UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               -------------------

                                  FORM 10-QSB/A
                                  -------------

                                Amendment No.1 to


 |X| Quarterly Report under  Section 13 or  15(d) of the Securities Exchange Act
     of 1934

                  For the quarterly period ended June 30, 2001

                                       OR

 | | Transition report under Section 13 OR 15(d) of the Securities Exchange
     Act of 1934

          For The Transition Period From                  To
                                          ---------------     ----------------

                          Commission File Number 1-5742



                             OCEAN POWER CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

                    Delaware                                 94-3350291
        (State or other jurisdiction of                   (I.R.S. Employer
        incorporation or organization)                   Identification No.)

                         5000 Robert J. Mathews Parkway
                        El Dorado Hills, California 95672
              (Address of principal executive offices and Zip Code)

                                 (916) 933-8100
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                         if changed since last report)

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act of 1934  during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing  requirements  for the past 90 days. |X|
Yes |_| No

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest  practicable date: The registrant had 38,439,094
shares of its $.01 par value common stock outstanding as of June 30, 2001.

     Transitional Small Business Disclosure Format (check one): Yes [ ] No: [X]


                                        1
<PAGE>

                           FORWARD-LOOKING STATEMENTS

IN  ADDITION  TO  HISTORICAL  INFORMATION,  THIS FORM  10-QSB  CONTAINS  CERTAIN
FORWARD-LOOKING  STATEMENTS  UNDER  THE  CAPTION  "MANAGEMENT'S  DISCUSSION  AND
ANALYSIS  OR  PLAN  OF  OPERATION,"  INCLUDING  STATEMENTS  CONCERNING  (I)  THE
COMPANY'S STRATEGY; (II) THE COMPANY'S EXPANSION PLANS, (III) THE MARKET FOR THE
COMPANY'S  PRODUCTS;  AND (IV)  THE  EFFECTS  OF  GOVERNMENT  REGULATION  OF THE
COMPANY'S  PRODUCTS.  BECAUSE SUCH  STATEMENTS  INVOLVE RISKS OF  UNCERTAINTIES,
ACTUAL  RESULTS MAY DIFFER  MATERIALLY  FROM THOSE  EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING  STATEMENTS.  THE COMPANY  UNDERTAKES  NO OBLIGATION TO PUBLICLY
REVISE THESE FORWARD-LOOKING  STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT
MAY  ARISE  AFTER  THE  DATE  HEREOF,   EXCEPT  AS  REQUIRED  BY  ITS  REPORTING
OBLIGATIONS.

                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)

                        CONSOLIDATED FINANCIAL STATEMENTS

                       June 30, 2001 and December 31, 2000

                                       3
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                           Consolidated Balance Sheets


                                     ASSETS
                                     ------

                                                    June 30,    December 31,
                                                      2001         2000
                                                   (Unaudited)
                                                   --------     ----------
CURRENT ASSETS

   Cash                                           $ 286,901     $ 2,152,593
   Cash - restricted                                 48,239          23,706
   Advances to employees                            355,497         320,567
   Prepaid expenses                                 143,295         222,235
                                                   --------     ----------
     Total Current Assets                           833,932       2,719,101

EQUIPMENT, NET                                    1,106,774         922,980
                                                   --------     ----------
OTHER ASSETS

   Debt offering costs                               10,500            --
   Deposits                                          54,729          55,348
   Patents, and licensing agreements, net         6,825,783       7,281,679
   Goodwill, net                                  5,985,695       6,315,183

     Total Other Assets                          12,876,706      13,652,210
                                                   --------     ----------
     TOTAL ASSETS                               $14,817,412     $17,294,291
                                                ===========      ===========

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                        4
<PAGE>

<TABLE>
<CAPTION>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                     Consolidated Balance Sheets (Continued)


                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

                                                                    June 30,
                                                                     2001         December 31,
                                                                 (Unaudited)         2000
                                                                 -------------    -------------
CURRENT LIABILITIES

<S>                                                              <C>             <C>
   Accounts payable                                              $  2,134,070    $  1,127,414
   Accrued expenses                                                 7,123,173       6,844,282
   Notes payable - related parties                                  1,235,813       1,317,618
   Notes payable - current portion                                  1,920,690         488,457
   Research advances                                                     --           473,145

     Total Current Liabilities                                     12,413,746      10,250,916
                                                                 -------------    -------------
LONG-TERM LIABILITIES

   Convertible debentures payable                                     550,000         550,000
   Notes payable                                                    1,195,504         744,588
                                                                 -------------    -------------

     Total Long-Term Liabilities                                    1,745,504       1,294,588
                                                                 -------------    -------------

     Total Liabilities                                             14,159,250      11,545,504
                                                                 -------------    -------------
STOCKHOLDERS' EQUITY

   Preferred stock: 20,000,000 shares authorized of
    $0.001 par value; no shares outstanding                              --              --
   Common stock: 500,000,000 shares authorized of
    $0.01 par value; 38,439,094 and 38,149,942 shares
    issued and outstanding, respectively                              384,391         381,499
   Additional paid-in capital                                      28,720,657      25,611,288
   Deferred consulting expense                                       (984,000)       (410,667)
   Other comprehensive income                                         365,682         195,258
   Deficit accumulated during the development stage               (27,828,568)    (20,028,591)
                                                                 -------------    -------------
     Total Stockholders' Equity                                       658,162       5,748,787

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                  $ 14,817,412    $ 17,294,291
                                                                 ============    ============
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                        5
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
      Consolidated Statements of Operations and Other Comprehensive Income
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                                                       From
                                                                                                    Inception on
                                               For the                          For the               June 30,
                                            Six Months Ended               Three Months Ended       1992 Through
                                                 June 30,                      June 30,               March 26,
                                          2001              2000         2001             2000           2001
                                       ----------       ----------     ----------      ----------    ----------


<S>                                  <C>             <C>             <C>             <C>             <C>
REVENUES                             $       --      $       --      $       --      $       --      $       --


EXPENSES

   General and administrative           4,840,307       4,009,294       2,646,008       1,644,659      20,783,595
   Impairment of intangible assets           --              --              --              --           400,000
   Research and development             1,671,974         140,850       1,610,478            --         3,217,430
   Depreciation and amortization          829,216         195,276         605,525           5,944       1,312,575
                                       ----------       ----------     ----------      ----------    ----------
     Total Expenses                     7,341,497       4,345,420       4,862,011       1,745,978      25,713,600
                                       ----------       ----------     ----------      ----------    ----------
     LOSS FROM OPERATIONS              (7,341,497)     (4,345,420)     (4,862,011)     (1,745,978)    (25,713,600)

OTHER INCOME (EXPENSE)
   Currency gain                             --              --              --              --               522
   Interest income                         29,276          79,578          12,169          43,405         244,820
   Loss on sale of assets                    --              --              --              --          (387,649)
   Interest expense                      (487,756)       (143,619)       (294,613)        (66,243)     (2,138,002)

     Total Other Income (Expense)        (458,480)        (64,041)       (282,444)        (22,838)     (2,280,309)
                                       ----------       ----------     ----------      ----------    ----------
LOSS BEFORE EXTRAORDINARY
 ITEM                                  (7,799,977)     (4,409,461)     (5,144,455)     (1,768,816)    (27,993,909)

EXTRAORDINARY ITEM

   Gain on settlement of debt                --           165,349            --              --           165,341
                                       ----------       ----------     ----------      ----------    ----------
     NET LOSS                          (7,799,977)     (4,244,112)     (5,144,455)     (1,768,816)    (27,828,568)
                                       ----------       ----------     ----------      ----------    ----------
OTHER COMPREHENSIVE INCOME

   Currency translation adjustment        170,424            --           152,268            --           365,682
                                       ----------       ----------     ----------      ----------    ----------

     TOTAL COMPREHENSIVE LOSS        $ (7,629,553)   $ (4,244,112)   $ (4,992,187) $   (1,768,816)   $(27,462,886)
                                     ============    ============    ============    ============    ============
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                        6
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Income (Continued)
                                   (Unaudited)

<TABLE>
<CAPTION>


                                                                                                       From
                                                                                                    Inception on
                                               For the                          For the               June 30,
                                            Six Months Ended               Three Months Ended       1992 Through
                                                 June 30,                      June 30,               March 26,
                                          2001              2000         2001             2000           2001
                                       ----------       ----------     ----------      ----------    ----------


<S>                                  <C>             <C>             <C>             <C>             <C>

BASIC AND DILUTED LOSS PER
 SHARE

Operating loss                       $      (0.20)    $      (0.12)  $     (0.13)     $     (0.05)
Extraordinary item                            --              0.00           --              0.00
                                     -----------      ------------    ----------      ----------    ----------
   Total                             $      (0.20)    $      (0.12)  $     (0.13)     $    (0.05)
                                     ============     ============    ==========      ============    ==========
WEIGHTED AVERAGE NUMBER
 OF SHARES OUTSTANDING                 38,184,499       34,725,423    38,160,423        35,240,478
                                     ============     ============    ==========      ============    ==========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                        7
<PAGE>

<TABLE>
<CAPTION>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Consolidated Statements of Stockholders' Equity





                                                                                                                  Deficit
                                                                                                                 Accumulated
                                               Common Stock            Additional       Other      Deferred      During the
                                       ---------------------------     Paid-In      Comprehensive Consultin      Development
                                         Shares          Amount        Capital          Income     Expense         Stage
                                        ------------   ------------   ------------   ----------   ----------    ------------

<S>                                      <C>          <C>            <C>            <C>           <C>           <C>
Balance, December 31, 1999               32,835,925   $    328,359   $  5,589,224   $      --     $   --       $(10,923,816)


January 4, 2000, common stock
issued for debt and consideration
for loan default at $2.75 per share         147,580          1,476        236,024          --         --             --

January 5, 2000, common stock
issued for services at $4.34 per
share                                        60,000            600        259,800          --         --             --

January 26, 2000, common stock
issued pursuant to a private
placement at $2.10 per share                 47,619            476         99,524          --         --             --

February 1, 2000, warrants
granted below market value                     --             --           41,242          --         --             --

February 18, 2000, options
granted below market value                     --             --          494,596          --         --             --

February 22, 2000, options
granted below market value                     --             --          624,998          --         --             --

March 9, 2000, common stock
issued for exercise of warrant
at $1.99 per share                           62,792            628        124,391          --         --             --

March 16, 2000, common stock
issued for conversion of convertible
debenture at $1.50 per share                 66,667            667         99,333          --         --             --

March 16, 2000, common stock
issued for exercise of warrants
at $0.75 per share                          133,333          1,333         98,667          --         --             --
                                        ------------   ------------   ------------   ----------   ----------    ------------
Balance Forward                          33,353,916   $    333,539   $  7,667,799   $      --     $   --        $(10,923,816)
                                        ------------   ------------   ------------   ----------   ----------    ------------
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                        8
<PAGE>

<TABLE>
<CAPTION>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
           Consolidated Statements of Stockholders' Equity (Continued)



                                                                                                                  Deficit
                                                                                                                 Accumulated
                                               Common Stock            Additional       Other      Deferred      During the
                                       ---------------------------     Paid-In      Comprehensive Consultin      Development
                                         Shares          Amount        Capital          Income     Expense         Stage
                                        ------------   ------------   ------------   ----------   ----------    ------------

<S>                                      <C>          <C>            <C>            <C>           <C>             <C>

Balance Forward                         33,353,916   $    333,539   $  7,667,799    $      --     $       --    $(10,923,816)


March 27, 2000, 3 stock issuances
for payment of debt at an average
price of $4.95 per share                    46,486            465        231,347           --             --              --

May 26, 2000, options granted below
market value                                  --             --        1,272,195           --             --              --

July 25, 2000, common stock issued
for conversion of accounts payable
at $4.00 per share                         100,000          1,000        399,000           --         (237,000)           --

July 25, 2000, common stock issued
for purchase of SIGMA at $3.20 per
share                                    1,718,748         17,187      5,482,813           --             --              --

January 25 - August 14, 2000, 62
stock issuances pursuant
to a private placement
memorandum at average
price of $3.58 per share                 1,930,792         19,308      6,896,423           --             --              --

August 8, 2000, options granted
below market value                            --             --          358,000           --             --              --

September 15, 2000, 23 stock
issuances pursuant to a private
placement memorandum at $3.00
per share                                1,000,000         10,000      2,990,000           --             --              --

Currency translation adjustment               --             --             --          195,258           --              --

Warrants granted for consulting
contract                                      --             --          340,000           --         (173,667)           --

Stock offering costs paid                     --             --          (26,289)          --             --              --

Net loss for the year ended
December 31, 2000                             --             --             --             --             --      (9,104,775)
                                        ------------   ------------   ------------   ----------   ----------    ------------
Balance, December 31, 2000              38,149,942   $    381,499   $ 25,611,288    $   195,258   $   (410,667) $(20,028,591)
                                        ------------   ------------   ------------   ----------   ----------    ------------
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       9
<PAGE>

<TABLE>
<CAPTION>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
           Consolidated Statements of Stockholders' Equity (Continued)



                                                                                                                  Deficit
                                                                                                                 Accumulated
                                               Common Stock            Additional       Other      Deferred      During the
                                       ---------------------------     Paid-In      Comprehensive Consultin      Development
                                         Shares          Amount        Capital          Income     Expense         Stage
                                        ------------   ------------   ------------   ----------   ----------    ------------

<S>                                      <C>          <C>            <C>            <C>           <C>             <C>
Balance, December 31, 2000              38,149,942   $    381,499   $ 25,611,288    $    195,258   $   (410,667)   $(20,028,591)


Valuation adjustment to warrants
granted for consulting services
(unaudited)                                   --             --          (60,000)           --           70,667            --

March 5, 2001, warrants issued
in connection with debt obligations
(unaudited)                                   --             --        1,662,746            --             --              --

April 2, 2001, warrants issued in
connection with debt obligations
(unaudited)                                   --             --          381,228            --             --              --

April 23, 2001, common stock
issued for conversion of accounts
payable (unaudited)                         50,000            500         74,500            --             --              --

June 8, 2001, common stock
issued for conversion of research
advances (unaudited)                       119,152          1,192        380,095            --             --              --

June 29, 2001, common stock
issued for consulting contract
(unaudited)                                120,000          1,200        334,800            --         (322,000)           --

June 29, 2001, warrants granted
for consulting contract (unaudited)           --             --          336,000            --         (322,000)           --

Currency translation adjustment
(unaudited)                                   --             --             --           170,424           --              --

Net loss for the six months ended
June 30, 2001 (unaudited)                     --             --             --              --             --        (7,818,162)
                                      ------------   ------------   ------------    ------------    -----------    ------------
Balance, June 30, 2001
(unaudited)                             38,439,094   $    384,391   $ 28,720,657    $    365,682   $   (984,000)   $(27,846,753)
                                      ------------   ------------   ------------    ------------    -----------    ------------

