       | Semi-Annual                  |       |                                                                | Yes        |                          |       | $0.150                                                    |       |                                | 8,133,333                       |                                            |       |                                            | —     |   |   | 1,220,000 |   |   | 932,164 |   |   | 2,115,000 |   |   | 1,549,454 |   |   |
|                      |       | Qualified  Individual  Investors |       |             |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2007                      |       | Funds &                      |       | 10%              |       | 19-30%             |       | Semi-Annual                  |       |                                                                | Yes        |                          |       | $0.150                                                    |       |                                | 6,083,667                       |                                            |       |                                            | 427,167    |   |   | 912,550 |   |   | 648,223 |   |   | — |   |   | — |   |   |
|                           |       | Qualified  Individual  Investors |       |             |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| On Demand                 |       | Qualified                        |       | 0% to 10%        |       | 0% to 15%          |       | Majority                     |       |                                                                | No         |                          |       | —                                                    |       |                                | —                          |                                            |       |                                            | —     |   |   | 83,000 |   |   | $ | 83,000 |   |   | $ | 222,000 |   |   | $ | 222,000 |   |   |
|                      |       | Individuals                      |       |             |       |               |       | Monthly                      |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| On Demand                 |       | Qualified                        |       | 10%              |       | 10%                |       | Maturity                     |       |                                                                | No         |                          |       | $0.400                                                    |       |                                | 132,500                         |                                            |       |                                            | —     |   |   | 53,000 |   |   | 53,000 |   |   | 53,000 |   |   | 53,000 |   |   |
|                           |       | Individual  Investors            |       |             |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stated Maturity Date 1997 |       | Qualified                        |       | 8%               |       | 8%                 |       | Maturity                     |       |                                                                | No         |                          |       | $0.400                                                    |       |                                | 125,000                         |                                            |       |                                            | —     |   |   | 50,000 |   |   | 50,000 |   |   | 50,000 |   |   | 50,000 |   |   |
|                      |       | Individual  Investor             |       |             |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Not Stated                |       | Qualified                        |       | Not  stated      |       | 4.50%              |       | Not  stated                  |       |                                                                | N/A        |                          |       | $0.495                                                    |       |                                | 85,859                          |                                            |       |                                            | —     |   |   | 42,500 |   |   | 42,500 |   |   | 52,500 |   |   | 52,500 |   |   |
|                           |       | Individual  Investors            |       | imputed  at 4.5% |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2008                      |       | PNC  Bank,                       |       | 8%               |       |               |       | Monthly                      |       |                                                                | No         |                          |       | N/A                                                       |       |                                | N/A                             |                                            |       |                                            | —     |   |   | 32,353 |   |   | 32,353 |   |   | 40,449 |   |   | 40,449 |   |   |
|                      |       | Guarantee  by  Chairman          |       |             |       |               |       | principal  payments  of $813 |       |                                                                |       |                          |       |                                                      |       |                                |                            |                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                           |       |                             |       |             |       |               |       |                         |       |                                                                |       |                          |       | Total                                                     |       |                                | 24,560,359                      |                                            |       |                                            | $          | 855,738 |   |   | $ | 3,393,403 |   |   | 2,841,240 |   |   | $ | 2,532,949 |   |   | 1,967,403 |   |   |
|                      |       |                             |       |             |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                | Less Current  Maturities        |                                            |       | 1,235,714                                       |       |   |   |   |   | 384,901 |   |   |
|                           |       |                             |       |             |       |               |       |                         |       |                                                                |       |                          |       |                                                      |       |                                | Total Long-term notes and  Debt |                                            |       | $                                               | 1,605,526  |   |   |   |   |   | $ | 1,582,502 |   |   |
|                           |            |                                  |            |                  |            |                    |            |                              |            |                                                                     |            |                               |            |                                                           |            |                                     |                                 |                                                 |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In conjunction with the SPA described in Note 6, theCompany entered into a term loan with HIT Credit Union and Hong Kong LeagueCentral Credit Union (the “Lenders”) and SBI Advisors, LLC as agent for thelenders for $800,000. A financing fee of $80,000 was paid to the Lenders. Duringthe third quarter, the term loan was amended to allow for borrowings up to$1,000,000 and amounts borrowed to be repaid and re-borrowed from time to time,the interest rate was lowered from 18% to 15% and the maturity date wasextended to October 31, 2005. In December 2004, the term loan wasamended to allow for the Company, at its sole option provided the shares issuedare tradable, to convert a portion or all of the term loan outstanding intocommon stock of the Company at a discount of 30% to then current market priceof the stock, provided the conversion price cannot be below $0.10 per share andhigher than $0.40 per share. As a result of the addition of the beneficialconversion feature to the terms of the term loan, the Company recordedbeneficial conversion expense of $428,571 in the fourth quarter of 2004.

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 this transaction and the associatedamendments. Compensation expense of $138,000 was recorded in 2004 as a resultof the issuance of these warrants.

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Thecurrent maturities of long-term debt are:
| 2005  |   | $       | 1,235,714 |   |
|-------|--------|---------|-----------|--------|
| 2006  |   | 939,882 |      |
| 2007  |   | 656,990 |      |
| 2008  |   | 8,654   |      |
| Total |   | $       | 2,841,240 |   |

 

**Note (8)   Related Party Transactions**

*Notes Payable*

Below are notes payableowed to directors, officers and employees of the Company as of December 31,2004 and 2003:
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                    |       | $        | 98,706     |     | $          | 185,894 |   |
| Officers and  employees                      |       | 115,013  |       | 159,703  |       |
| Total                                        |       | 213,719  |       | 345,597  |       |
| Less current  maturities                     |       | (123,013 | )          | (262,703 | )          |
| Total long term note  payable, related party |       | $        | 90,706     |     | $          | 82,894 |   |

 

Notes payable to directorsincludes a three-year convertible loan dated January 30, 2003, face valueof $100,000 which bears interest at 10% per annum. The loan is convertible atthe option of the holder at $0.15 per common share for a total of 666,667shares. All other notes payable to directors and employees are due on demandand 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 $39,000for 2003 and $36,000 in 2004 plus utilities and maintenance, see Commitmentsnote.

The Chairman and Chief Executive Officer hasguaranteed $32,353borrowed from a bank under a note issued in 2001.