</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       10
<PAGE>

<TABLE>
<CAPTION>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
                                                                                           From
                                                                                        Inception
                                                                                            on
                                                                                          March 26,
                                                          For the Six Months Ended      1992 Through
                                                                   June 30,              June 30,
                                                           2001            2000            2001
                                                     -------------   ------------    ---------------
CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                  <C>             <C>             <C>
   Net loss                                          $ (7,799,977    $ (4,244,112)   $ (27,828,568)
   Adjustments to reconcile net loss to net
    cash used by operating activities:
     Depreciation and amortization                        829,216         195,276       1,312,575
     Deferred consulting expense                           98,667         135,416         428,000
     Value of common stock, warrants, options
      and discounts on equity instruments issued
      for services                                           --         2,830,931       3,802,930
     Loss on sale of assets                                  --              --           387,649
     Amortization of debenture discount                   581,782            --         1,231,782
     Amortization of debt issue costs                       1,500            --             1,500
     Gain on disposition of debt                             --              --          (165,340)
     Impairment loss                                         --              --           400,000
   Change in operating asset and liability accounts,  net of amounts acquired in
      business combination:
     (Increase) in overpayment receivable                    --           (74,700)           --
     (Increase) decrease in advances to employees,
      prepaid expenses, deposits
      and debt offering costs                              32,011            --        (5,957,938)
     (Increase) decrease in other assets                     --           359,110            --
     Increase (decrease) in accounts payable            1,276,024        (462,714)      2,309,485
     Increase (decrease) in accrued expenses              278,891        (275,211)      6,999,412
                                                     -------------   ------------    ------------
       Net Cash Used by Operating Activities           (4,701,886)     (1,900,683)    (17,078,513)
                                                     -------------   ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES

   Payments on license agreement                             --              --          (400,000)
   Cash acquired in Sigma acquisition                        --              --           142,254
   Proceeds from sale of assets                              --              --                 1
   Purchase of fixed assets                              (310,951)       (745,615)     (1,054,926)
   Equipment procurement costs                               --              --          (564,110)
                                                     -------------   ------------    ------------
       Net Cash (Used) by Investing Activities           (310,951)       (745,615)     (1,876,781)
                                                     -------------   ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES

   Proceeds from notes payable                          3,600,000            --         3,600,000
   Repayment of related party notes payable               (81,805)           --        (1,603,005)
   Repayment of notes payable                            (346,517)     (2,566,039)     (1,685,591)
   Loans from related parties                                --            82,178       7,224,287
   Issuance of convertible debentures                        --              --           650,000
   Common stock issued for cash                              --         7,149,880      11,131,032
   Stock offering costs                                      --              --           (26,289)
                                                     -------------   ------------    ------------
       Net Cash Provided by Financing Activities        3,171,678       4,666,019      19,290,434
                                                     -------------   ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                           (1,841,159)      2,019,721         335,140
CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD                                              2,176,299         368,276            --

CASH AND CASH EQUIVALENTS AT END OF PERIOD           $    335,140    $  2,387,997    $    335,140
                                                     ============    ============    ============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                        11
<PAGE>

<TABLE>
<CAPTION>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                Consolidated Statements of Cash Flows (Continued)
                                   (Unaudited)
                                                                                            From
                                                                                         Inception
                                                                                            on
                                                                                         March 26,
                                                            For the Six Months Ended   1992 Through
                                                                   June 30,              June 30,
                                                              2001            2000          2001
                                                           ------------- ------------  ---------------
CASH PAID FOR:

<S>                                                        <C>          <C>          <C>
   Interest                                                $   68,459   $   12,946   $   81,405
   Income taxes                                            $     --     $     --     $     --

NON-CASH FINANCING ACTIVITIES

   Value of common stock, warrants, options and
    discounts on equity instruments issued for
    services                                               $     --     $     --     $3,802,930
   Equity instruments issued for deferred
     consulting expense                                    $  672,000   $     --     $1,412,000
   Common stock issued for recapitalization                $     --     $     --     $2,761,773
   Common stock issued for conversion of debt              $  456,287   $     --     $2,963,572
   Acquisition of licenses through
   license agreement payable                               $     --     $     --     $6,940,000

</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       12
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000

NOTE 1 -      BASIS OF FINANCIAL STATEMENT PRESENTATION

              The  accompanying   unaudited  condensed   consolidated  financial
              statements have been prepared by the Company pursuant to the rules
              and regulations of the Securities and Exchange Commission. Certain
              information  and  footnote   disclosures   normally   included  in
              financial   statements   prepared  in  accordance  with  generally
              accepted  accounting  principles have been condensed or omitted in
              accordance  with  such  rules  and  regulations.  The  information
              furnished  in  the  interim   condensed   consolidated   financial
              statements  include normal recurring  adjustments and reflects all
              adjustments,  which,  in the opinion of management,  are necessary
              for a fair  presentation  of such financial  statements.  Although
              management believes the disclosures and information  presented are
              adequate to make the information  not misleading,  it is suggested
              that these interim condensed  consolidated financial statements be
              read  in  conjunction  with  the  Company's  most  recent  audited
              financial  statements  and notes thereto  included in its December
              31, 2000 Annual Report on Form 10-KSB.  Operating  results for the
              six months ended June 30, 2001 are not  necessarily  indicative of
              the results that may be expected for the year ending  December 31,
              2001.

NOTE 2 -      PATENTS AND LICENSING AGREEMENTS

              The  Company's  patents and license  agreements  consisted  of the
              following at June 30, 2001 and December 31, 2000:
<TABLE>
<CAPTION>
                                                                                       June 30,             December 31,
                                                                                        2001                   2000
                                                                                        ----                   ----
                                                                                    (Unaudited)
<S>                                                                              <C>                  <C>
                      Patents                                                    $         887,333    $        973,658
                      Licensing Agreement - Aquamax and Keeran                           6,540,000           6,540,000
                      Accumulated amortization                                            (601,550)           (231,979)

                                                                                 $       6,825,783    $      7,281,679
</TABLE>

              As part of the  purchase of Sigma,  the Company  acquired  patents
              valued at their  fair  value of  $887,333,  adjusted  for  foreign
              currency fluctuations since the date of purchase. The patents have
              an  estimated  remaining  life of 90 months from the date of Sigma
              acquisition. The patents are pledged as collateral for obligations
              of $469,077 at June 30,  2001.  The license  agreement  represents
              rights to patent and patent  applications for technology  acquired
              from  Aquamax  and  Keeran  (Note  7).  The  cost  of the  license
              agreement is being amortized over its estimated  useful life of 10
              years. Amortization expense for the period ended June 30, 2001 and
              accumulated  amortization at June 30, 2001 amounted to $25,571 and
              $71,386,   respectively   (Patents)  and  $347,000  and  $537,850,
              respectively (Licensing Agreement).

NOTE 3 -      BUSINESS COMBINATION

              In August 2000,  the Company  acquired  SIGMA  Elektroteknisk,  AS
              (SIGMA) by exchanging 1,718,748 shares of its common stock for all
              of the common stock of SIGMA.  The purchase was accounted for as a
              purchase in accordance with APB 16, "Business  Combinations."  The
              excess of the total  acquisition  cost over the fair  value of the
              net assets acquired of $6,589,756 is being amortized over 10 years
              by the  straight-line  method.  Amortization  expense  amounted to
              $329,488 and $-0- for the six months ended June 30, 2001 and 2000,
              respectively.


                                       13
<PAGE>


19

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000

NOTE 4 -      NOTES PAYABLE

              Notes  payable at June 30, 2001 and  December  31, 2000 consist of
the following:
<TABLE>
<CAPTION>

                                                                                       June 30,             December 31,
                                                                                         2001                   2000
                                                                                    (Unaudited)
<S>                                                                              <C>                <C>

              Notes payable to two parties bearing interest at
              10.5%, collateralized by guarantee of the president
               of the Company, due in full by March 5, 2002.                     $       3,000,000  $                -

              Notes  payable to two parties  bearing  interest  at 10%,  without
               collateral, convertible into the Company's common
               stock at $4.00 per share, due in full by April 2, 2003.                     600,000                   -

              Less discount resulting from allocation of proceeds
               to warrants and conversion rights issued with the debt                   (1,462,192)                  -
                                                                                         2,137,808
              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began May 1, 2000, uncollateralized.                          91,087             121,049

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began May 10, 2000, uncollateralized.                        396,312             569,964

              Note payable to Silent Clean Power bearing interest at 12.00%, due
               in equal semi-annual payments, collateralized
               by patents and licenses                                                     469,077             498,696

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began April 3, 2000, uncollateralized.                        21,910              43,336

              Total Notes Payable                                                $       3,116,194  $        1,233,045

              Annual maturities of notes payable are as follows:

                      Years Ending
                      December 31,
                            2002                                                 $       1,920,690
                            2003                                                         1,195,504

                                                                                 $       3,116,194
</TABLE>

              As additional  consideration  for $3,000,000 of the notes payable,
              the  Company  granted  1,200,000  warrants  valued  at  $3,730,212
              pursuant  to the Black  Scholes  pricing  model  using a risk-free
              interest rate of 6.43% expected volatility of 228% and an expected
              life of 3 years.  The  proceeds  of the loans have been  allocated
              between debt and additional  paid-in  capital in proportion to the
              relative  fair  value of the debt and the  warrants.  The  portion
              allocated to equity was  $1,662,746  and the balance of $1,337,254
              was  recorded  as debt,  net of  discount.  The  discount is being
              amortized to interest  expense over the term of the debt using the
              effective interest rate method.


                                       14
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 4 -      NOTES PAYABLE (Continued)

              As additional  consideration for $600,000 of the convertible notes
              payable,  the Company  granted  200,000  warrants with an exercise
              price of $1.50 per share and an expiration  date of April 1, 2003.
              the  warrants  were valued at $2.73 per share  ($546,000 in total)
              pursuant to the Black  Scholes  pricing  model.  The proceeds were
              allocated   between  debt  and  additional   paid-in   capital  in
              proportion  to the  relative  fair  value of the  debt and  equity
              (warrants  and  beneficial  conversion  rights)  elements  of  the
              transaction.  The portion allocated to equity was $381,228 and the
              balance of $218,772  has been  recorded as debt,  net of discount.
              The  discount of $381,228  and debt issue costs of $12,000 will be
              amortized to interest  expense over the term of the debt using the
              effective interest rate method.

NOTE 5 -      ACCRUED EXPENSES

              The  Company's  accrued  expenses are  comprised of the  following
items:

                                                     June 30,       December 31,
                                                      2001             2000
                                                      ----             ----
                                               (Unaudited)


    Accrued payroll taxes payable           $          23,946     $    26,657
    Accrued interest payable - payroll                 52,717          52,717
    Accrued payroll tax penalty                        98,845          98,845
    Accrued interest payable - notes                  245,818         118,155
    Other accrued items                               161,849           7,908
    Accrued license agreement (Note 7)              6,540,000       6,540,000

                  Total                     $       7,123,173     $ 6,844,272

NOTE 6 -       GOING CONCERN

               The Company's  financial  statements are prepared using generally
               accepted  accounting  principles  applicable  to a going  concern
               which  contemplates  the realization of assets and liquidation of
               liabilities in the normal course of business. The Company has had
               limited   activities   since   inception   and  is  considered  a
               development stage company because it has no significant operating
               revenues  and,   planned   principal   operations  have  not  yet
               commenced.  The Company has  incurred  losses from its  inception
               through June 30, 2001 of approximately  $28,000,000.  The Company
               does not have an established  source of funds sufficient to cover
               its operating costs and, accordingly,  there is substantial doubt
               about its ability to continue as a going concern.

               In order to develop a reliable source of revenues,  and achieve a
               profitable  level of  operations,  the Company  will need,  among
               other things,  additional capital  resources.  Management's plans
               include  raising  additional  capital  through the sale of common
               stock,  the  proceeds  of  which  will  be used  to  develop  the
               Company's   products,   pay   operating   expenses   and   pursue
               acquisitions and strategic alliances. The Company expects that it
               will need  $20,000,000  to  $30,000,000  of additional  funds for
               operations  and  expansion in 2001.  However,  management  cannot
               provide any  assurances  that the Company will be  successful  in
               accomplishing any of its plans.

                                       15
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 6 -       GOING CONCERN (Continued)

               The  ability of the  Company to  continue  as a going  concern is
               dependent  upon its ability to  successfully  accomplish the plan
               described  in  the  preceding  paragraph  and  eventually  attain
               profitable  operations.  The accompanying financial statements do
               not  include  any  adjustments  that  might be  necessary  if the
               Company is unable to continue as a going concern.

NOTE 7 -       COMMITMENTS AND CONTINGENCIES

               Wohlreich

               During  January  2000,  the  Company  entered  into a  three-year
               consulting   agreement  with  Clement  J.  Wohlreich  to  receive
               financial,  marketing  and  management  services.  The  agreement
               called for the Company to issue 100,000 units, each consisting of
               one share of the Company's  common stock and one attached warrant
               granting  the  right  for three  years to  purchase  one share of
               common  stock for an exercise  price of $1.50.  As the  agreement
               provided for issuance of the units upon commencement of services,
               the Company accrued a liability and deferred  consulting  expense
               as a reduction of shareholders'  equity in an amount equal to the
               value of the common  stock and  warrant at the  inception  of the
               agreement. The liability was converted to equity upon issuance of
               the  units  and the  value  of the  stock  and  warrants  will be
               expensed  over  the  term of the  agreement  upon  completion  of
               services each quarter.  Pursuant to EITF 96-18,  "Accounting  For
               Equity  Instruments  That Are Issued To Other Than  Employees For
               Acquiring Or In Conjunction With Selling, Goods Or Services", the
               Company will  continue to revalue the warrants  until earned upon
               completion  of  services.  As of June 30,  2000,  the  consulting
               contract was valued at $680,000,  representing the 100,000 shares
               of common stock issued on July 25, 2000 at the then trading price
               of $4.00 per share and the value of the warrants of $280,000,  as
               determined by the Black  Scholes  pricing  model.  For the period
               ended June 30, 2001,  the Company had  amortized  $340,000 of the
               contract,  leaving a  remaining  balance of  $340,000 at June 30,
               2001 which is included as a reduction of stockholders' equity.

               Martineau

               During June 2001, the Company entered into a two-year  consulting
               agreement  with Gene  Martineau  to receive  services  related to
               interfacing with institutional investors and brokerage firms. The
               agreement  called  for the  Company  to issue  120,000  shares of
               common stock and grant 120,000 warrants exercisable for two years
               at  $1.50.  Pursuant  to  EITF  96-18,   "Accounting  For  Equity
               Instruments that Are Issued To Other Than Employees For Acquiring
               Or In Conjunction With Selling,  Goods or Services",  the Company
               will   continue  to  revalue  the  warrants   until  earned  upon
               completion  of  services.  As of June 30,  2001,  the  consulting
               contract was valued at $672,000,  representing the 120,000 shares
               of common stock issued on June 30, 2001 at the then trading price
               of $2.80 per share and the value of the warrants of $336,000,  as
               determined by the Black  Scholes  pricing  model.  For the period
               ended June 30,  2001,  the Company had  amortized  $28,000 of the
               contract,  leaving a  remaining  balance of  $644,000 at June 30,
               2001 which is included as a reduction of stockholders' equity.