Included in accrued salescommissions as of December 31, 2004 is $ 46,919 owed the Chairman andChief Executive Officer under a management services fee agreement dated April 1,1991 expiring 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.

**Note (9)   Convertible Preferred Stock**

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

In 2000, the Company issued 611,111 shares of Series B7% three-year Convertible Preferred Stock at $0.90 per share. The Series BPreferred Stock proceeds were intended to be used by the Company for theinitial operating requirements of WorldWater (Phils) Inc., the Philippinesubsidiary of the Company. The 

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conversion privileges,which expired September 2003, were either into 10% of WorldWater(Phils)Inc. or into 611,111 common 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 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.

**Note (10)   Common Stock Transactions**

Commonstock transactions during the twelve months ended December 31, 2004consisted of the following:
| ** **                                                                                                                                                                              | ** ** | **Fiscal 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **Shares**           | ** ** | **Price Per  Share** | ** ** | **Addition to  Common  Stock Par  Value** | ** ** | **Addition  to Paid-In  Capital** | ** ** | **Expense  Recorded** | ** ** |
| Shares Issued and  Outstanding December 31, 2003                                                                                                                                   |       | 52,506,720           |       | $0.29 |   |   | $ | 52,507 |   |   |   |   |   |   |
| Shares sold under  Stock Purchase Agreement                                                                                                                                             |       | 12,000,000           |       | 0.17-0.22 |   |   | 12,000 |   |   | 2,278,000 |   |   |   |
| Conversion of  Convertible Loans totaling $1,145,000                                                                                                                                    |       | 9,699,999            |       | 0.12-0.15 |   |   | 9,700 |   |   | 1,335,300 |   |   |   |
| Warrants  exercised                                                                                                                                                                     |       | 2,095,667            |       | 0.10-0.30 |   |   | 2,096 |   |   | 354,254 |   |   |   |
| Shares issued as  compensation for services provided including investor relations, political  advisory, financing assistance and repayment loans and accounts payable  totaling $33,000 |       | 1,506,357            |       | 0.15-0.44 |   |   | 1506 |   |   | 323,074 |   | $ | 291,580 |   |
| Restricted shares  sold in private placement                                                                                                                                            |       | 1,000,000            |       | 0.15 |   |   | 1,000 |   |   | 149,000 |   |   |   |
| Stock options  exercised                                                                                                                                                                |       | 635,836              |       | 0.15-0.34 |   |   | 635 |   |   | 107,017 |   |   |   |
| Shares issued in  lieu of payment of cash for interest                                                                                                                                  |       | 261,206              |       | 0.23-0.33 |   |   | 261 |   |   | 71,847 |   |   |   |
| Conversion of  preferred stock                                                                                                                                                          |       | 66,667               |       | 0.90 |   |   | 67 |   |   | 59,933 |   |   |   |
| Shares issued in  lieu of payment of preferred dividends                                                                                                                                |       | 61,889               |       | 0.20 |   |   | 62 |   |   | 12538 |   |   |   |
| Change for year  ended December 31, 2004                                                                                                                                           |       | 27,327,621           |       | 0.17 |   |   | 27,327 |   |   | 4,690,963 |   | 291,580 |   |
| Shares Outstanding  December 31, 2004                                                                                                                                              |       | 79,834,341           |       | $0.25 |   |   | $ | 79,834 |   |   |   |   | $ | 291,580 |   |

 

**Note (11)   Warrant Transactions**

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 60.73%; risk free interest rate of 3.14% and an averageterm of 4.72 years. The relative fair value of the warrants resulted innon-cash expenses charges of $1,521,445 and $30,000 for the year ended December 31,2004 and 2003.

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Warranttransactions consisted of the following during the twelve months ended December 31,2004: 
| ** **                                                                                                    | ** ** | **Exercisable** | ** ** | **Stock Price** | ** ** | **Addition to**          | ** ** | **Expense**  | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|-------------------------------|------------|--------------|------------|
| ** **                                                                                                    | ** ** | **Warrants**    | ** ** | **Range**            | ** ** | **Paid In Capital** | ** ** | **Recorded** | ** ** |
| Warrants  Outstanding As of December 31, 2003                                                            |       | 17,978,999      |       | $0.10 to $0.50       |       |                          |       |         |       |   |   |
| Detachable  warrants issued in conjunction with obtaining $1,262,550 in convertible notes                     |       | 5,638,667       |       | 0.30                 |       |                          | $          | 593,900      |       |   |   |   |
| Detachable  warrants issued in conjunction with the issuance of $2,290,000 of registered  common stock shares |       | 3,600,000       |       | 0.19                 |       |                          | 481,444    |         |       | 481,444 |   |
| Warrants issued  in consideration for business development services in the Peoples Republic of  China         |       | 3,000,000       |       | 0.40                 |       |                          | 270,000    |         |       | 270,000 |   |
| Warrants issued  in consideration for services rendered in raising financing on behalf of the  Corporation    |       | 2,737,632       |       | 0.15  to 0.33        |       |                          | 643,601    |         |       | 643,601 |   |
| Detachable  warrants issued in conjunction with the issuance of $150,000 of restricted  common stock shares   |       | 670,000         |       | 0.20                 |       |                          | 80,400     |         |       | $ | 80,400 |   |
| Warrants issued  in consideration for extentsions of short-term loans by a Director and  Shareholders         |       | 525,000         |       | 0.15                 |       |                          | 46,000     |         |       | 46,000 |   |
| Exercise of  Warrants (capital addition included in the Stock Transactions Note)                              |       | (2,095,667      | )          | 0.15  to 0.30        |       |                          |       |         |       |   |   |
| Expiration of  Outstanding Warrants                                                                           |       | (890,000        | )          |                 |       |                          |       |         |       |   |   |
|                                                                                                          |       | 13,185,632      |       |                 |       |                          | $          | 2,115,345    |       |   | $ | 1,521,445 |   |
| Warrants Outstanding As  of December 31, 2004                                                            |       | 31,164,631      |       | $0.15 to $0.50       |       |                          |       |         |       |   |   |

 

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Warrantsoutstanding expire as follows:
| ** ** | ** ** | **Warrants** | ** ** | **Strike**   | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| **Year**   | ** ** | **Expiring** | ** ** | **Price**    | ** ** |
| 2005       |       | 1,118,333    |       | $0.15 - 0.25 |       |
| 2006       |       | 1,313,000    |       | 0.15 - 0.30  |       |
| 2007       |       | 4,266,000    |       | 0.15 - 0.50  |       |
| 2008       |       | 9,680,999    |       | 0.15 - 0.30  |       |
| 2009       |       | 7,986,299    |       | 0.15 - 0.30  |       |
| 2010       |       | 6,800,000    |       | 0.17 - 0.40  |       |
|       |       | 31,164,631   |       |         |       |

 

**Note (12)   Income Taxes**

Incometax benefit for the years ended December 31, 2004 and 2003 were asfollows:
| ** **                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Federal:                                                        |       |     |       |     |       |
| Current                                                         |       | $        | —     |     | $          | — |   |
| Deferred                                                        |       | —   |       | —   |       |
|                                                            |       | $        | —     |     | $          | — |   |
| State:                                                          |       |     |       |     |       |
| Current                                                         |       | $        | —     |     | $          | — |   |
| Deferred                                                        |       | —   |       | —   |       |
| Benefit from sale of net operating losses and  research credits |       | 219,381  |       | 0        |       |
|                                                            |       | $        | 219,381    |     | $          | — |   |

 

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, 2004 and 2003:
| Income tax  benefit at US federal statutory tax rate                  |   | $         | (2,676,000 | )         | $      | (1,094,605 | )      |
|-----------------------------------------------------------------------|--------|-----------|------------|-----------|--------|------------|--------|
| State income  taxes, net of federal tax effect                        |   | (281,900  | )          | (198,000  | )      |
| Permanent items                                                       |   | 1,062,296 |       | 142,000   |   |
| Change in  deferral tax asset valuation allowance                     |   | 1,895,604 |       | 1,150,605 |   |
| Benefit from sale  of State net operating losses and research credits |   | 219,381   |       | —    |   |
| Provision for income tax                                              |   | $         | 219,381    |      | $      | —     |   |

 

As of December 31,2004, the Company had federal and state net operating loss carryforwardstotaling approximately $20,991,800 and $1,934,000, respectively, available toreduce future taxable income and tax liabilities which expire at various datesbetween 2005 and 2024. In addition, as of December 31, 2004, the Companyhad federal and state research and development tax credit carryforwards ofapproximately $180,600 and $20,000, respectively, available to reduce futuretaxable income and tax liabilities which expire at various dates between 2009and 2024. Under provisions of the Internal Revenue Code, substantial changes inthe Company’s ownership may limit the amount of net operating loss 

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carryforwards and research and development creditcarryforwards, which can be used in future years. The carryforwards will expireas follows:
| **Year  Expiring** | ** **  | **Net Operating Loss  Carryforwards** | ** ** | **Research and Development  Tax Credits** | ** **  |
|--------------------|-------------|-------------------------------------------------|------------|----------------------------------------------------------|-------------|
| ** **         | **Federal** | ** **                                      | **State**  | ** **                                               | **Federal** | ** ** | **State** | ** ** |
| 2005               |        | $                                               | 94,500     |                                                     | —      |   | — |   | — |   |
| 2006               |        | 402,700                                         |       | —                                                   |        | — |   | — |   |
| 2007               |        | 251,100                                         |       | —                                                   |        | — |   | — |   |
| 2008               |        | 641,300                                         |       | —                                                   |        | — |   | — |   |
| 2009               |        | 887,900                                         |       | —                                                   |        | 19,600 |   | — |   |
| 2010               |        | 912,400                                         |       | 24,000                                                   |        | 15,200 |   | — |   |
| 2011               |        | 981,200                                         |       | 1,910,000                                                |        | 15,400 |   | 20,000 |   |
| 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 |   | — |   |
|               |        | $20,991,800                                     |       | $                                                        | 1,934,000   |   | $ | 180,600 |   | $ | 20,000 |   |
|                    |             |                                                 |            |                                                          |             |  |  |  |  |  |  |  |  |

 

Managementof the Company has evaluated the positive and negative evidence bearing uponthe realizability of its deferred tax assets. Management has considered the Company’shistory of losses and, in accordance with the applicable accounting standards,has fully reserved the deferred tax asset. Deferred tax assets consist of thefollowing at December 31, 2004 and 2003:
| Gross deferred tax  assets                 |   |       |      |       |   |
|--------------------------------------------|--------|------------|-----------|------------|--------|
| Net operating loss carryforwards           |   | $          | 7,173,000 |       | $      | 5,266,343 |   |
| Warranty reserve                           |   | 64,600     |      | 32,753     |   |
| Accrued expenses and deferred compensation |   | 168,000    |      | 210,900    |   |
|                                       |   | 7,405,600  |      | 5,509,996  |   |
| Gross deferred tax  liabilities            |   |       |      |       |   |
| Deferred tax valuation allowance           |   | (7,405,600 | )         | (5,509,996 | )      |
|                                       |   | $          | —    |       | $      | — |   |

 

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 2004, theCompany submitted applications to the New Jersey Economic Development Authority(the “EDA”) to participate in the Program for the years 2002 and 2003 and theapplications were approved. The EDA then issued certificates certifying theCompany’s eligibility to participate in the Program for these years.

The program requires thata purchaser pay at least 75% of the amount of the surrendered tax benefit.During 2004 the Company sold approximately $1,200,000 and $1,450,000 of its2003 and 2002 New Jersey State net operating loss carryforwards and $6,020 and$14,418 of its 2003 and 2002 research and development tax credits and recognizeda tax benefit of $219,381. The Company did not participate in the program in2003.

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**Note(13)   Stock-Based Compensation Plans**

**IncentiveStock 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 purpose of the 1999 Plan is toencourage directors, officers, employees and consultants who render services,by providing opportunities to purchase stock of the Company. The 1999 Planauthorizes the issuance of incentive stock options and nonqualified stockoptions. Options other than those granted to consultants expire ten years fromthe date of issuance. Options granted to consultants expire three years fromthe date of grant. Incentive stock options granted generally vest as follows:grants to directors and consultants—immediately upon grant; grants to officers—generallyover a define term up to three years; and grants to employees—over thesucceeding twelve months.