                                       16
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN

               During  September  2000,  the  Company  entered  into a worldwide
               license agreement (License Agreement) with Aquamax  International
               Holdings,  BV of the  Netherlands  and  Keeran  Corporation  NV a
               Netherlands Antilles Corporation (Licensors) for their issued and
               pending patents and other  intellectual  property rights relating
               to the use of plastic heat  exchangers  for the  distillation  of
               seawater.  The  scope of this  license,  and thus the  authorized
               "field of use," is for the  distillation  of  potable  water from
               naturally  occurring  saline  water in units of 1000 cubic meters
               per day or larger.

               The  basic  terms of this  license  provide  for the grant to the
               Company of an exclusive  right to sell products  within the above
               field of use utilizing (i) over 60 issued and pending patents and
               improvements  (as  defined  in the  License  Agreement)  on  such
               patents  owned by the  Licensors,  and (ii)  issued  and  pending
               patents  owned  by third  parties  to which  the  Licensors  have
               licensed  rights,   which  consist  of  an  international  patent
               application  (which is  expected to result in  identical  patents
               covering the identical  invention in eight  different  countries)
               owned by Hadwaco Oy, a Finnish company  ("Hadwaco"),  under which
               the Licensors  have a license.  The Company also granted  Aquamax
               and  Keeran  certain  exclusive  rights  in  its  technology.  In
               exchange,  the Company will receive 50% of any license royalty or
               amounts of a similar nature they receive from third parties.

               Under the terms of the License  Agreement,  the Company agreed to
               pay a total of $4,000,000  and 600,000 shares of its common stock
               for the  rights  under  the  License  Agreement  under a  payment
               schedule  contingent on various factors as to timing but to be no
               later than  December 31, 2000.  The Company has paid  $400,000 to
               the  Licensors.  No  shares  of common  stock  have  been  issued
               pursuant to the License  Agreement.  The remaining amount payable
               under the License  Agreement is  $6,540,000 at December 31, 2000,
               which  consists  of  $3,600,000  payable  in cash and  $2,940,000
               payable in common stock (representing the value of 600,000 shares
               of  common  stock to be  issued,  valued at the  market  value of
               shares of the Company's  common stock as of the effective date of
               the  transaction,  September  21,  2000),  has been  accrued as a
               liability  and  included  in the amount  recorded  as a licensing
               agreement  asset along with the $400,000 paid in cash. The asset,
               with  a  cost  of  $6,940,000  ($6,540,000  after  an  impairment
               adjustment of $400,000),  is being  amortized  over its estimated
               useful life of ten years using the straight-line method.



                                       17
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN (Continued)

               The   license   agreement   was   signed  by  the   Company   and
               Aquamax/Keeran  representatives  as of September  21,  2000,  but
               because of questions  raised as to the identity and  authority of
               one  Aquamax/Keeran  signatory,  an  exhibit  was  added  to  the
               agreement solely to clarify the matter.  Revised  signature pages
               (signed by the  original  Aquamax/Keeran  person and dated on the
               original  September  signing date) were received by us on October
               2, 2000. The transaction was originally  recorded in October 2000
               in the belief that, until properly executed  signature pages were
               received, it was not effective.  Based on our reassessment of the
               circumstances,  we have  determined  that  the  agreement  became
               binding on September 21, 2000. Therefore,  the September 30, 2000
               financial  statements  were amended to reflect the transaction as
               occurring in September.  The key points  leading to the change in
               the  Company's  position  as to  the  effective  date  were:  (1)
               although  the name and  title of the  representative  signing  on
               behalf of Keeran  Corporation  was not disclosed on the signature
               page or accompanying documents, the signature was an original and
               the  signer had  actual  authority  from  Keeran  Corporation  to
               execute  the  agreement;  (2)  original  signature  pages for all
               parties were  exchanged in September  with the intent to be bound
               by the agreement;  (3) the  re-execution of the signature page on
               behalf of Keeran Corporation was by the same person and was dated
               by  him  to  the  original   signing   date,   which   presumably
               demonstrates that Keeran Corporation  believed that the agreement
               was  effective  as  of  the  original  signature  date;  and  (4)
               notwithstanding  the position  taken at the time by the Company's
               intellectual  property  attorney,  that  the  agreement  was  not
               effective  until the revised  signature  page was  received,  the
               Company had wire  transferred the additional  payment of $300,000
               due under the agreement to  Aquamax/Keeran on September 30, 2000,
               prior to receipt of the revised  signature  page. On the basis of
               these facts,  the Company has  concluded  that the better view is
               that the agreement  became legally  binding on all parties during
               the third, rather than the fourth, quarter of 2000.  Accordingly,
               the  transaction has been accounted for as occurring in September
               2000. The measurement date, for purposes of valuing shares of the
               Company's  common stock due as part of the purchase price that is
               included in the accrued  liability is as of  September  21, 2000,
               because  the  effective  date of the  agreement  is the  date the
               rights  to  the  patented  technology  were  transferred  to  the
               Company.




                                       18
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX/KEERAN  (Continued)

               The License Agreement provided that all technology covered by the
               Agreement was to be exclusive  within the specified field of use.
               Subsequent  to the  execution  of the License  Agreement  and the
               initial  payments to the Licensors,  the Company  discovered that
               the Licensors  rights to Hadwaco's  patent  application  that was
               sub-licensed  to the Company  pursuant to the License  Agreement,
               was not an exclusive license, as was represented and warranted by
               the Licensors but was,  rather,  a  non-exclusive  license.  As a
               result, the Company served a notice of default under the terms of
               the License  Agreement on the Licensors on December 22, 2000. The
               Company demanded arbitration pursuant to the License Agreement to
               determine the value of the technology  which the Licensors agreed
               to  license  on  a  exclusive  basis,  but  only  licensed  on  a
               non-exclusive basis.  Consequently,  the value the one portion of
               the  licensed  technology  is  diminished  due to the  fact  that
               Hadwaco   is   free,   contrary   to  the   Licensors'   original
               representations,  to license the same technology to third parties
               for their  (potentially  competitive)  use. The Company's request
               for  arbitration  does not assert that the license does not exist
               or is not  effective.  The Company  has  suspended  all  payments
               beyond the  $400,000  paid in  September  2000 under the  License
               Agreement pending the outcome of the resolution of the dispute in
               connection  with the one element of the Agreement.  In any event,
               the  Company  intends to  proceed  with its  planned  uses of the
               technology,  whether on an exclusive or  non-exclusive  basis.  A
               portion  of  the  cost  of the  License  Agreement  amounting  to
               $400,000  was  expensed in September  2000 which  management  has
               determined to be an appropriate  impairment  adjustment to reduce
               the asset book value by  management's  estimate of the difference
               between  the  amount  the  Company  is  obliged  to pay under the
               License  Agreement and the fair value of the technology  based on
               management's  estimate of the reduction in purchase  price had it
               been  known  that  one  patent   application  was  non-exclusive.
               Management  believes  that no loss,  other  than  the  impairment
               adjustment,  will be incurred in connection with the dispute over
               the License Agreement.

               The full  purchase  price has been  recorded as a  liability  and
               offset  by the  $400,000  paid to date.  The full  amount  of the
               liability was recorded (without offset for potential reduction in
               resolution of the Hadwaco sublicense  dispute) because management
               believes  that:  (1) based on the oral  opinion of the  Company's
               General Counsel, the full amount of the liability,  until amended
               through  negotiation or legal process,  represents an enforceable
               liability  as long  as the  Company  retains  the  patent  rights
               conveyed  under  the  agreement;  (2)  the  liability  meets  the
               accounting  definition  of a liability  as stated in Statement of
               Financial  Accounting  Concepts  No.  6,  Elements  of  Financial
               Statements;  and (3) the reduction of the liability to anticipate
               a reduction  in  negotiations  or legal  process  would result in
               recording a contingent  asset that is  prohibited  by SFAS No. 5,
               Accounting for Contingencies.  Accordingly, and since the Company
               intends to keep the patent  rights,  the Company has recorded the
               liability,  and  related  asset,  because  under the terms of the
               agreement the Company has no  discretion to avoid future  payment
               of the  remaining  cash and common stock  payable.  The amount of
               payment under the agreement  withheld  pending  resolution of the
               dispute was not indicative of the diminished  value of the patent
               rights   received   as  the   management   has   estimated   that
               approximately $400,000 of the purchase price represents the value
               of the  exclusivity  feature  of the  one  patent  that  was  not
               received.  The  failure of  Aquamax/Keeran  to deliver  exclusive
               rights to all  patents  resulted  in a  condition  of  default by
               Aquamax/Keeran.  Aquamax/Keeran  has asserted  that the Company's
               subsequent  withholding  of payment  resulted in a  condition  of
               default by us.


                                       19
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN  (Continued)

               The  Company  has  demanded  arbitration  of  this  dispute  with
               Aquamax/Keeran  as  contemplated  in the license  agreement.  The
               arbitration  procedures  have not commenced while the Company and
               Licensors  have been  involved in  settlement  negotiations.  The
               negotiations  resulted in the execution by both parties,  as well
               as Hadwaco Ltd. Oy and Hackman Oy Abp, of a non-binding Letter of
               Intent (LOI). The LOI was executed by the various parties between
               June 15, 2001 and June 20, 2001.  Contemporaneously,  the Company
               entered into a related  non-binding Letter of Intent with Hadwaco
               Ltd Oy and  Hackman Oy Abp.  The  agreement  of the  parties,  as
               memorialized in both LOIs, is as follows. The Company will form a
               new company  (Newco) in Finland.  Because it will control  Newco,
               the Company's financial  statements will report its investment in
               Newco on a  consolidated  basis.  The  Company  will  immediately
               provide  Newco  with  enough  working  capital to  purchase  from
               Hadwaco its  existing  and ongoing  water  remediation  business,
               including all related  intellectual  property.  The  intellectual
               property  transferred  to Newco  will  include  technology  which
               Hadwaco has licensed to Aquamax/Keeran and which is the source of
               our dispute with Aquamax/Keeran.

               In July 2001,  the  aforementioned  negotiations  resulted in the
               execution by Aquamax/Keeran  and the Company,  as well as Hadwaco
               Ltd. Oy and Hackman Oy Abp, of agreements  which will, if closing
               occurs  as  stipulated,  resolve  the  dispute  favorably  to the
               Company. The Agreements therein entered into in July 2001 provide
               that  the  Company  will  make  to  Aquamax/Keeran   payments  of
               $1,800,000  in cash and  600,000  shares  of  common  stock on or
               before  September 28, 2001,  unless  extended by the parties,  in
               addition  to the  $400,000  already  paid to  Aquamax/Keeran,  in
               exchange for ownership (as opposed to licenses as provided in the
               September  2000  License  Agreement)  of all  the  Aquamax/Keeran
               technology in any way connected to water  treatment,  rather than
               the  $4,000,000  of cash  and  600,000  shares  of  common  stock
               aggregate amount under the September 2000 License Agreement.  The
               agreements  also  provide  that the  Company  will  grant back to
               Aquamax/Keeran a royalty free,  exclusive,  worldwide  license to
               exploit Newco's water  desalination  technology for  applications
               where the  volume of water  processed  is less than  1,000  cubic
               meters per day. The license back of rights to  Aquamax/Keeran  is
               exclusive for a term of five years and non-exclusive  thereafter.
               A similar grant back of rights was included in the September 2000
               License  Agreement  but provided for  royalties to be paid to the
               Company based on Aquamax/Keeran's future revenues from use of the
               technology.  The  agreements  also  include  release of liability
               provisions,  whereby all parties  release  each other of and from
               all  claims  and   liabilities,   including  the  amount  due  in
               connection with the Company's obligation under the September 2000
               License  Agreement  as well as the  Company's  claim  for a price
               reduction  due to the  non-exclusivity  of the  Hadwaco  license.
               Contemporaneously,  the  Company  entered  into  agreements  with
               Hadwaco Ltd Oy and Hackman Oy Abp (Hadwaco). The agreement of the
               parties  is as  follows:  The  Company  will  form a new  company
               (Newco) in Finland.  The Company will  immediately  provide Newco
               with  $1,500,000  to purchase from Hadwaco a 100% interest in its
               existing and ongoing water  remediation  business,  including all
               related  intellectual   property.   Newco's  purchase  price  for
               Hadwaco's  water  remediation  business will be $1,500,000 plus a
               19%  interest in Newco's  common  stock.  The parties have agreed
               that on June 30, 2004 Newco will  reacquire  the 19%  interest in
               its stock from Hadwaco  three years after the  effective  date of
               the purchase transaction at a price dependent on Newco's earnings
               and  other  factors  but  is  not  to  exceed   $2,000,000.   The
               intellectual  property  transferred will include technology which
               Hadwaco has  licensed to  Aquamax/Keeran  and the  Licensors,  in
               turn, licensed to the Company.


                                       20
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN

               Newco's  failure to  repurchase  the shares  would  constitute  a
               breach under the  shareholder  agreement that the Company expects
               to enter into with Hadwaco and Newco.  In such an event,  Hadwaco
               would  have the right to request  arbitration.  The  Company  has
               agreed to provide senior debt funding up to a principle aggregate
               amount of  $7,500,000  over a period of three years from the date
               of closing of the Hadwaco  purchase.  The Board of  Directors  of
               Newco will  determine  the timing and amounts of the $7.5 million
               in loans  by the  Company  to  Newco.  The  terms  governing  the
               repayment  by Newco to the  Company of the $ 7.5 million in loans
               have not been established.

               As the July  2001  Agreement  with  the  Licensors  represents  a
               significant  change to the terms of the September 2000 agreement,
               it will be accounted for by (1)  redetermining the purchase price
               to reflect a new measurement date for the 600,000 shares of stock
               to be issued under the agreement from an original market price of
               $3.85  per  share   (which   reflected   a  variable   accounting
               methodology  and  was  remeasured  at  each  quarter  end but was
               amended to the September 21, 2000 market price of $4.90 per share
               upon  determination  that  a  commitment  date  had  occurred  on
               September 21, 2000) to the market price of $2.27 per share on the
               revised  commitment date of July 20, 2001 commitment date and (2)
               reducing the  liability  and asset by the  $2,888,000  difference
               between the  redetermined  purchase  price of $3,562,000  and the
               September 2000 price of $6,450,000. The transaction between Newco
               and Hadwaco will be accounted for as a business combination using
               the purchase method and the provisions of SFAS No. 141,  Business
               Combinations.

               SIGMA

               On March 6, 2001, the Company's wholly owned  subsidiary,  SIGMA,
               entered into a  collaboration  agreement  with Baxi Group Ltd. (a
               manufacturer  of heating  systems in Europe) for the  development
               and marketing of a combined  heat and power  product  (micro-CHP)
               for the residential  market in the United Kingdom.  The objective
               of the agreement is to form a joint working  arrangement  for the
               development  of a  micro-CHP  package,  consisting  of the  Sigma
               Energy  Converter  (Sigma Stirling  engine) and the metal cabinet
               for domestic use, into which each unit will be mounted, including
               controls  and  connections  to both  systems and the  electricity
               supply network. The purpose of the collaboration  agreement is to
               design a prototype micro-CHP package to be installed incompliance
               with  applicable  regulations  in  older  and  larger  houses  as
               replacements  for  boilers  that  have  reached  the end of their
               service  life.  The  parties  will  work  together  in  assigning
               sufficient  priority and allocating  necessary  resources  (which
               have  already  been  budgeted by Sigma) to the project to develop
               the  package  in  a  mutually  agreeable  time  frame,  which  is
               currently anticipated to be by mid-2002. Pursuant to the terms of
               the  collaboration  agreement,  each party pays its own expenses.
               The  agreement  has  no  fixed   termination  date,  but  can  be
               terminated  at any time by either party on three  months  notice.
               The costs incurred by the Company which are  associated  with the
               Baxi collaboration  have been expensed when incurred.  During the
               three-month  period ended June 30, 2001,  such costs consisted of
               travel  costs  and  research  and  development   costs.  For  the
               three-months  ended June 30, 2001, the Company expensed $4,615 of
               travel  costs  for  monthly   planning  and  update  meetings  in
               connection  with the  collaboration  which is included in general
               and administrative  expenses and $12,444 of engineer compensation
               costs  which  are  included  in  the  research  and   development
               expenses.