Thefollowing is a summary of stock option activity:
| ** **                       | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|----------------------------------|------------|------------|------------|-------------------------------------------|------------|
| Balance,  December 31, 2002 |       | 5,742,371  |       |                                      | $          | 0.24 |   |   |
| Granted                          |       | 1,324,386  |       |                                      | 0.15       |   |   |
| Cancelled                        |       | (835,850   | )          |                                      | 0.15       |   |   |
| Exercised                        |       | (100,000   | )          |                                      | 0.30       |   |   |
| 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, 2003 |       | 10,015,325 |       |                                      | $          | 0.25 |   |   |

 

Summarizedinformation about stock options outstanding is as follows:
| **Range of  Exercise Prices** | ** ** | **Options  Outstanding  as of  December 31, 2004** | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Average  Exercise  Price** | ** ** | **Options  Exercisable  Options as of  December 31, 2004** | ** ** | **Average  Exercise  Price of  Exercisable  Options** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| $0.15-0.19                              |       |                                                              | 4,119,640  |                                      |       |                         | 7.3 yrs.   |                                                                           |       | $0.15                                                      |       |   | 3,986,306 |   |   |   | $ | 0.15 |   |   |
| 0.20-0.30                               |       |                                                              | 3,907,485  |                                      |       |                         | 9.2        |                                                                           |       | 0.26                                                       |       |   | 1,985,547 |   |   |   | 0.26 |   |   |
| 0.31-0.40                               |       |                                                              | 1,808,900  |                                      |       |                         | 5.3        |                                                                           |       | 0.34                                                       |       |   | 1,551,731 |   |   |   | 0.34 |   |   |
| 0.41-0.60                               |       |                                                              | 179,300    |                                      |       |                         | 1.8        |                                                                           |       | 0.51                                                       |       |   | 179,300 |   |   |   | 0.51 |   |   |
| Total                                   |       |                                                              | 10,015,325 |                                      |       |                         |       |                                                                           |       | Total                                                      |       |   | 7,702,884 |   |   |   |   |   |   |

 

In 2004, in accordancewith APB Opinion No. 25, the Company did not recognize compensationexpense for options granted under the 1999 Plan. SFAS No. 123, “Accountingfor Stock-Based Compensation” as amended in 2004, requires the Company todetermine the fair market value of all awards of stock based compensation usingan option price model and to disclose pro-forma net income as if the resultingstock-based compensation amounts were recorded. Refer to the above SignificantAccounting Policies note for the required pro-forma information.

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**RestrictedStock Agreement**

In 2002 the Company granted 1,000,000 shares ofrestricted common stock for the benefit of its Chairman and Chief ExecutiveOfficer. Compensation expense for the grant was based on the market price($0.15) for the common stock and is being amortized on a straight-line basisover the five year vesting period based on continuous service. The recipienthas the right to vote all shares subject to the grant, whether or not theshares have vested.

The balance of unearnedcompensation related to the restricted shares as of December 31, 2004 was$75,000. Compensation expense recognized in each of the years ended December 31,2003 and 2004 was $30,000, respectively.

**Note (14)   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, 2004, theCompany has not made any contributions to the plan.

**Note (15)   Commitments**

*Operating Leases*

The Company’s executiveoffice, research and development facility is housed in a leased 12,000 squarefoot site located at 55 Route 31 South, Pennington, New Jersey. The operatinglease expires June 25, 2007. In addition the Company has leased officespace in Foster City, California for its California sales activities. Theoperating lease expires in May 31, 2006 . The Company also uses a secondleased facility in Hopewell, New Jersey for conferences, meetings anddemonstrations of its products. This facility is leased from Quentin T. Kelly,the Chairman and Chief Executive Officer, as document in his employmentagreement.

*EmploymentAgreements*

The Company has entered into employment agreementswith its Chief Executive Officer, Chief Financial Officer and certain keyemployees of the Company which have remaining terms extending through January 1,2007.  Employment benefits include autoallowances, participation in Company health insurance coverage, and, in thecase of the CEO, maintenance of a whole life insurance policy.

Thefollowing is a schedule, by year, of future minimum lease payments requiredunder the non-cancelable operating leases and minimum contracted employmentobligations as of December 31, 2004:
| ** ** | ** ** | **Operating  Lease Payments** | ** ** | **Employment  Payments** | ** ** | **Total** | ** ** |
|------------|------------|------------------------------------|------------|--------------------------|------------|-----------|------------|
| 2005       |       |                               | $          | 159,944                  |       |      |       | $ | 433,500 |   |   | $ | 593,444 |   |
| 2006       |       |                               | 140,337    |                     |       |      | 346,000    |   |   | 486,337 |   |
| 2007       |       |                               | 64,773     |                     |       |      | —     |   |   | 64,773 |   |
| Total      |       |                               | $          | 365,054                  |       |      |       | $ | 779,500 |   |   | $ | 1,144,554 |   |

 

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**Note (16)   Risk and Uncertainties**

*Foreign Operations*

The Companyoperates in various countries that are subject to risks peculiar to eachcountry. 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 2004 all revenues weregenerated within the United States. In 2003, foreign sales was limited to$35,817 in the Philippines. In 2004 the Company initiated a marketing initiativein Iraq and other Middle East countries and the Peoples Republic of China. Unsettledpolitical conditions, social unrest, acts of terrorism, force majeure, war orother armed conflict, exploitation or other governmental actions, inflation,exchange controls or currency devaluation may result in increased business riskin these regions.

*Fixed-priceContracts*

The Companyutilizes fixed-price contracts which results in business risk. Risk arisesfrom, among other things:

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

·       laboravailability and productivity; and

·       supplier and subcontractorpricing and performance.

*IntellectualProperty Rights*

The Company relies on avariety of intellectual property rights in the manufacture of our products. TheCompany may not be able to preserve these rights intellectual property rightsin the future and these rights could be invalidated, circumvented or challenged.In addition, the laws of some foreign countries in which our equipment may besold do not protect intellectual property rights to the same extent of theUnited States. Failure to protect our proprietary information and successfulintellectual property challenges or infringement proceedings against theCompany could materially and adversely affect the Company’s competitiveposition.

*TechnologicalDevelopments*

The market for ourequipment is characterized by continual technological developments to providebetter and more reliable performance and services. If the Company is not ableto design, develop, and produce commercially competitive products and completeinstallation in a timely manner in response to 

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changesin 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 servicesthe Company sells in association with the equipment sold is complex and highlyengineered and often must be performed in harsh conditions. The Company’ssuccess depends on its ability to employ and retain technical personnel withthe ability to design, utilize and enhance these products and services. Inaddition, our ability to expand our operations depends in part on our abilityto increase our skilled labor force. The demand for skilled workers is high andthe supply is limited. A significant increase in wages paid by competingemployers could result in a reduction of our skilled labor force and orincreases in wage rates that we must pay. If either of these events were tooccur, our cost structure could increase, our margins decrease and our growthpotential could be impaired.

*GovernmentIncentives*

The competitiveness of our technology and equipment isvery much dependent upon governmental rebates and incentives. If there thegovernmental rebates and incentives were to be materially reduced or eliminatedour business and revenues could be materially and adversely affected.

The Company markets itsproducts to developing nations. The ability of these customers to order and payfor the Company’s products and services is dependent on a variety of factorsincluding government approval, adequate funding and vigorous testingprocedures.

*Effective InternalControls*

Effective internal controls are necessary for theCompany to provide reliable financial reports. The Company has in the pastdiscovered, and may in the future discover, areas of its internal controls thatneed improvement. In addition, Section 404 of the Sarbanes-Oxley Act of2002 requires the Company to evaluate and report on its internal controls overfinancial reporting and have its independent auditors annually attest to itsevaluation, as well as issue their own opinion on the Company’s internalcontrols over financial reporting, beginning with our Annual Report on Form 10-KSBfor the fiscal year ending December 31, 2006.

The Company is preparing for compliance with Section 404by strengthening, assessing and testing its system of internal controls toprovide the basis for its report. The process of strengthening its internalcontrols and complying with Section 404 is expensive and time consuming,and requires significant management attention. The Company cannot be certainthat these measures will ensure that it will maintain adequate controls overits financial processes and reporting in the future. Furthermore, as theCompany grows its business, its internal controls will become more complex andwill require significantly more resources to ensure its internal controlsoverall 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 our financial statements and harm theCompany’s stock price.

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**Note (17)   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(18)   Supplemental Disclosure of Cash Flow Information**
| ** **                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid during  the year for interest              |       | $        | 86,757     |     | $          | 51,800 |   |
| Benefit for sale of New  Jersey net operating losses |       | $        | 219,381    |     | $          | — |   |

 

**Note (19)   Subsequent Events**

In the first quarter theCompany made an offer to warrant holders having warrants with an exercise pricein excess of $0.20 an opportunity to exercise those warrants at $0.20 per shareprovided the warrants are exercised on or before March 31, 2005. As of March 23,2005 there have been 111,667 warrants exercised resulting in proceeds of$22,339 to the Company.

**ITEM 8.     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.**

Effective January 15, 2003, the Company engagedAmper Politziner & Mattia (“Amper”) as its independent publicaccountant to audit its financial statements beginning with the year ended December 31,2002. During the fiscal year ended prior to January 15, 2003, the Companyhad not consulted with Amper regarding either (i) the application ofaccounting principles to a specific transaction, either completed or proposed,or the type of opinion that might be rendered on its financial statements; or (ii) anymatter that was either the subject of a disagreement or a reportable event asdefined in Item 304(a) (2) of Regulation S-K.

**ITEM 8A.   CONTROLSAND 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, ifany, within a company have been detected. The Company’s disclosure controls and procedures are designed to providea reasonable assurance of achieving their objectives.

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 ofDecember 31, 2004. Based on this evaluation, our Chief Executive Officer andChief Financial Officer concluded that 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. Such evaluation did not identify any change in the year endedDecember 31, 2004 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting but there are two areas ofmaterial 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 December31, 2004, Amper Politziner & Mattia, P.C. delivered a letter to the Audit 

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Committee of our Board ofDirectors and the Company’s management that identifies certain items that itconsiders to be material weaknesses in the effectiveness of the Company’sinternal controls pursuant to standards established by the Public CompanyAccounting Oversight Board. A “material weakness” is a reportable condition inwhich the design or operation of one or more of the specific control componentshas a defect or defects that could have a material adverse effect on ourability to record, process, summarize and report financial data in thefinancial statements in a timely manner. 

These material weaknesses are: (1) limited resourcesin the accounting function which: a) limit the level of monitoring andoversight 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 accountingprinciples to significant non-routine complex transactions; and c) limit theability to obtain optimum segregation of duties required to meeting theCompany’s continued 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, as stated above, that thelimited number of projects completed in the year ended 2004, two, and therecruitment of its new CFO, the Company’s disclosure controls and proceduresare generally effective for gathering, analyzing and disclosing the informationthe Company is required to disclose in the reports filed under the SecuritiesExchange Act of 1934, within the time periods specified in the SEC’s rules andforms. The Company agrees with its independent auditors that its system ofinternal control and reporting controls should be improved in line withexpected 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 31,2004 and did not affect the results of this period or any prior period.

*Mitigation StepsBeing Implemented By The Company*

To address the issue of limited resources in theaccounting function, the Company will retain external accounting professionalconsultants with a depth of accounting, auditing and public company reportingexpertise to augment the Company’s existing resources in the preparation of therequired periodic financial reports of the Company with a primary emphasis ondeveloping an effective quarterly and annual review closing procedures,including researching and selecting the appropriate accounting for anddisclosure of significant non-routine complex transactions.

In January 2005 the Company upgraded the version ofaccounting software.  The software hascontrols built-in to mitigate internal control risk which the Company has begunutilizing upon the completion of the audit of its 2004 annual financialstatements and intends to utilize the controls going forward.  

b) Changes in internal controls.

There has been no significant changes in the Company’sinternal controls or in other factors that could significantly affect internalcontrols subsequent to their evaluation. There were no significant deficiencies or material weaknesses, andtherefore there were no corrective actions taken.