                                       21
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 8 -       SUBSEQUENT EVENTS

               On various  dates  between  July 1, 2001 and August 8, 2001,  the
               Company borrowed $600,000 under six convertible  promissory notes
               payable.  Each note bears interest at 10% and is due in one year.
               One note in the amount of $100,000 is guaranteed by the Company's
               president.  Each of the notes are  convertible at any time by the
               note holder into the Company's  common stock at a conversion rate
               of $3.00 per share.  concurrent  with the promissory  notes,  the
               Company  granted  133,335  warrants to purchase  one share of the
               Company's  common stock with exercise  prices of $1.50 per share.
               The warrants  were  granted as  additional  consideration  to the
               lenders for funding  the  promissory  notes and will be valued at
               $470,838  pursuant  to  the  Black  Scholes  pricing  model.  The
               proceeds  of  the  loans  will  be  allocated  between  debt  and
               additional  paid-in  capital in  proportion  to the relative fair
               value  of the  debt  and  the  equity  (warrants  and  beneficial
               conversion feature) elements of the transactions.  The portion to
               be  allocated  to equity  will be  $398,389  and the  balance  of
               $201,611 will be recorded as debt, net of discount.  The discount
               of $398,389  will be amortized to interest  expense over the term
               of the debt using the effective interest rate method.

               On August 27,  2001,  the Company  obtained an  extension  of the
               payment  due date  which was due to Silent  Clean  Power from May
               2001 to October 20, 2001. Payment of approximately $90,000, which
               includes accrued  interest,  will be paid in Swedish kronor on or
               before  October  20,  2001.  Accordingly,  the  Company is not in
               default of the  agreement  to purchase  the  patents  from Silent
               Clean  Power.  The  Company  expects it will make the  payment to
               Silent Clean Power either by raising funds from third parties or,
               if  such  funding  is not  available,  through  contributions  to
               capital by the three directors of the Company,  each of whom have
               agreed  jointly and  severally to contribute to the Company funds
               necessary to make such payment.  In the event that the Company is
               unable to make such  payment,  it would have a  material  adverse
               effect on the Company and could result in an impairment charge on
               Sigma's  assets,   including  Stirling  engine  patents  and  its
               goodwill.

               On August 29, 2001,  the Company  entered into an agreement  with
               Aquamax (International) Holdings B.V. and Keeran Corporation N.V.
               ("Aquamax/Keeran") to extend the deadline for consummation of the
               transactions set forth in the agreement executed on July 20, 2001
               by and among Aquamax/Keeran,  Balantum Oy (Newco)and the Company.
               As  amended,  the closing of the  transaction  shall occur on the
               earlier to occur of September  28, 2001 or the first  practically
               possible day after the Company  becomes  listed on the Nasdaq OTC
               Bulletin Board. Additionally,  after August 31, 2001, the Company
               shall  take  responsibility  for paying  for the  processing  and
               maintenance  of patents  and patent  applications  which shall be
               transferred  to Balantum Oy pursuant to the terms of the July 20,
               2001 agreement.  In connection with the extension agreement,  the
               Company  has  assumed  the   obligation  of   Aquamax/Keeran   to
               compensate a finder in connection with the  transactions  between
               Aquamax/Keeran  and the Company an amount of $105,080  and 31,040
               shares of the Company's common stock.


                                       22
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 8 -       SUBSEQUENT EVENTS (Continued)

               AQUAMAX/KEERAN AND HADWACO (Continued)

               On August 30, 2001,  the Company  entered into an agreement  with
               Hadwaco  OYJ  ABP   ("Hadwaco")   to  extend  the   deadline  for
               consummation  of the  transaction  set forth in the July 20, 2001
               agreement by and among  Hadwaco OYJ ABP,  Hadwaco Ltd. Oy and the
               Company. Pursuant to the terms of the extension, the Company will
               pay to Hadwaco an  aggregate  amount of  $150,000  in four weekly
               installments:  $50,000 on each of September 7 and  September  14,
               and  $25,000 on each of  September  21 and  September  28. In the
               event  that the  closing  of the  transaction  in the  July  2001
               agreement  does not take place by September  28, 2001 and that is
               not the sole fault of  Hadwaco,  the amount paid will remain with
               Hadwaco  as  compensation  for the  delay.  In the event that the
               closing in the July 2001  agreement  does take place on or before
               September 28, 2001,  Newco's payment  obligations  under the July
               20,  2001  agreement  shall be reduced by the amount paid for the
               extension.

NOTE 9 -       NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS

               In June 2001, the Financial  Accounting  Standards  Board adopted
               SFAS No. 141, Business  Combinations,  and SFAS No. 142, Goodwill
               and Other Intangible Assets.  SFAS No. 141 is effective as to any
               business  combination after June 30, 2001 and certain  transition
               provisions that affect accounting for business combinations prior
               to June 30, 2001 are  effective  as of the date that SFAS No. 142
               is applied in its  entirety  which will be January 1, 2002 by the
               Company.  SFAS No. 142 is effective,  generally,  in fiscal years
               beginning  after  December 15, 2001 which will be the year ending
               December 31, 2002 by the Company.

               SFAS No. 141  provides  standards  for  accounting  for  business
               combinations.  Among  other  things,  it  requires  that only the
               purchase method of accounting be used and that certain intangible
               assets acquired in a business combination (i.e. those that result
               from  contractual  or other  legal  rights or are  separable)  be
               recorded  as  an  asset  apart  from  goodwill.   The  transition
               provisions  require  that  an  assessment  be  made  of  previous
               business  combinations and, if appropriate,  reclassifications be
               made to or from  goodwill to adjust the  recording of  intangible
               assets such that the criteria  for  recording  intangible  assets
               apart  from   goodwill  is  applied  to  the  previous   business
               combinations.

               SFAS No. 142  provides,  among other  things,  that  goodwill and
               intangible   assets  with   indeterminate   lives  shall  not  be
               amortized.  Goodwill  shall be assigned  to a reporting  unit and
               annually   assessed  for  impairment.   Intangible   assets  with
               determinate  lives shall be amortized over their estimated useful
               lives, with the useful lives reassessed  continuously,  and shall
               be assessed for impairment  under the provisions of SFAS No. 121,
               Accounting  for  the  Impairment  of  Long-Lived  Assets  and for
               Long-Lived  Assets to be Disposed Of.  Goodwill is also  assessed
               for impairment on an interim basis when events and  circumstances
               warrant.  Upon  adoption  of  SFAS  No.  142,  the  Company  will
               recognize and measure an impairment loss as follows:  compare the
               fair  value  of  the  "reporting  unit"  to the  carrying  value,
               including  goodwill.  If the carrying  value  exceeds fair value,
               then compare the implied fair value of the  goodwill" (as defined
               in SFAS No. 142) to the carrying  amount of the goodwill.  If the
               carrying  amount of the goodwill  exceeds the implied fair value,
               then the goodwill will be adjusted to the implied fair value.



                                       23
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                       June 30, 2001 and December 31, 2000


NOTE 9 -       NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

               While the Company has not  completed  the process of  determining
               the  effect  of  these  new  accounting   pronouncements  on  its
               financial  statements,  the Company  currently  expects  that the
               reclassification   made  in   accordance   with  the   transition
               provisions  of SFAS No. 141 will result in a decrease in goodwill
               and an increase in  intangible  assets apart from goodwill in the
               approximate  range of 90% (or  approximately  $5,200,000)  of the
               goodwill recorded at of January 1, 2002. After  implementation of
               SFAS No. 142, all intangible  assets will be amortizable  and the
               remaining goodwill will not be amortizable.

NOTE 10 -      RECENT DEVELOPMENTS

               The Company has been  informed  that the staff of the Division of
               Enforcement  of  the   Securities  and  Exchange   Commission  is
               conducting an informal  investigation  concerning the company and
               has requested information from the Company, including among other
               things past sales of securities and accounting  matters  relating
               to the  Company's  acquisition  of Sigma  Elektroteknisk  and the
               Company's  transactions with Aquamax  International  Holdings, BV
               and Keeran  Corporation  NV. The Company is cooperating  with the
               inquiry.


                                       24
<PAGE>

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         This Form 10-QSB contains forward-looking statements.  These statements
relate to future  events or the  Company's  future  financial  performance.  The
Company's financial projections contain figures relating to plans, expectations,
future results,  performance,  events or other matters. When used in the Plan of
Operations,  or elsewhere  in this Form,  words such as  "estimate",  "project",
"intend", "expect", "anticipate",  "believe", "can", "continue", "could", "may",
"plans", "potential",  "predicts",  "should", or "will" or the negative of these
terms or other  similar  expressions  are  intended to identify  forward-looking
statements.

These  statements are only  predictions  and involve known and unknown risks and
uncertainties.  Such  forward  looking  statements  involve  numerous  risks and
uncertainties,  pertaining to technology,  development of the Company's products
and markets for such products, timing and level of customers orders, competitive
products  and  pricing,  changes in  economic  conditions  and  markets  for the
Company's products and other risks and uncertainties.

Actual  results,  performance  and  events  are  likely to differ and may differ
materially and adversely. Investors are cautioned not to place undue reliance on
these forward-looking  statements which speak only as to the date of the Plan of
Operations.

The  Company  undertakes  no  obligation  to  publicly  update or  revise  these
forward-looking  statements  for any  reason,  or to update the  reasons  actual
results could differ materially from those anticipated in these  forward-looking
statements,  even if new information  becomes  available in the future except as
otherwise required by law or its reporting obligations.

Plan Of Operation

The  Company's  current  operations  began  in  January  1997  by  Manufacturing
Technologies   Corporation  (MTC).  MTC  was  a  Delaware  corporation  and  was
originally  set  up  to  develop  a  business   manufacturing  modular  seawater
desalination  and power  plants.  In March of 1998,  MTC  became a wholly  owned
subsidiary of PTC Holdings,  Inc., when PTC Holdings  acquired 100% of the stock
of MTC in return for assuming $1.4 million of its debt which represented 100% of
MTC's outstanding debt. PTC Holdings  subsequently merged with the Company, then
named PTC Group,  in June 1999. PTC Group  continued as the surviving  corporate
entity conducting the business of PTC Holdings.

The Company is developing modular seawater  desalination systems integrated with
environmentally  friendly  power  sources.  It is also  developing  stand  alone
modular Stirling based power systems. These systems are intended to be sold to a
series of regional joint ventures that will ideally take 15-25 year contracts to
sell water and power.  If successful,  this will provide the Company dual income
streams  from  both  equipment  sales and  royalties  from the sale of water and
power.  Entry into  regional  joint  ventures may involve  certain risks such as
exposure to  liabilities  incurred by the other joint  venturer  and the need to
share certain intellectual property with such regional joint venturers. However,
the Company plans to limit these risks by forming such regional  joint  ventures
with entities which limit liability of their owners,  such as  corporations  and
limited liability companies.  The Company does not currently plan to license its
intellectual  property to these regional joint ventures.  All such  intellectual
property will remain the property of Ocean Power. Furthermore,  any enhancements
to Company's  intellectual  property  arising out of the regional joint ventures
will be licensed back to the Company for its use.

The Company has had no profit to date. It has experienced a total of $27,828,568
in losses from inception of current operations on March 26, 1992 through to June
30, 2001. The Company's losses have resulted from the fact that its products are
still in development and planned principle operations have not commenced.

At June 30, 2001, the Company's  cash position  declined to $335,140 as compared
to $2,683,773 at March 31, 2001 and  $2,176,299 at December 31, 2000 and we have
incurred  accounts  payable,  notes  payable and other  obligations  aggregating
$14,159,250.  During the 3 months  ended June 30,  2001,  aggregate  liabilities
increased by $1,607,462.

At June 30,  2001,  the Company  was in  discussion  with Silent  Clean Power to
convert the current  semi-annual  principle  payment of  approximately  $80,000,
which was due on a note payable which is  collateralized  by patents used in the
Company's  stirling engine business by its subsidiary,  Sigma, into stock in the
Company.  The  discussions  did not result in an  agreement  to convert  debt to
stock.  Management  intends  to  cure  the  delinquency  through  future  equity
infusions or borrowings,  and does not believe that the delinquencies affect the
company's  ownership of the patents. On August 27, 2001, the Company obtained an


                                       25
<PAGE>


extension  of the payment due date which was due to Silent  Clean Power from May
2001 to October 20,  2001.  Payment of  approximately  $90,000,  which  includes
accrued interest,  will be paid in Swedish kronor on or before October 20, 2001.
Accordingly,  the Company is not in default of the  agreement  to  purchase  the
patents from Silent Clean Power. The Company expects it will make the payment to
Silent  Clean  Power  either by raising  funds from  third  parties  or, if such
funding  is not  available,  through  contributions  to  capital  by  the  three
directors  of the  Company,  each of whom have agreed  jointly and  severally to
contribute  to the Company funds  necessary to make such  payment.  In the event
that the  Company  is unable  to make such  payment,  it would  have a  material
adverse  effect on the  Company  and could  result  in an  impairment  charge on
Sigma's assets, including Stirling engine patents and its goodwill.

Due to the increased  level of activity  projected  during the next three years,
additional funding will be needed and is being sought. From June 30 to August 8,
2001, the Company has raised $600,000 of additional  financing  through proceeds
from  notes  payable  (see note 8 in the  financial  statements  for  additional
details on notes payable).

The Company does not have an established source of revenues  sufficient to cover
its  operating  costs and,  accordingly,  there is  substantial  doubt about the
ability of the Company to continue as a going concern.