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**PART III.**

**ITEM 9.     DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OFTHE EXCHANGE ACT**

The followingtable sets forth the names, ages and positions of the executive officers and directorsof the Company as of December 31,2004. Their respective backgrounds are describedfollowing the table:
| **NAME**                   | ** ** | ** ** | ** ** | **AGE**                                                          | ** ** | **POSITION WITH THE COMPANY** |
|----------------------------|------------|------------|------------|------------------------------------------------------------------|------------|-------------------------------|
| Quentin T. Kelly           |       | 70         |       | Chairman of the Board  and Chief Executive Officer               |
| Dr. Anand  Rangarajan |       | 54         |       | Executive Vice President                                         |
| Peter I. Ferguson          |       | 61         |       | Vice President                                                   |
| James Brown                |       | 49         |       | Vice President, Chief  Financial Officer and Corporate Secretary |
| Joseph Cygler              |       | 69         |       | Director                                                         |
| Rolf Frauenfelder          |       | 38         |       | Director                                                         |
| David Lifschultz           |       | 58         |       | Director                                                         |
| Dr. Davinder Sethi    |       | 57         |       | Director                                                         |
| Lange Schermerhorn         |       | 64         |       | Director                                                         |

 

Quentin T. Kelly founded WorldWater, Inc. in 1984as a consulting and R&D company and has been Chairman and CEO since then. Mr. Kellywas previously Director of Information Services and Assistant to the Presidentof Westinghouse Electric Corporation from 1965 to 1971, and subsequently becamePresident of Kelly-Jordan Enterprises, Inc., a leisure products company from1971 to 1975, and then President of Pressurized Products, Inc., manufacturers andinternational marketers of specialized water systems and products, from 1976 to1984. Mr. Kelly is an alumnus of Kenyon College and holds three U.S.patents relating to water systems. He has many years’ experience ininternational business relating to water and power needs in the developingworld. He has worked on water supply and solar power projects with governmentsand several of the international assistance agencies (USAID, UNDP and UNICEF)and more than a dozen governments and private contractors throughout the world.

Dr. Anand Rangarajan, Executive Vice President,has been employed by the Company since 1998. He is a solar and water pumpspecialist with 20 years experience in all aspects of the solar electricbusiness and has pioneered the development of several proprietary solar waterpumping systems, products and markets. His systems have been installed in over20 countries. He holds a Ph.D. in Engineering from the University 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. Hegraduated from Rutgers University in accounting and management.

James S. Brown, Vice President, Chief FinancialOfficer and Secretary, joined WorldWater in May 2004. Mr. Brown hasextensive 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 an MBAfrom 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. Previouslyhe was an executive at Kepner-Tregoe, Inc., an international businessconsulting firm, from 1976 to 1986, an executive with 

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Honeywell InformationSystems from 1964 to 1976, and a marketing representative with InternationalBusiness Machines from 1961 to 1964. Mr. Cygler has a BS in Engineeringfrom the U.S. Military Academy at West Point.

Rolf Frauenfelder has served as a Director since 1999.He is the President of SparWohl Frauenfelder, an asset management company,based in Switzerland. He is a graduate in Economics of Zurich University with anemphasis in Environmental Economics.

David Lifschultz has served as Chief Executive Officerand President of Lifschultz Terminal Leasing, an institutional holding company,since 1998. From 2002 to 2003, he also served as Chairman of Genoil, Inc.,a Canadian oil technology company, and has served as Chairman and ChiefExecutive Officer of Genoil, Inc. from 2003 to the present. He spent nearly 30years at Lifschultz Industries and was Chief Executive Officer from 1987 to 2001.

Dr. Davinder Sethi has served as a Director since2000. He has served Entrada Networks, Inc. in various capacities since November 2001and currently is Vice Chairman and Chief Financial Officer. Prior to that time,he was an independent advisor in the fields of information technology andfinance. 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, Economicsand Statistics from the University of California, Berkeley, and is a graduate ofthe Executive Management Program at Penn State. Dr. Sethi serves on theBoard of Directors of Entrada Networks, Inc.

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 Sri Lanka, Vietnam, Tehran,London and Washington D.C. Ms. Schermerhorn’s education and relatedexperience include Mt. Holyoke College (B.A. 1961), Harvard Business School, andNational War College.

The Board of Directors has a standing Audit Committee anda standing Compensation Committee. The Audit Committee met three times and theCompensation Committee met two times during the fiscal year ended December 31,2003 and each have met following the end of each of the first three quarters of2004.

Messrs. Cygler and Sethi comprise the AuditCommittee. The Audit Committee operates under a formal written charter. The AuditCommittee makes recommendations concerning the engagement of independent publicaccountants, reviews with the independent accountants the results of the auditengagement, approves professional services provided by the accountantsincluding the scope of non-audit services, if any, and reviews the adequacy ofour internal accounting controls.

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

We have a staggered Boardof Directors and each of the Directors serves a two year term or until theirsuccessors are elected or appointed. All officers are appointed by and serve atthe discretion of the Board of Directors, although, Messrs. Kelly,Ferguson and Brown have entered into employment agreements. See “Management—EmploymentAgreements.” There are no family relationships between any of our directors orofficers.

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**ITEM 10.   EXECUTIVECOMPENSATION**

**SUMMARY COMPENSATION TABLE**

Thefollowing table sets forth information with respect to the compensation paid bythe Company to its chief executive officer and to each other executive officerof the Company who received at least $100,000 in salary and bonus during 2004 the(“Named Executive Officers”).
|                                            | ** ** | ** **                   | ** ** | **LONG TERM  COMPENSATION  AWARDS** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **ANNUAL COMPENSATION** | ** ** | **SECURITIES**                           | ** ** | ** ** | ** ** |
| **NAME AND  PRINCIPAL POSITION** | ** ** | ** **                   | ** ** | **FISCAL  YEAR**                         | ** ** | **SALARY** | ** ** | **BONUS** | ** ** | **UNDERLYING  OPTIONS (#)** | ** ** | **ALL OTHER  COMPENSATION** | ** ** |
| Quentin T. Kelly,                          |       |                         | 2004       |                                     |       | $          | 69,786     |   | $ | 0 |   |   | 240,000 |   |   |   | $ | 44,000 | (1) |   |
| Chairman & Chief Executive  Officer    |       |                         |       |                                     |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Dr. Anand  Rangarajan                 |       |                         | 2004       |                                     |       | 114,073    |       | 15,000 |   |   | 822,000 |   |   |   |   |   |   |
| Executive Vice President                   |       |                         |       |                                     |       |       |       |   |   |   |   |   |   |   |   |   |   |
|                                            |            |                              |            |                                          |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)   Represents the premium paid for a life insurance policy, thebeneficiary of which is Mr. Kelly’s wife.

**OPTIONGRANTS FOR YEAR ENDED DECEMBER 31, 2004(INDIVIDUAL GRANTS IN FISCAL YEAR)**
| **NAME**                   | ** ** | ** ** | ** ** | **NUMBER OF  SECURITIES  UNDERLYING  OPTIONS** | ** ** | **PERCENT OF TOTAL  OPTIONS GRANTED  TO EMPLOYEES** | ** ** | **EXERCISE PRICE  PER SHARE(1)** | ** ** | **EXPIRATION  DATE** | ** ** |
|----------------------------|------------|------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------|------------|
| Quentin T. Kelly           |       |       | 240,000    |                                                |       |                                                                    | 5          | %                                          |       |                 | $          | 0.215 |   |   |   | 12/31/2014 |   |   |
| Dr. Anand  Rangarajan |       |       | 822,000    |                                                |       |                                                                    | 16         | %                                          |       |                 | $          | 0.269 |   |   |   | 12/31/2014 |   |   |

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(1)   Allgrants of options have been made with exercise prices equal to fair value atdate of grant. The amounts shown represent an average share price for theshares indicated.

**AggregatedOption ExercisesFor Fiscal Year Ended December 31, 2003And 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           |       |                 | —     |                 |       |                                                                                                      | —     |                                                                                                |       | 1,707,975 |   |   | 120,000 |   |   |   | 229,196 |   |   |   | 2,400 |   |   |
| Dr. Anand  Rangarajan |       |                 | —     |                 |       |                                                                                                      | —     |                                                                                                |       | 364,000 |   |   | 750,000 |   |   |   | 34,840 |   |   |   | 15,000 |   |   |
|                            |            |                      |            |                      |            |                                                                                                           |            |                                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)   No stockappreciation rights are held by the named Executive Officer.

(2)          The total number of unexercisedoptions held as of December 31, 2004, separated between those options thatwere exercisable and those options that were not exercisable on that date.

(3)          Forall unexercised options held as of December 31, 2004, the aggregate dollarvalue of the excess of the market value of the stock underlying those options overthe exercise price of those unexercised options. As required, the price used tocalculate these figures was the closing sale price of the common stock at year’send, which was $0.30 per share on December 30, 2004.

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**Compensationof Directors**

Outside directors areentitled to receive options to purchase 50,000 shares of our common stock foreach year of service on the Board of Directors. Members of the standingcommittees of the Board of Directors are compensated on a quarterly basis for theirparticipation in meetings of the respective committees.

**EmploymentContracts**

On January 1, 2002, the Company entered into afive-year employment agreement with the Mr. Kelly. Compensation under theagreement is $150,000 annual salary, $1,200 per month auto allowance and $3,000(as amended) per month to cover rental offices in Hopewell, New Jersey. BetweenJuly 1, 2002 and September 30, 2004, Mr. Kelly agreed to areduced salary which resulted in an unpaid accrued salary of $311,450 as of December 31,2004. Mr. Kelly participates in the Company “fringe benefits” including healthcoverage and the maintenance of a whole life policy. The benefits continue if employmentis terminated without cause or by reason of death or disability to Mr. Kellyor his estate 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. In December 2004, Mr. Kellywas granted 150,000 stock options, 30,000 vesting on December 31, 2004 andthe remainder vesting in equal installments of 10,000 shares per month incalendar year 2005, at an exercise price of $0.28, the fair market value at thedate of the grant.

In July 2002, Mr. Kelly was granted1,000,000 shares of restricted stock, 600,000 of which remain unvested as of December 31,2004. The balance of unearned compensation related to these restricted sharesas of December 31, 2004 was $75,000. Total compensation expense recognized was$30,000 in each of the years ended December 31, 2004 and 2003.

Included in accrued sales commissions as of December 31,2004 is $46,919 owed to Mr. Kelly under a Management Services FeeAgreement dated April 1, 1991 and expiring on December 31, 2005,calling for a management services/sales incentive fee equal to one-half percent(0.5%) of the Company’s gross product revenues less any related productreturns, rebates, allowances, freight charges, tariffs and sales taxes, not toexceed $250,000 per annum.

Also on May 24, 2004, the Company entered into anemployment agreement with the Vice President, Chief Financial Officer andCorporate Secretary.

As of December 31,2004 the Company has unpaid salaries of $475,478, including $311,450 owed Mr. Kelly(see above), have been deferred by officers (current and former) and are includedin accrued expenses.

 

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

The followingtable sets forth the number and percentage of the shares of the registrant’s Commonstock owned as of January 1, 2005 by all persons known to the registrantwho own more than 5% of the outstanding number of such shares, by all directorsof the registrant, and by all officers and directors of the registrant as agroup. Unless otherwise indicated, each of the stockholders has sole voting andinvestment power with respect to the shares beneficially owned.
| Name and Address  of Beneficial Owner(1)                                   | ** ** | ** **   | ** ** | **Number of Shares  Beneficially  Owned(1)** | ** ** | **Percent  of Class** |
|----------------------------------------------------------------------------|------------|--------------|------------|----------------------------------------------|------------|-----------------------|
| David K. Lifschultz                                                        |       | 6,155,001(2) |       | 7.0%                                         |
| 641 West 59th Street  New York, New York 10019                             |       |         |       |                                         |
| Quentin T. Kelly                                                           |       | 4,707,975(3) |       | 6.0%                                         |
| Pennington  Business Park  55 Route 31 South  Pennington, New Jersey 08534 |       |         |       |                                         |
| Joseph Cygler                                                              |       | 800,000(4)   |       | 1.0%                                         |
| Pennington Business Park  55 Route 31 South  Pennington, New Jersey 08534  |       |         |       |                                         |
| Rolf Frauenfelder                                                          |       | 588,646(5)   |       | *%                                           |
| Pennington  Business Park  55 Route 31 South  Pennington, New Jersey 08534 |       |         |       |                                         |
| Dr. Davinder Sethi                                                    |       | 500,000(6)   |       | *%                                           |
| Pennington Business Park  55 Route 31 South  Pennington, New Jersey 08534  |       |         |       |                                         |
| Lange Schermerhorn                                                         |       | 350,000(7)   |       | *%                                           |
| Pennington  Business Park  55 Route 31 South  Pennington, New Jersey 08534 |       |         |       |                                         |
| All Directors and Officers as  a group (8 persons)                         |       | 15,215,622   |       | 17.7%                                        |