In order to continue as a going concern,  develop a reliable source of revenues,
and achieve a profitable level of operations, the Company will need, among other
things, additional capital resources.  Management's plans to continue as a going
concern include raising  additional  capital through private  placement sales of
the  Company's  common stock and/or  loans from third  parties,  the proceeds of
which will be used to develop the Company's products, pay operating expenses and
pursue  acquisitions and strategic  alliances.  The Company expects that it will
need $20,000,000 to $30,000,000 of additional funds for operations and expansion
in 2001,  including  the funding  necessary to close the purchase of Hadwaco and
the water treatment  technology of Aquamax/Keeran..  In that regard, the Company
has  entered  into an  agreement  with  Hadwaco  Ltd Oy and its parent  company,
Hackman Ojy Abp,  of Finland to form a new company  ("Newco") , which will be an
81% owned  subsidiary of the Company and to  immediately  fund Newco with enough
working  capital to  purchase  from  Hadwaco  its  existing  and  ongoing  water
remediation business and all related intellectual  property.  Unless extended by
the  parties,  the  Company  must  fund  Newco  with $1.5  million  on or before
September 28, 2001.  The Company has also agreed to settle all ongoing  disputes
with  Aquamax/Keeran  by the payment of $1.8  million and 600,000  shares of the
Company's  stock on or before  September  28,  2001 in  exchange  for all of the
Aquamax/Keeran   technology  in  any  way  connected  to  water  treatment.  The
agreements with  Hadwaco/Hackman and Aquamax/Keeran are described in more detail
in footnote 7 to the financial  statements.  However,  management cannot provide
any assurances that the Company will be successful in  accomplishing  any of its
plans.  Failure  to  raise  sufficient  capital  to make the  payments  on these
agreements  could have a material  adverse  effect on the  company's  results of
operations,  financial  condition,  and  liquidity.  Even in the event  that the
company is able to finance these payments, failure to raise sufficient operating
capital to finance the  company's  business  plans through the end of 2001 would
also have a material  adverse  effect on the  company's  results of  operations,
financial condition and liquidity.

The ability of the Company to continue as a going concern is dependent  upon its
ability to successfully accomplish the plan described in the preceding paragraph
and  eventually  attain  profitable   operations.   The  accompanying  financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.

The Company has a limited  operating history on which to evaluate its prospects.
The risks,  expenses and difficulties  encountered by start-up companies must be
considered when  evaluating the Company's  prospects.  All  development  efforts
share  the  risks  that  the  technology   being  pursued  may  not  perform  to
expectations. Also the cost to manufacture may exceed the product's value in the
market.  Changing  market  conditions  and new  technological  breakthroughs  by
competitors also pose risks.

Due to these uncertainties,  the exact cost of the development program described
below cannot be  guaranteed.  Difficulties  and setbacks occur and can adversely
affect  the  Company.  All  plans  contain  contingencies  but  they  may  prove
insufficient.

If  market  conditions  change,  financial  performance  projections  may  prove
unreachable.  All of these  factors must be weighed when  evaluating  the future
prospects (value) of a development stage company.


                                      26
<PAGE>

The Company does not have an established  source of revenue  sufficient to cover
its  operating  costs  and to allow it to  continue  as a going  concern.  Also,
management  cannot provide any assurances that the Company will be successful in
accomplishing  any of its plans.  The  ability of the  Company to  continue as a
going concern is dependent upon its ability to successfully  accomplish the plan
described  in  the  following   paragraphs  and  eventually   attain  profitable
operations.


As  part  of our  monitoring  the  progress  of  Sigma  on its  Stirling  engine
development program, we assess whether circumstances indicate that an impairment
of the value of the assets of Sigma,  including its patents and goodwill.  There
are no  circumstances  as of June  30,  2001  that  indicate  that  there  is an
impairment of Sigma's assets.



The Company's plan of operation for the next twelve months is as follows:

         (i)      Since  completion  of its  water  quality  certification  on 9
                  December  1999,  the  Company  has  raised  approximately  $13
                  million  pursuant  to private  placement  financing  which has
                  allowed  the  Company to  implement  its  Product  Development
                  Program, as well as to further business development, strategic
                  partnering and acquisition activities. Based on an analysis of
                  its sales and development  costs, the Company intends to raise
                  an additional  $20-30  million  pursuant to private  placement
                  sales of its common  stock  and/or  loans  from third  parties
                  during  2001.  In  addition,  depending  on the pace of actual
                  sales  and the  acquisition  activities  of the  Company,  the
                  Company  may seek to raise an  additional  round of  financing
                  (for a minimum of $100  million  dollars) in the first half of
                  2002.  The exact  method  by which  this  additional  round of
                  financing will be raised will be based on the  maximization of
                  shareholder  value.  The additional  equity,  if raised by the
                  Company, will allow the Company to execute its business plan.

                  Maximization  of  shareholder  value is the basic lens through
                  which all investment  and other  business  decisions are made.
                  One of the major  reasons  that the  Company  prefers to enter
                  into joint  ventures to finance its  endeavors  is to off-load
                  the bulk of the expense of market  development  onto the joint
                  venture partners. This brings market share without dilution of
                  Ocean  Power  shareholders.   However,   there  are  potential
                  disadvantages  to our reliance on joint  ventures,  such as, a
                  reliance on third  parties to properly  implement our business
                  plan. Similarly,  the choice to subcontract  manufacturing and
                  engineering wherever possible is done for the same reason. The
                  only in-house  manufacturing will be of extremely  proprietary
                  components  using  processes  protected by trade  secrets that
                  cannot be otherwise protected.

         (ii)     The Company  intends to complete  the  formation  of Newco (as
                  describe  above an in footnote 7 to the financial  statements)
                  and the purchase of the assets of Hadwaco, which constitute an
                  ongoing water remediation  business with a backlog of existing
                  contracts.  The Company  believes  that this  business,  which
                  utilizes  technology  similar to the technology to be utilized
                  in  development  of  the  Company's   seawater  thermal  vapor
                  compression   desalinization  business,  will  complement  the
                  Company's existing business plans and provide the Company with
                  an  additional  long term  stream of income.  The  Company has
                  committed to fund the  operations of Newco up to $7,500,000 in
                  senior  debt  funding  for a  period  of  three  (3)  years as
                  necessary for the operations of Newco

         (iii)    The Company will be doing  technology and product  development
                  in a number of areas. They are:

                  (a)      low-temperature hydrogen generation
                  (b)       ejectors
                  (c)      chemical-free water pretreatment
                  (d)      enhanced heat transfer in plastic heat exchangers
                  (e)      high-performance alkaline fuel cells
                  (f)      Stirling engines.

                  (g)      Plasma chemical reactors


                                       27
<PAGE>

                  This  work is all  aimed  at  improving  the  performance  and
                  reducing the capital cost of the Company's products.

         (iv)     The Company intends to build and install additional facilities
                  in the next year. They are

                  (a)      further laboratory and test facilities
                  (b)      system integration facilities, and
                  (c)      a manufacturing facility for proprietary components

          (v)     Although the Company plans to subcontract  out as much work as
                  possible, during the next year it still anticipates increasing
                  the  number  of  employees  from the  current  50 full time to
                  approximately 75 full time.

     Aquamax International Holdings BV and Keeran Corporation

                  Our License from Aquamax/Keeran

In September 2000, we signed an agreement with Aquamax  International  Holdings,
BV of  the  Netherlands  and  Keeran  Corporation  NV,  a  Netherlands  Antilles
Corporation,  providing  for a worldwide  license  for their  issued and pending
patents and other  intellectual  property  rights relating to the use of plastic
heat evaporator  condensers for the distillation of seawater.  The scope of this
license  which  we  refer  to as the  authorized  "field  of  use"  is  for  the
distillation of potable water from naturally  occurring saline water in units of
1000  cubic  meters  per day or larger.  Additionally,  Aquamax/Keeran  has also
independently  licensed certain of the same technology covered by its license to
us to Hadwaco Oy, a Finnish company ("Hadwaco"), but for a separate and distinct
field of use, that of wastewater treatment.

The basic terms of our license provide for the grant to us of an exclusive right
to sell products  within the above field of use utilizing (i) over 60 issued and
pending patents and improvements on such patents,  owned by Aquamax/Keeran,  and
(ii) issued and pending  patents owned by third parties to which  Aquamax/Keeran
has licensed rights.  Currently,  third party intellectual  property to which we
have rights consists of one international  patent  application of Hadwaco (which
is expected to result in identical  patents covering the identical  invention in
eight different  countries)  relating to a heat exchange element for a thin film
heat  exchanger.  Hadwaco's  patent  application is directed to a  manufacturing
method to utilize  the  patented  technology  of  Aquamax/Keeran  covered by our
exclusive license from them.

Under  the terms of the  license,  we  agreed  to pay a total of  $4,000,000  US
Dollars and 600,000  shares of our common stock for this  license.  To date,  we
have  paid to  Aquamax/Keeran  $400,000  dollars,  but we  have  not  issued  to
Aquamax/Keeran  any shares of common stock  pursuant to the  license.  The total
purchase  price,  including  the value of the  shares to be  issued  which  were
measured as of the September 2000  effective date of the agreement,  amounted to
$6,540,000.

                  Our Dispute with Aquamax/Keeran

Our  license  to all  technology  covered  by the  license  agreement  was to be
exclusive within the specified field of use.  Subsequent to the execution of the
license  agreement and to our making of the initial  payments to  Aquamax/Keeran
under the license,  we  discovered  that  Aquamax/Keeran's  license to Hadwaco's
international  patent  application  that was  sub-licensed to us pursuant to the
license  agreement,  was not  exclusive,  as was  represented  and  warranted by
Aquamax/Keeran. As a result, on December 22, 2000, we served on Aquamax/Keeran a
notice  of  default  under  the  terms of the  license  agreement.  We  demanded
arbitration  pursuant  to the license  agreement  and  asserted  that there is a
difference in the value of the Hadwaco  sublicense  because it is non-exclusive.
The  possible  diminished  value  arises due to the fact that Hadwaco is free to
license the same technology  covered by the Hadwaco patent  application to third
parties for their  (potentially  competing)  use in the field of use provided in
our agreement with  Aquamax/Keeran.  Our request for  arbitration was limited to
the issue of the  consideration we owe  Aquamax/Keeran  and does not assert that
the license does not exist or is not effective.  Aquamax/Keeran did not formally
respond to our demand for arbitration.  We suspended all further payments due to
Aquamax/Keeran  under the license  agreement  pending  resolution of the dispute
which is discussed below.


                                      28
<PAGE>

Nevertheless,  we  commenced  development  activities  predicated  on using  the
technology licensed from  Aquamax/Keeran  regardless of whether the amounts owed
to Aquamax/Keeran  and the value of the licenses are adjusted.  The technologies
licensed from Aquamax/Keeran are part of the long-range  development program for
distillation-based  systems and are not part of the SWRO  systems to be utilized
in 2001. As part of monitoring  developments in the  desalination  market and as
mentioned in our discussion of the H2OkW System,  there are several  systems for
distillation  which  we are  continuously  in the  process  of  researching  and
evaluating.

                  Potential Resolution of the Dispute

Arbitration  proceedings have not commenced while the Company and Aquamax/Keeran
engaged in settlement negotiations. These negotiations resulted in the execution
by both parties and Hadwaco and Hackman Oy Abp (an  affiliate of Hadwaco),  of a
non-binding  Letter of  Intent  in June  2001.  Contemporaneously,  the  Company
entered into a related  non-binding Letter of Intent with Hadwaco and Hackman Oy
Abp. Under the Letters of Intent,  the Company will form a new company ("Newco")
in Finland.  The  Company  would  provide  Newco with  capital to purchase  from
Hadwaco its water  remediation  business,  including  all  related  intellectual
property   (which  would  include  the  patent   underlying   the  license  from
Aquamax/Keeran that is the basis of our dispute with Aquamax/Keeran).

Between July 20 and July 25, 2001,  the Company  entered  into  agreements  with
Aquamax/Keeran,  Hadwaco and Hackman,  one purpose of which was to implement the
aforementioned letter with intent and to settle all outstanding disputes between
Aquamax/Keeran  and the Company.  Another  purpose of the agreements was for the
Company to acquire the water remediation business of Hadwaco.

The  agreements  with  Aquamax/Keeran  entered into on July 20, 2001 represent a
renegotiation of the terms of the original license agreement entered into by the
Company and  Aquamax/Keeran in September 2000. Under the July agreements (a) the
Company will make payments to  Aquamax/Keeran  of $1,800,000 in cash and 600,000
shares of common stock on August 31, 2001,  unless  extended by the parties,  in
addition  to the  $400,000  already  paid to  Aquamax/Keeran,  in  exchange  for
ownership of all the  Aquamax/Keeran  technology  in any way  connected to water
treatment;  (b) the Company will grant back to  Aquamax/Keeran  a royalty  free,
exclusive,  worldwide license to exploit Newco's water  desalination  technology
for  applications  where the volume of water  processed is less than 1,000 cubic
meters per day, except that after five years such license will be non-exclusive;
(c) the parties  release each other from all claims and  liabilities,  including
amounts due in connection with the Company's obligation under the September 2000
License  Agreement as well as the Company's  claim for a price  reduction due to
the non-exclusivity of the Hadwaco license.

Under the July 20, 2001 agreement with Hackman and Hadwaco: (a) the Company will
form a new company (Newco) in Finland;  (b) the Company will immediately provide
Newco with  $1,500,000  for the  purchase  from  Hadwaco of a 100%  interest  in
Hadwaco's existing and ongoing water remediation business, including all related
intellectual   property;   (c)  Newco's   purchase  price  for  Hadwaco's  water
remediation  business will be $1,500,000  plus a 19% interest in Newco's  common
stock.  The parties have agreed that on June 30, 2004 Newco will  reacquire  the
19% interest in its stock from Hadwaco at a price dependent on Newco's  earnings
and other factors but is not to exceed  $2,000,000.  The  intellectual  property
transferred will include technology which Hadwaco has licensed to Aquamax/Keeran
and  Aquamax/Keeran,  in turn,  licensed  to the  Company.  Newco's  failure  to
repurchase  the  shares as  provided  would be a breach  under  the  shareholder
agreement  that we expect to enter into with  Hadwaco  and Newco at closing  for
which  Hadwaco  would  have the right to  request  arbitration  thereunder.  The
Company has agreed to provide  senior debt  funding up to a principle  aggregate
amount of  $7,500,000  over a period of three  years from the date of closing of
the Hadwaco  purchase.  The Board of  Directors  will  determine  the timing and
amounts  of the $7.5  million in loans by the  Company  to Newco.  All dates are
subject  to  extension  by  mutual   agreement  of  the  parties.   See  "Recent
Developments - Aquamax/Keeran and Hadwaco." The terms governing the repayment by
Newco to the Company of the $7.5 million in loans have not been established.


The agreement with Aquamax/Keeran remains subject to the satisfaction of certain
conditions,  including:  (a) the Company's formation of "Newco" in Finland;  (b)
the Company's  funding of Newco with enough  working  capital so that Newco will
pay to Hadwaco,  on or before August 31, 2001,  $1,5000,000  for the purchase by
Newco of certain assets constituting the water remediation  business of Hadwaco;
and (c) the  Company  must also pay to  Aquamax/Keeran  $1,800,000  and  600,000
shares of the Company's common stock on or before August 31, 2001.

The agreement with Hadwaco and Hackman  remains  subject to the  satisfaction of
certain conditions,  including: Newco's acquisition of Aquamax/Keeran technology
pursuant  to the terms of the July 20,  2001  agreement  between the Company and
Aquamax/Keeran as described above.


                                       29
<PAGE>

On  August  29,  2001,  the  Company  entered  into an  agreement  with  Aquamax
(International) Holdings B.V. and Keeran Corporation N.V.  ("Aquamax/Keeran") to
extend  the  deadline  for  consummation  of the  transactions  set forth in the
agreement executed on July 20, 2001 by and among Aquamax/Keeran, Balantum Oy and
the  Company.  As  amended,  the closing of the  transaction  shall occur on the
earlier to occur of  September  28, 2001 or the first  practically  possible day
after the Company becomes listed on the Nasdaq OTC Bulletin Board. Additionally,
after August 31, 2001, the Company shall take  responsibility for paying for the
processing  and  maintenance of patents and patent  applications  which shall be
transferred to Balantum Oy pursuant to the terms of the July 20, 2001 agreement.
In  connection  with the  extension  agreement,  the  Company  has  assumed  the
obligation  of  Aquamax/Keeran  to  compensate a finder in  connection  with the
transactions  between  Aquamax/Keeran  and the Company an amount of $105,080 and
31,040 shares of the Company's  common  stock.  On August 30, 2001,  the Company
entered  into an  agreement  with  Hadwaco  OYJ ABP  ("Hadwaco")  to extend  the
deadline  for  consummation  of the  transaction  set forth in the July 20, 2001
agreement  by and  among  Hadwaco  OYJ ABP,  Hadwaco  Ltd.  Oy and the  Company.
Pursuant  to the terms of the  extension,  the  Company  will pay to  Hadwaco an
aggregate  amount of $150,000 in four  weekly  installments:  $50,000 on each of
September 7 and  September 14, and $25,000 on each of September 21 and September
28. In the event that the closing of the  transaction in the July 2001 agreement
does not take  place by  September  28,  2001 and that is not the sole  fault of
Hadwaco, the amount paid will remain with Hadwaco as compensation for the delay.
In the event that the closing in the July 2001  agreement  does take place on or
before September 28, 2001,  Newco's payment  obligations under the July 20, 2001
agreement shall be reduced by the amount paid for the extension.


                  Our Accounting for the Aquamax/Keeran License

In September  2000,  $400,000 was expensed in  connection  with the dispute with
Aquamax/Keeran  due to our  belief  at that  time  that the  agreement  would be
terminated  and the  $400,000  would  not be  recoverable.  At the time that the
Company's financial  statements for the year ended December 31, 2000 were filed,
it was no longer  likely that the  transaction  would be voided but the $400,000
expense was then left as an expense due to an error in preparing  such financial
statements.  In connection  with the process of preparing the Company's  amended
Form 10-KSB for December 31, 2000, we identified this  aforementioned  error and
consider that amount to be a reasonable approximation of impairment of the asset
that  results  from  having  received  one  patent  that  did  not  contain  the
exclusivity  feature that was  contemplated in the purchase price. In connection
with this  recharacterization  of the amount  expensed in  September  2000 as an
impairment rather than a contingent liability,  our conclusion in this regard is
based on a two-part assessment. The first part is a legal exposure analysis. Our
general  counsel  reviewed the  situation  and  estimated  the  recovery  (i.e.,
estimated  reduction in purchase  price of the patent rights  acquired under the
Aquamax/Keeran license agreement) that we might expect by applying the standards
of  SFAS  5,  Accounting  for  Contingencies,   and  the  related  American  Bar
Association  Statement  of  Policy.  The  second  part of the  assessment  was a
proportionate  value  methodology.   While  no  appraisal  of  the  patents  was
conducted,  we allocated  the purchase  price of the group of patents  among the
various elements of technology  acquired  (including the exclusivity  feature of
the  Hadwaco  patent)  by  applying  our  judgment,  in  consultation  with  our
intellectual  property  attorney most  familiar  with the relative  value of the
patents.  Both  approaches  resulted in amounts that  approximated  the $400,000
expensed in September 2000.

The full  purchase  price has been  recorded  as a  liability  and offset by the
$400,000 paid to date.  The full amount of the  liability was recorded  (without
offset for potential  reduction in resolution of the Hadwaco sublicense dispute)
because management believes that: (1) based on the oral opinion of the Company's
General  Counsel,  the full  amount  of the  liability,  until  amended  through
negotiation or legal process, represents an enforceable liability as long as the
Company  retains  the  patent  rights  conveyed  under  the  agreement;  (2) the
liability meets the accounting  definition of a liability as stated in Statement
of Financial  Accounting Concepts No. 6, Elements of Financial  Statements;  and
(3) the reduction of the liability to anticipate a reduction in  negotiations or
legal process would result in recording a contingent asset that is prohibited by
SFAS No. 5,  Accounting for  Contingencies.  Accordingly,  and since the Company
intends to keep the patent rights,  the Company has recorded the liability,  and
related  asset,  because  under the terms of the  agreement  the  Company has no
discretion  to avoid  future  payment of the  remaining  cash and  common  stock
payable.  The amount of payment under the agreement  withheld pending resolution
of the dispute was not indicative of the  diminished  value of the patent rights
received as the  management  has estimated  that  approximately  $400,000 of the
purchase price represents the value of the exclusivity feature of the one patent
that was not received. The failure of Aquamax/Keeran to deliver exclusive rights
to  all  patents   resulted  in  a  condition  of  default  by   Aquamax/Keeran.
Aquamax/Keeran has asserted that the Company's subsequent withholding of payment
resulted in a condition of default by us.

                                       30
<PAGE>

The related  asset is being  amortized  over the useful life of 10 years.  While
there are  approximately 60 patents,  they represent a "basket" or dependent set
of  intellectual  property  (IP set) which  means that the  primary  patents are
dependent in that they represent  components of one end product. As such, useful
life was assessed as a single life for the IP set. The  individual  patents have
remaining  patent  terms  ranging  from 8 to 20 years.  The life of 10 years was
selected for the IP set as a whole  because some of the key patents on which the
others are dependent have a remaining  term at the shorter end of the range.  In
addition to patent expiration pattern, the Company has assessed its expectations
as to  term  of  use of  the  patented  technology  in  its  revenue  generating
activities  and  concluded  that the 10 year  life  resulting  from  the  patent
expiration pattern is appropriate.

Our methodology for  determining  whether an impairment  exists at balance sheet
dates is to monitor our progress against the our vapor compression  desalination
development  program  described in the next paragraph.  Prior to commencement of
the plan of product  improvement  (PPI)  described  below,  we will  continue to
monitor the desalination marketplace and assess whether any significant changes,
such as  emergence  of new  competing  technologies,  changes in market size and
configuration,  or changes in the competitor's  business have taken place.  This
enables us to assess whether any market conditions threaten the viability of our
planned  business.  If any such  threatening  conditions were to occur, we would
assess whether the market value of our vapor compression  desalination  business
is less  than  the  carrying  value of the  assets  employed  in that  business,
including the Aquamax/Keeran patent assets. Market value, in such circumstances,
would be based on fair value of future  expected cash receipts or other methods.
If the  market  value  were to be  less  than  the  carrying  value,  impairment
adjustments  would be made. We would use any such  significant  negative  market
conditions as a factor in our continuous assessment of useful life of the assets
employed  in  the  vapor  compression   desalination  business,   including  the
Aquamax/Keeran  patent assets.  After  implementation of the PPI, we will assess
progress against the benchmarks within the PPI to determine  whether  impairment
exists. If we conclude that impairment  exists,  impairment  adjustments will be
measured in the same manner as described above.

The  Company  has  accomplished  the first  two  steps of its vapor  compression
desalination   development   program:  (1)  acquisition  of  the  Aquamax/Keeran
technology;  and (2) obtaining  patent rights on its own technology that will be
combined with the Aquamax/Keeran  technology  (preliminary  patents filed August
2000 and  nonpreliminary  patents filed August 2001).  The remaining  step is to
complete a PPI which  consists of 14 projects,  the combined  effect of which is
projected to yield a more economically viable seawater desalination system, with
lower energy and operating costs for both the projected vacuum vapor compression
system and the existing seawater reverse osmosis technology.  The formal PPI was
initially  designed in 1997, after the first physical  assessment of the Aquamax
equipment in Finland.  The program was  thereafter  continuously  developed  and
refined to reflect new information  gathered from the Aquamax  equipment we have
acquired  and have  under  testing  in  Malta,  as well as data  gathered  about
competitive  technologies  from our  consultants,  and our own monitoring of the
market.  The planning,  scheduling and cost estimating of the formal program was
finalized  in October of 2000.  The PPI is expected to require  approximately  4
full-time  employees and 18 to 20 months to complete once additional  funding of
approximately $5 million is arranged. Neither the time, manpower requirements or
cost necessary for the PPI have changed.  Two of the projects represent critical
path projects on which the 18 to 20 month time line will be  dependent.  The two
critical path projects are: "High Efficiency Steam Ejector Development" Project,
the goal of which is to replace a mechanical  compressor  with a high efficiency
hypercritical  ejector (OPC has a U.S.  patent  application  in process) and the
"Evaporator-Condenser  Efficiency  Increase"  Project,  the  goal of which is to
increase the overall  efficiency of the vapor  compression cycle by at least 30%
(OPC has a U.S.  patent  application in process).  Timely  completion of the two
critical path projects will be benchmarks for measuring  progress for impairment
testing purposes.  Management believes the seawater desalination products market
continues to be large, the competitive  environment is  substantially  unchanged
from that of September 2000 when the Aquamax/Keeran  patent rights were obtained
and continues to have the potential to generate  substantial  profits from which
the investment in the Aquamax/Keeran patents can be recovered.  The commencement
of the PPI has been delayed until funding is arranged. Losing our eligibility to
                                       31
<PAGE>


have our common stock traded on the Nasdaq OTC Bulletin  Board has resulted in a
delay to our  arranging  funding  for the PPI for two  reasons:  first,  because
potential  investors  have elected not to invest until we are again  eligible to
trade on the OTC Bulletin  Board;  and second,  as a result of the  diversion of
management  resources to the task of amending the SEC filings and other  efforts
necessary to re-attain  eligibility to trade on the OTC Bulletin  Board.  During
the period that the PPI has been delayed by the  unavailability of funding,  the
Company has assessed  impairment of the carrying value of its assets employed in
the  desalination  business  by  monitoring   developments  in  the  market  for
desalination  products to  determine  if  technological,  competitive  or market
conditions  indicate that the value of the assets  (including the amortized cost
of the licensed patents and the value of the research and development activities
that were expensed as incurred including research leading to Ocean Power's three
additional  patents and the "know how" resulting from our testing of the unit in
Malta)  is  less  than  the  carrying  value  of the  related  asset  consisting
principally  of  the  cost  of the  Aquamax/Keeran  patent  net  of  accumulated
amortization and the previous impairment adjustment.  Management's assessment of
market  conditions  described above leads  management to conclude that there has
been no impairment of the  Aquamax/Keeran  related license agreement asset other
than the  $400,000  that was  recorded  in  connection  with  the  dispute  with
Aquamax/Keeran over exclusivity of one of the patents, as described below.

The  license   agreement   was  signed  by  the   Company   and   Aquamax/Keeran
representatives  as of September 21, 2000, but because of questions raised as to
the identity and authority of one Aquamax/Keeran signatory, an exhibit was added
to the agreement solely to clarify the matter.  Revised  signature pages (signed
by the  original  Aquamax/Keeran  person  and  dated on the  original  September
signing  date) were  received  by us on October 2,  2000.  The  transaction  was
originally  recorded in October 2000 in the belief that, until properly executed
signature pages were received,  it was not effective.  Based on our reassessment
of the  circumstances,  we have determined that the agreement  became binding on
September 21, 2001. Therefore,  the September 30, 2000 financial statements were
amended to reflect the  transaction  as occurring in  September.  The key points
leading to the change in the Company's  position as to the effective  date were:
(1)  although  the name and  title of the  representative  signing  on behalf of
Keeran  Corporation  was not  disclosed on the  signature  page or  accompanying
documents,  the  signature  was an original and the signer had actual  authority
from Keeran  Corporation to execute the agreement;  (2) original signature pages
for all parties were  exchanged in September  with the intent to be bound by the
agreement;  (3) the  re-execution  of the  signature  page on  behalf  of Keeran
Corporation was by the same person and was dated by him to the original  signing
date, which presumably  demonstrates that Keeran  Corporation  believed that the
agreement  was   effective  as  of  the  original   signature   date;   and  (4)
notwithstanding  the position  taken at the time by the  Company's  intellectual
property  attorney,  that the  agreement  was not  effective  until the  revised
signature  page was received,  the Company had wire  transferred  the additional
payment of $300,000 due under the agreement to  Aquamax/Keeran  on September 30,
2000,  prior to receipt of the  revised  signature  page.  On the basis of these
facts,  the Company  has  concluded  that the better view is that the  agreement
became legally binding on all parties during the third,  rather than the fourth,
quarter  of  2000.  Accordingly,  the  transaction  has  been  accounted  for as
occurring in  September  2000.  The  measurement  date,  for purposes of valuing
shares of the Company's  common stock due as part of the purchase  price that is
included in the accrued  liability  is as of  September  21,  2000,  because the
effective  date  of the  agreement  is  the  date  the  rights  to the  patented
technology were transferred to the Company.


                  Our License to Aquamax/Keeran

Under the September 2000 license  agreement we also granted to Aquamax/Keeran an
exclusive  worldwide  license to sell  products  utilizing  issued  and  pending
patents and  improvements  (as defined in the license  agreement) on our patents
relating to mechanical or thermal vapor compression  distillation  applications.
The  scope of this  license  covers  the  distillation  of  potable  water  from
naturally  occurring  saline  water in units of less than 1000 cubic  meters per
day. In consideration  for such license,  Aquamax/Keeran  was required to pay us
royalties on the sale of the licensed  products,  plus 50% of any royalties they
receive  pursuant  to sales by their  sub-licensees.  Since this was an advanced
technology  development  program,  the amount of future royalties due from sales
were to be determined  once the product was fully developed and the actual value
of the technology was determined. Under the July 2001 agreements, Aquamax/Keeran
will  receive  a fully  paid up  license  for the same  licensed  technology  in
consideration  for a reduction  in purchase  price to be paid by the Company for
the Aquamax/Keeran technology.


                                       32
<PAGE>





    Sigma Elektroteknisk AS Acquisition

Ocean Power  acquired  its wholly  owned  subsidiary,  Sigma  Elektroteknisk  AS
(Sigma) because of Sigma's advanced work in the development of a single-cylinder
Stirling engine system.  A Stirling engine is an external  combustion  engine in
which an ambient pressure burner is used to heat a gas sealed in the engine. The
primary  advantages of the Stirling  engine are that the external  combustion is
cleaner,  quieter and more efficient than internal combustion engines and, since
it has fewer parts than an internal  combustion  engine, it is potentially lower
in cost with higher reliability. Sigma's research and design work had focused on
the development of an external  combustion  engine capable of generating 3 kW of
electricity  and 9 kW of recoverable  heat. We acquired Sigma in order to obtain
distributed power generation technology,  such as Sigma's Stirling engines, that
we believe is commercially viable and has demonstrated technical viability.