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*       Lessthan 1%

(1)   For purposesof this table, a person or group of persons is deemed to have “beneficial ownership”of any shares of common stock that such person has the right to acquire within60 days of February 1, 2005. For purposes of computing the percentage ofoutstanding shares of common stock held by each person or group of personsnamed above, any security which such person or persons has or have the right toacquire within such a date is deemed to be outstanding but is not deemed to beoutstanding for the purpose of computing the percentage ownership of any otherperson. Except community property laws, the Company believes based on informationsupplied by such persons, that the persons named in this table have sole votingand investment power with respect to all shares of common stock which they beneficiallyown.

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(2)   This amountincludes 3,305,000 shares issuable upon the conversion of warrants outstanding asof December 31, 2004.

(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 to purchase 1,827,975shares outstanding as of December 31, 2004.

(4)   This amountincludes options to purchase 200,000 shares outstanding as of December 31,2004.

(5)   This amountincludes options to purchase 200,000 shares outstanding as of December 31,2004.

(6)   This amountrepresents options to purchase 500,000 shares outstanding as of December 31,2004.

(7)   This amount represents options to purchase 350,000 sharesoutstanding as of December 31, 2004.

**ITEM 12.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

Includedin notes payable and long-term debt at December 31, 2004 and December 31,2003, are amounts payable to employees and directors as follows. 
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Directors                                    |       | $        | 98,706     |     | $          | 185,894 |   |
| Officers and  employees                      |       | 115,013  |       | 159,703  |       |
| Total                                        |       | 213,719  |       | 345,597  |       |
| Less current  maturities                     |       | (123,013 | )          | (262,703 | )          |
| Total long term note  payable, related party |       | $        | 90,706     |     | $          | 82,894 |   |

 

Notes payable to directorsincludes a three-year convertible loan dated January 30, 2003, face valueof $100,000 which bears interest at 10% per annum. The loan is convertible atthe option of the holder at $0.15 per common share for a total of 666,667shares. All other notes payable to directors and employees are due on demandand accrue interest at 10% per annum.

*Other Related PartyTransactions*

The Chairman and Chief Executive Officer has guaranteed$32,353borrowedfrom a bank, under a note issued in 2001.

Included in accrued sales commissions as of December 31,2004 is $46,919 owed the Chairman and Chief Executive Officer under amanagement services fee agreement dated April 1, 1991 expiring December 31,2005 calling for a management services/sales incentive fee equal to one-halfpercent (0.5%) of the company’s gross product revenues less any related productreturns, rebates, allowances, freight charges, tariffs and sales taxes, not toexceed $250,000 per annum.

The Company leases officeand laboratory facilities from the Chairman of the Company. Lease payments tothe Chairman were $39,000 for 2003 and $36,000 in 2004 plus utilities andmaintenance, see Commitments note.

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**PART IV**

**ITEM 13.   EXHIBITSLIST AND REPORTS ON FORM 8-K**

(a) Exhibits:
| Exhibit Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                        |
|----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1            |       | Plan of Merger of  WorldWater Corp., a Nevada corporation with and into WorldWater Corp., 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 Corp. 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).                                                                                              |
| 10.1           |       | Securities Purchase  Agreement between WorldWater Corp. and SBI Brightline VIII LLC dated  April 1, 2004. Incorporated by reference to Exhibit 10.1 to  Company’s Form SB-2 filed 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 Corp. 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 Corp. 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).                                                                 |

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| 10.6  |   | Form of  Registration Rights Agreement between WorldWater Corp. 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 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).                                           |

 

(b) Reports on Form 8-K.

Form 8-K filed October 13,2004 reporting the restructuring of the Company’s term credit agreements.

**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 2004 were approved bythe Audit Committee of the Board of Directors.

**AUDIT RELATED FEES**

The aggregate fees billedby for professional services for the audit of the annual financial statementsof the Company and the reviews of the financial statements included in theCompany’s quarterly reports on Form 10-QSB for 2004 and 2003 were$$75,000 and $80,000, respectively, plus out of pocket expenses and anadditional $15,000 and $38,000 in 2004 and 2003, respectively, for reviews ofregistration statements in 2004 and audit fees related to filing amendments onprior years in 2003.

**TAX FEES**

There were no tax feesbilled by our independent auditors during 2004 and 2003.

**ALL OTHER FEES**

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

56

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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 Corp.  (Registrant) |                                                   |        |
|--------------------------------|--------------------------------------------------------|-------------|
|                           |                                                   |        |   |
| By:                            | /s/ QUENTIN T. KELLY                                   | Date:  | March 30, 2005 |
|                           | Quentin T. Kelly,*Chairman/CEO*                        |        |   |
|                           |                                                   |        |   |
| By:                            | /s/ JAMES S. BROWN                                     |        | March 30, 2005 |
|                           | James S. Brown*Vice President/Chief Financial 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        |          | Chief Executive Officer  and Director                   |       | March 31,  2005 |
| Quentin T. Kelly             |          |
| /s/  JAMES S. BROWN          |          | Vice President, Chief  Financial Officer  and Secretary |       | March 31,  2005 |
| James Brown                  |          |
| /s/  JOSEPH CYGLER           |          | Director                                                |       | March 31,  2005 |
| Joseph Cygler                |          |
| /s/  ROLF FRAUENFELDER       |          | Director                                                |       | March 31,  2005 |
| Rolf Frauenfelder            |          |
| /s/  DAVID LIFSCHULTZ        |          | Director                                                |       | March 31,  2005 |
| David Lifschultz             |          |
| /s/  DR. DAVINDER SETHI |          | Director                                                |       | March 31,  2005 |
| Dr. Davinder  Sethi     |          |
| /s/  LANGE SCHERMERHORN      |          | Director                                                |       | March 31,  2005 |
| Lange  Schermerhorn          |          |

 

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**EXHIBIT INDEX**
| 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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