After having  evaluated  all other known  Stirling  systems and  evaluated  such
factors as Sigma's core of knowledge and experience-based  "know how," strategic
marketing,  relationships with potential  customers,  an established vendor base
and its existing  business  plan,  we  concluded  that Sigma,  its product,  its
management team, its intellectual property and its market focus, represented the
most  attractive  acquisition for us. At the time that we acquired Sigma, it had
spent over four years developing its Stirling engine. Sigma had built and tested
four prototypes -- three internally and one through an independent  third party.
These tests  included  running each of three engines for 400 hours followed by a
wear analysis. The fourth engine had been run for endurance.  Through these four
prototype  engines,  Sigma  accumulated a total of approximately  4,000 hours of
operating  experience  prior  to our  acquisition.  In  addition  to the  engine
testing,  Sigma  had  identified  the flaws in the  initial  burner  design  and
completed a redesign  intended to be more  efficient  with  significantly  lower
emissions.  Prior to our acquisition,  Sigma had focused primarily on developing
customers in Europe. Sigma's relationship with Statoil (which is discussed above
under "The Business - Distributed Power Generation/Renewable Energy Technologies
- Strategic  Relationships - Personal Combustion Power ("PCP") Project") and the
Norwegian  government had been in place since 1998. Outside of Norway, Sigma was
in serious  negotiations  with two boiler  manufacturers,  including  Baxi Group
Ltd.,  which led to the final  selection of Baxi as the first system  integrator
(see our discussion of our agreement with Baxi below).  Additionally,  Sigma was
then engaged in ongoing  discussions with utilities and energy service companies
from all over Europe.  Prior to our acquisition,  Sigma had focused its business
efforts on customers in Norway, with business development in Europe.

For the reasons set forth above,  we concluded that Sigma had a clearly  defined
Stirling engine product with strong market  potential,  that would best meet our
needs  and,  therefore,  warranted  an  acquisition  price of  $7,862,148  which
consisted of shares of our common stock valued at $5,500,000  and  assumption of
$2,362,148 of Sigma's liabilities.

We have concluded  that Sigma's  Stirling  engine held  strongest  potential for
economic  viability in the  distributed  power market.  Because the Sigma engine
combines both the displacer piston and the working piston into the same cylinder
for more  compact  engine  design,  it  contains  fewer parts and because of its
design  simplicity  and  related  operating  reliability,  we believe  the Sigma
Stirling engine offers  significant  advantages over competing Stirling engines.
Our plan is to arrange for the  manufacture  of these engines by companies  that
build  engines for the  automobile  industry,  thereby  reducing  the  Company's
potential  capital  needs to produce a  commercially  viable  distributed  power
product.

                                       33
<PAGE>

Another  factor  drawing us to Sigma was its focus on what we believe could be a
profitable  business in the growing  distributed  power market in Europe -- home
heat and power  generation.  We  believe  that  Sigma's  focus can  enable us to
develop a source of revenue from Sigma's Stirling engine design within as few as
15 months from acquisition  (November 2001). We are seeking to configure Sigma's
basic engine design for a range of other uses in the  commercial  and industrial
power  markets,  as well as adapting these engines as a power source for our H20
kW sea water  desalination  systems.  We believe that Sigma's basic one-cylinder
model can be  expanded  from the  current  3 kW to up to a 25 kW engine  with no
basic design  change.  Our  long-term  plan,  ultimately,  is to seek to combine
several 25 kW engine  systems in  parallel  arrays that will allow us to install
distributed power systems from kilowatts to megawatts with one basic design that
can share many  common  parts;  thereby  reducing  the cost to produce the power
systems. This manufacturing efficiency, coupled with the inherent flexibility of
the fuel  sources  for a Stirling  engine (any heat source will do, such as oil,
gas, solar power or any biomass) we believe will cause Stirling  engines to have
significant  commercial  advantages as a source of distributed  power over other
distributed  technologies  such as fuel cells,  with their more  stringent  fuel
requirements.

The purchase  price for Sigma of $7,862,148  represents  the market value of the
shares  of our  common  stock  issued  in the  acquisition  of  $5,500,000  plus
liabilities  of  $2,362,148  assumed.  In  accordance  with  generally  accepted
accounting principles, we allocated $1,272,392 of this purchase price to Sigma's
tangible and intangible  assets  representing  our estimate of the fair value of
such net assets.  Of the portion  allocated to tangible and  intangible  assets,
approximately  $978,000 was allocated to patents owned by Sigma.  In the absence
of a third party appraisal of the individual  assets and liabilities of Sigma at
the date of the  acquisition,  and the  absence of an "open  market" for patents
from which a market value could be  determined,  we estimated  fair value of the
patents as being  approximately  equal to their  carrying  value in the books of
Sigma.  Our  decision  was based on the  following:  (1) Sigma had  acquired the
patent rights in negotiated  transactions  in 1997 and 1998,  which  established
their value at those dates,  and (2) after  acquisition of the patents,  nothing
had  occurred at Sigma or in the market  place to warrant a change in the market
value of the patents, except for a reduction in value due to the passage of time
which had  already  been taken  into  account  by  Sigma's  amortization  of the
patents' carrying value for 23 months of the 134 months remaining on the term of
the patents.  The remaining  portion of the purchase price  ($6,589,756),  which
represented  the  excess of the  purchase  price  over the fair value of Sigma's
identifiable tangible and intangible assets, was recorded as goodwill.
                                       34

<PAGE>

The process of allocating the purchase price for the Sigma acquisition  included
assigning an  estimated  useful life to the patents and goodwill for purposes of
amortizing  their carrying value of these assets on our financial  statements as
required by generally accepted accounting  principles.  The useful life assigned
to the patents was 90 months  (representing the remaining weighted average terms
on the patents at the date of the purchase of Sigma by the Company) and 10 years
for the goodwill which resulted from the acquisition.  The time periods assigned
for these useful lives recognized that Sigma (1) was well along in its technical
development,  (2) had identified a market for its product (i.e., the residential
distributed  heat and power market in Europe),  and (3) had developed a business
plan to exploit the European market for combined heat and power generation.  Our
expectation  at the time of  allocating  the  purchase  price was that the Sigma
business would begin generating modest amounts of revenues in late 2001 or early
2002,  and that  commercial  production  would  begin in 2003 and  continue on a
profitable basis at least through 2010, which would be 10 years from the date of
the acquisition.

We  evaluate  the  carrying  value of patents and  goodwill  for  impairment  by
monitoring  the  progress  of  the  Sigma  business   against   expectations  of
accomplishment  as well as  developments  in the market  place  with  respect to
competing  technology,  obsolescence  or other factors bearing on the commercial
viability  of  the  Company's  business.   These  expectations  were  informally
established at the time of the  acquisition of Sigma in August 2000 and were set
forth in a business  plan dated  April  2001 which was  updated in August  2001.
Until the updated  business  plan from August 2001,  the  Company's  approach to
assessing impairment of Sigma-related assets was to monitor,  without the formal
use of benchmarks,  Sigma's progress against our expectations for development of
the technology and the positioning of such technology for commercial  operations
under Sigma's business plan. Given that the Stirling engine development  project
is discretely  centered in Sigma,  the small size of Sigma and the close working
relationship between Sigma and Ocean Power management teams, management believes
that it had sufficient  information  to recognize  whether or not impairment was
likely. From the time of our acquisition of Sigma, Ocean Power has monitored its
progress in developing its Stirling engine.  At the time of our acquisition,  we
made it clear that we wanted to add a major  manufacturing cost reduction effort
and US market  development to Sigma's business plan. This monitoring process has
included  establishing  a regime of weekly  conference  calls,  regular  visits,
planning sessions,  and design reviews.  We also instituted an outside review of
Sigma's  progress by consultants,  including  Ricardo and Kockums.  (For further
description of our relationships  with Ricardo and Kockums,  see "The Business -
Distributed   Power   Generation/Renewable   Energy   Technologies  -  Strategic
Relationships   -  Ricardo   US"  and  "The   Business   -   Distributed   Power
Generation/Renewable  Energy  Technologies - Strategic  Relationships - Kockums,
Sweden".)  These plans have  specific  development  goals and  progress has been
carefully  monitored.  This  monitoring  program was  augmented by the April and
August revisions to the Sigma business plan and remains on-going.

The above mentioned  activities were documented in normal  engineering  fashion.
Notebooks,   PowerPoint  presentations,   timelines,  schedules,  design  review
documents,  drawings and hardware were all generated.  Management  also received
regular reports on the various activities.

With  frequent  contact  among  the CEO of  Sigma,  Ocean  Power's  Director  of
Manufacturing,  Chief  Scientist and other staff,  as well as regular visits and
internal  reports,  management  concluded that all activities  were  progressing
acceptably.  Continuous  monitoring of competing  technologies and review of our
development  progress led management to believe that the new technologies  Sigma
was applying to Stirling engines could result in competitive  advantages and the
total value of their basic patents has not decreased.

                                       35
<PAGE>

The Board of Directors and management of Ocean Power were regularly  apprised of
the progress on all activities,  including Sigma. Based on management's  regular
monitoring,  we concluded  that no  impairment  of the goodwill or Sigma patents
existed at any of the balance sheet dates since September 2000.

Beginning in August  2001,  the  benchmarks  in the  development  plan are being
monitored  and will be updated  quarterly.  We would view any failure to meet an
established  benchmark by a significant  degree as an indication  that there may
exist an impairment of goodwill and/or the patent assets.  In such case, we will
compare the then-estimated fair value of Sigma (using present value of projected
future  cash flows of the  Stirling  engine  business,  adjusted  to reflect the
change in  circumstances  leading to failure to meet the benchmark)  against the
carrying value of the assets of the Stirling engine business.  We will recognize
an impairment  adjustment if the fair value of the Stirling  engine  business is
less than its carrying  value.  The assessment  might also result in a change in
useful  life of patents or  goodwill  even if an  impairment  adjustment  is not
required.  Statement of Financial  Accounting  Standard (SFAS) No. 142, Goodwill
and Other Intangible  Assets,  will be effective January 1, 2002 for the Company
and, from such date, the Company will apply its  provisions,  and those of other
accounting pronouncements referenced therein, for assessing impairment.

The development benchmarks for Sigma's Stirling engine business are as follows:

<TABLE>
<CAPTION>

               Targeted Completion Date                                      Benchmark
------------------------------------------------------- -----------------------------------------------------
<S>                                                     <C>
First Quarter of 2001                                   Prime customer agrees to collaborate in
                                                        development efforts
------------------------------------------------------- -----------------------------------------------------
Fourth Quarter of 2001                                  Second generation prototype available to Sigma for
                                                        testing
------------------------------------------------------- -----------------------------------------------------
Fourth Quarter 2001 or First Quarter 2002               First proceeds from sale of prototypes
------------------------------------------------------- -----------------------------------------------------
Late First Quarter or early Second Quarter of 2002      Release of second generation prototype for external
                                                        testing
------------------------------------------------------- -----------------------------------------------------
Second Quarter 2002                                     Micro combined heat and power system ready for
                                                        internal testing
------------------------------------------------------- -----------------------------------------------------
Third Quarter 2002                                      Freezing (finalization) of design of the second
                                                        generation prototype
------------------------------------------------------- -----------------------------------------------------
Fourth Quarter 2003                                     Commence production of product (small energy
                                                        converter with electrical output of 3 kW and
                                                        thermal output of 9 kW)
------------------------------------------------------- -----------------------------------------------------
</TABLE>


                                       36
<PAGE>

Sigma  successfully  achieved  the first  benchmark  in March  2001 by  reaching
agreement  with Baxi Group Ltd,  a major  manufacturer  of boilers in the United
Kingdom collaborate with Sigma in developing a micro-CHP package for residential
use consisting of the Sigma Energy  Converter  (Sigma Stirling engine in a metal
cabinet which also contains controls,  electrical  connections and tanks to both
heat and power system . The Company expects that the collaboration will take the
form of a vendor-customer relationship and not include a legal entity, such as a
partnership or joint venture.

The milestones  have remained  unchanged  since the date of acquisition of Sigma
and we are on schedule.  Nothing has occurred to date that brings into  question
the valuation of the long-lived assets of Sigma or their useful lives.

Our  initial  anticipated  time-line  to develop  our 3 kW  Stirling  engine for
commercial  use was three years from the date of initial  funding of the capital
necessary  to continue  the work  already  begun by Sigma before the date of the
acquisition.  The initial  funding and  commencement  of work began in September
2000  and,  as of  August  2001,  there  has  been  no  change  to the  plan  of
development.  To reduce the risk that the time  necessary for  development  will
have to be extended,  the Company has contracted for outside engineering support
from Ricardo Inc.

Our initial  estimate of our funding  requirements to achieve the benchmarks set
forth above was  approximately  $19.9 million,  which amount continues to be the
estimate.  The $19.9 million aggregate amount needed over a three year period to
fund the activities in the Plan of Development is as follows:  $700,000 in 2000,
$9.0  million  in 2001,  $6.7  million in 2002 and $3.5  million in 2003.  As of
August  2001,  the Company has provided  approximately  $3.0 million of the $9.7
million originally  projected to be needed in 2000 and 2001. While the remaining
$6.7  million has not yet been  provided to Sigma,  it has been able to meet the
Stirling  engine  benchmarks  to date by (1)  focusing  on the core  activity of
designing,  developing  and  engineering  a  production  prototype  of the first
generation Sigma 3kW electric/9 kW thermal Stirling engine;  (2) using available
funds  of $3.0  million;  (3)  obtaining  vendor  credit  of $1.0  million;  (4)
deferring  development  tasks (and the related  costs) that were not part of the
core activity and could be deferred  without  causing delay to the time line for
development;  and (5) converting of debt to stock of Ocean Power. By focusing on
the  designing,  developing  and  engineering  of a production  prototype of the
engine,  we have been able to complete a pre-mass  production  engine  ready for
manufacture. We have also been able to have Ricardo, our engineering consultant,
begin  planning the design and  manufacture of the second  generation  prototype
engine,  which is intended to be lighter,  simpler in design and less  expensive
that  the  first  generation  engine.  Thirty  units  of the  second  generation
prototype  units have been  ordered  and are under  production.  The first three
units are scheduled for delivery (subject to the availability of funding) in the
fourth  quarter  2001.  In fourth  quarter 2001 or first quarter 2002, we expect
(subject to the  availability of funding) to start generating cash flow from the
release of second generation  prototype engines to utilities and other potential
customers for testing. Because of the low volume of production, pricing of these
second generation engines will only cover the high initial manufacturing cost of
the initial thirty units.  Therefore,  early stage  production will not generate
sufficient  cash  flow to fund  other  development  tasks  such as the  deferred
activities and other second generation development activities such as marketing.

With  respect  to  the  conversions  of  debt  to  equity,   Statoil   converted
approximately  $381,000 of its loans to Sigma into approximately  119,000 shares
of common  stock of the  Company.  The  temporary  solution to our  shortfall in
available  funding was to focus on core  activity.  Additional  funding  will be
needed  during the  remainder  of 2001 or the early part of 2002 to complete the
development   tasks  deferred   during  2001  and  to  complete  the  benchmarks
established  for the time period and to avoid an  impairment in the value of the
Sigma assets (including patents and goodwill).

                                       37
<PAGE>

During the course of discussions with potential customers relating to a possible
business  relationship,  such  as  related  to  marketing,   manufacturing,  and
installation  of our  products,  some of our  potential  customers  expressed an
interest in  purchasing  equity  securities  of the  Company.  While we have had
preliminary  discussions with potential customers  concerning the possibility of
such an equity investment in the Company,  we are not currently  discussing with
any  potential  customer  the terms of any such  investment.  The Company has no
intention of issuing equity  securities to acquire customers for no, or nominal,
cash consideration.

While management  believes  sufficient funds can be raised from external sources
of capital, no assurance can be given that the funding will be obtained.  In the
event that  funding is not  available,  or is only  available  on terms that the
Company  believes are  unfavorable,  adequate  funding may not be obtained which
could  have a  material  adverse  effect on the  Company's  financial  position,
results of  operations  and liquidity and would result in delays in the expected
schedule and would likely result in an impairment of the carrying value of Sigma
assets  (including  patents and  goodwill)  and could lead to a reduction in the
estimated useful life used to amortize these assets.

Our initial estimate,  which remains unchanged, of our manpower requirements for
the Stirling  engine  development  plan was a total of 53 people by 2004.  Sigma
currently has 20 employees. To develop the Stirling engine as we currently plan,
we anticipate  increasing  Sigma's  manpower to  approximately  26 by the end of
2001, to 38 in 2002 and to 45 in 2003. At the time of  acquisition  in September
2000,  Sigma  had  six  full-time  employees  and by the end of  2000  that  had
increased  to ten.  For the current year 2001,  Sigma  expects to increase  that
amount by 16 to reach the total of 26 by year end. Sigma increased its full time
employees  to 16 by March 31 and to 20 by June 30 of this year.  To date,  Sigma
has met its expected manpower requirements.
                                       39
<PAGE>
         Recently Issued Accounting Pronouncements

               In June 2001, the Financial  Accounting  Standards  Board adopted
               SFAS No. 141, Business  Combinations,  and SFAS No. 142, Goodwill
               and Other Intangible Assets.  SFAS No. 141 is effective as to any
               business  combination after June 30, 2001 and certain  transition
               provisions that affect accounting for business combinations prior
               to June  30,  2001 are  effective  as of the  date  that  SFAS is
               applied  in its  entirety  which  will be  January 1, 2002 by the
               Company.  SFAS No. 142 is effective,  generally,  in fiscal years
               beginning  after  December 15, 2001 which will be the year ending
               December 31, 2002 by the Company.

               SFAS No. 141  provides  standards  for  accounting  for  business
               combinations.  Among  other  things,  it  requires  that only the
               purchase method of accounting be used and that certain intangible
               assets acquired in a business combination (i.e. those that result
               from  contractual  or other  legal  rights or are  separable)  be
               recorded  as  an  asset  apart  from  goodwill.   The  transition
               provisions  require  that  an  assessment  be  made  of  previous
               business  combinations and, if appropriate,  reclassifications be
               made to or from  goodwill to adjust the  recording of  intangible
               assets such that the criteria  for  recording  intangible  assets
               apart  from   goodwill  is  applied  to  the  previous   business
               combinations.

               SFAS No. 142  provides,  among other  things,  that  goodwill and
               intangible   assets  with   indeterminate   lives  shall  not  be
               amortized.  Goodwill  shall be assigned  to a reporting  unit and
               annually   assessed  for  impairment.   Intangible   assets  with
               determinate  lives shall be amortized over their estimated useful
               lives, with the useful lives reassessed  continuously,  and shall
               be assessed for impairment  under the provisions of SFAS No. 121,
               Accounting  for  the  Impairment  of  Long-Lived  Assets  and for
               Long-Lived  Assets to be Disposed Of.  Goodwill is also  assessed
               for impairment on an interim basis when events and  circumstances
               warrant.  Upon  adoption  of  SFAS  No.  142,  the  Company  will
               recognize and measure an impairment loss as follows:  compare the
               fair  value  of  the  "reporting  unit"  to the  carrying  value,
               including  goodwill.  If the carrying  value  exceeds fair value,
               then compare the "implied fair value of the goodwill" (as defined
               in SFAS No. 142) to the carrying  amount of the goodwill.  If the
               carrying  amount of the goodwill  exceeds the implied fair value,
               then the goodwill will be adjusted to the implied fair value.
                                       38
<PAGE>

               While the Company has not  completed  the process of  determining
               the  effect  of  these  new  accounting   pronouncements  on  its
               financial  statements,  the Company  currently  expects  that the
               reclassification   made  in   accordance   with  the   transition
               provisions  of SFAS No. 141 will result in a decrease in goodwill
               and an increase in  intangible  assets apart from goodwill in the
               approximate  range of 90% (or  approximately  $5,200,000)  of the
               goodwill recorded at of January 1, 2002. After  implementation of
               SFAS No. 142, all intangible  assets will be amortizable  and the
               remaining goodwill will not be amortizable.

                           PART II. OTHER INFORMATION


ITEM 1.   Legal Proceedings

     Not applicable.


ITEM 2.   Changes in Securities and Use of Proceeds

     Except as otherwise  noted,  the  securities  described in this Item 2 were
issued pursuant to the exemption from  registration  provided by Section 4(2) of
the Securities  Act of 1933.  Each such issuance was made pursuant to individual
contracts which are discrete from one another and are made only with persons who
were sophisticated in such transactions and who had knowledge of, and access to,
sufficient  information  about  the  Company  to  make  an  informed  investment
decision.  Among  this  information  was  the  fact  that  the  securities  were
"restricted securities".

     1.  Issuance  of   Convertible   Notes  Payable  to  Vesta  Liv  and  Vesta
     Forksikring.

         On April 2, 2001,  the Company  issued two  convertible  notes payable,
     each with the following  terms:  The notes accrue interest at a rate of 10%
     per annum and are convertible  into the Company's common stock at $4.00 per
     share. As additional  consideration,  the company granted 200,000  warrants
     with an exercise price of $1.50 per share, with an expiration date of April
     1, 2003. A commission  of $12,000 was retained by Sundal  Collier & Co., in
     Norway.  The market price for the  company's  common stock on April 2, 2001
     was $2.73 per share. Such convertible notes payable were issued as follows:

<TABLE>
<CAPTION>

    Date of                           Conversion      Number of       Price per       Expiration
    Issuance          Note Amount     Securities      Shares          Share           Date            Recipient
    ----------------- --------------- --------------- --------------- --------------- --------------- ---------------
<S>                   <C>             <C>             <C>             <C>             <C>             <C>
         4/2/01          $360,000         Common          90,000          $4.00           4/2/03      Vesta Liv
                                         Warrants        120,000          $1.50           4/1/03
    ----------------- --------------- --------------- --------------- --------------- --------------- ---------------

    ----------------- --------------- --------------- --------------- --------------- --------------- ---------------
         4/2/01          $200,000         Common          60,000          $4.00           4/2/03      Vesta
                                         Warrants         80,000          $1.50           4/1/03      Forsikring
    ----------------- --------------- --------------- --------------- --------------- --------------- ---------------
</TABLE>

     2.  Conversion of Debt

         On April 2, 2001,  the Company  issued  50,000  shares of the company's
common stock to Wilke,  Fluery,  Hoffelt,  Gould & Birney, LLP, (an unaffiliated
third party) for the cancellation of debt in the amount of $75,000, and the cash
payment of $500 (the par value of the stock  issued).  The company owed the debt
for legal  services  provided on behalf of the company.  The market price of the
company's common stock on April 23, 2001 was $2.65 per share.
                                       39

<PAGE>

     3.  Conversion of Debt

         On June 8, 2001,  the Company  issued  119,152  shares of the company's
common stock to Statoil ASA., (an unaffiliated third party) for the cancellation
of debt in the amount of $381,286.  SIGMA,  the Company's  subsidiary,  owed the
debt to Statoil for research advances.  The market price of the company's common
stock on June 8, 2001 was $3.70 per share.

     Except as otherwise noted, the securities  described in this Item 2(3) were
issued pursuant to the exemption from  registration  provided by Section 4(2) of
the Securities Act of 1933 and Regulation S.

     4.  Issuance to Gene Martineau

         On June 1, 2001, the Company  entered into a Consulting  Agreement with
Gene Martineau for a 2 year term to receive services related to interfacing with
institutional investors and brokerage firms.

         Pursuant to the  contract,  on June 29, 2001 the company  issued common
stock and warrants to Gene Martineau as consideration for services.  The company
issued  120,000  shares of its common stock on June 29, 2001.  Also, the company
granted  120,000  warrants  with an  exercise  price of $1.50  per share for two
years. The market price of the company's common stock on June 29, 2001 was $2.80
per share.


                                       40
<PAGE>

ITEM 3.   Defaults Upon Senior Securities

     Not applicable.

ITEM 4.   Submission of Matters to a Vote of Security Holders

     No matters  were  submitted to a vote of the  security  holders  during the
thirteen-week period ended June 30, 2001.

ITEM 5.   Other Information

         The Company deems the following  information to be of importance to its
security holders:

Recent Developments

SEC Matter

The Company has been informed that the staff of the Division of  Enforcement  of
the Securities and Exchange  Commission is conducting an informal  investigation
concerning the Company and has requested information from the Company, including
among other things past sales of securities and accounting  matters  relating to
the Company's  acquisition of Sigma  Elektroteknisk  and our  transactions  with
Aquamax  International  Holdings,  BV and Keeran  Corporation NV. The Company is
cooperating with the inquiry.

Aquamax/Keeran and Hadwaco

On  August  29,  2001,  the  Company  entered  into an  agreement  with  Aquamax
(International) Holdings B.V. and Keeran Corporation N.V.  ("Aquamax/Keeran") to
extend  the  deadline  for  consummation  of the  transactions  set forth in the
agreement executed on July 20, 2001 by and among Aquamax/Keeran, Balantum Oy and
the  Company.  As  amended,  the closing of the  transaction  shall occur on the
earlier to occur of  September  28, 2001 or the first  practically  possible day
after the Company becomes listed on the Nasdaq OTC Bulletin Board. Additionally,
after August 31, 2001, the Company shall take  responsibility for paying for the
processing  and  maintenance of patents and patent  applications  which shall be
transferred to Balantum Oy pursuant to the terms of the July 20, 2001 agreement.
In  connection  with the  extension  agreement,  the  Company  has  assumed  the
obligation  of  Aquamax/Keeran  to  compensate a finder in  connection  with the
transactions  between  Aquamax/Keeran  and the Company an amount of $105,080 and
31,040  shares of the Company's  common stock.
                                       41

<PAGE>

On August 30, 2001,  the Company  entered into an agreement with Hadwaco OYJ ABP
("Hadwaco") to extend the deadline for consummation of the transaction set forth
in the July 20, 2001 agreement by and among Hadwaco OYJ ABP, Hadwaco Ltd. Oy and
the Company.  Pursuant to the terms of the extension,  the Company will pay into
an escrow account an aggregate  amount of $150,000 in four weekly  installments:
$25,000  on each  of  September  7 and  September  14,  and  $50,000  on each of
September 21 and September 28. In the event that the conditions precedent in the
July 2001  agreement are not completed by September 28, 2001,  the escrow amount
shall  be  unconditionally  refunded  to the  Company.  In the  event  that  the
conditions  precedent in the July 2001  agreement are completed by September 28,
2001, the escrow amount shall be unconditionally released to Hadwaco, and should
the  completion  of the sale of assets  under the July 20, 2001  agreement  take
place on or before  September 28, 2001,  Newco's payment  obligations  under the
July 20, 2001 agreement  shall be reduced  accordingly.

   Organic Power transaction update:

On page 24 of the  Company's  Annual  Report on Form  10-KSB  for the year ended
December 31, 2000,  we reported  that  discussions  were ongoing  regarding  the
potential  purchase by Ocean Power of up to 50% of the stock of Organic Power, a
Norwegian  company  ("Organic  Power").  Such  discussions  have been suspended.
However,  negotiations  between the Company and Organic  Power for an  exclusive
license to use or sell Organic Power's  gasification  technology in the areas of
distributed  power and seawater  desalination in those regions currently covered
by our joint venture agreements or heads of agreement--Greece  and Greek Cyprus,
Mexico and  twenty-eight  countries and territories and islands in the Caribbean
region, as well as the United States and Canada are ongoing on the same basis as
previously  disclosed.  The  parties  have  agreed  to  complete  the terms of a
definitive  license agreement by August 31,2001 or the letter of Intent of March
14, 2001 between the parties will terminate unless extended by agreement.  As of
September  4, 2001,  a difinitive  agreement  had not been  signed.  However the
parties were continuing to negotiate.

   Status  of   anticipated   joint   ventures   with  Apollo  Water  and  Power
International,   Inc.   ("Apollo")   and   Caribbean   Water  and  Power,   Inc.
("Caribbean"):

On page 12-13 of the Company's  Annual Report on Form 10-KSB we reported that on
February 23, 2001, the Company entered into Joint Venture Agreements with Apollo
and  Caribbean,  respectively,  for the  development  of private water and power
systems  in  Greece  and  Greek  Cyprus  and a  specific  list  of  twenty-eight
countries,  territories and islands  throughout the Caribbean basin. Those Joint
Venture  Agreements  provided that the agreements are not binding unless certain
supporting  documents  identified in the Form 10-KSB are executed within 60 days
of the date the  joint  venture  agreement  is  executed  by both  parties.  The
supporting  documents  have not been  executed,  but the parties  have agreed to
continue  negotiations  beyond  the  60  day  limit.  The  Company  is  also  in
negotiations  with the  Apollo,  Caribbean  and our  prospective  joint  venture
partner in Mexico to include the gasification technology of Organic Power within
the power  systems  which they will be able to market  within  their  respective
territories.

    Battelle Memorial Institute, Pacific Northwest Division

On pages 7 and 24 of the  Company's  Annual  Report on Form 10-KSB,  we reported
that since  November  2000, we have been testing at our  facilities in El Dorado
Hills, California, three ozone generators based upon the Plasma Chemical Reactor
("PCR") technology  developed by the Kharkov Institute of Physics and Technology
("KIPT") in collaboration  with Battelle Memorial  Institute,  Pacific Northwest
Division  ("Battelle") and funded by the U.S. Department of Energy's Initiatives
for Proliferation  Prevention  Program. On March 8, 2001, Battelle proposed that
we  participate  in the  development  of the  next  phase of the  project  as an
industry partner with the United States Department of Energy's Pacific Northwest
National Laboratory ("PNNL"), which is operated by Battelle, to refine the ozone
generator technology derived from the PCR technology.

By accepting  the position of Industrial  Partner  under a Thrust II CRADA,  the
Company has secured an  exclusive  position  to license the PCR  technology  for
seawater  desalination  applications,  and a non-exclusive license for all other
applications.  Under  terms of the  agreement,  PNNL  has  taken  possession  of
additional  higher capacity PCR units at KIPT and is providing such equipment to
the Company for testing with its desalination equipment in Malta.


                                    42
<PAGE>

    Water Services Corporation and Malta Desalination Services Ltd.

On  pages  7, 8, and 13 of the  Company's  Annual  Report  on Form  10-KSB/A  we
reported that we were  negotiating the terms of a joint venture  arrangement for
the initial  production  of the Reverse  Osmosis  subsystem for the H2OkW System
with Water  Services  Corporation,  a Maltese  government  owned public  Limited
Liability  Company.  On June  19,  2001  the  Company  instead  entered  into an
Exclusive  Distribution  Agreement with Malta Desalination  Services Ltd , which
grants to the Company the exclusive right to market,  sell and install  seawater
reverse osmosis desalination (SWRO) equipment produced by MDS on a global basis,
excluding only the island of Malta itself.  The initial term of the agreement is
19 months. The Company and MDS have also agreed to continue to negotiate for the
formation of a jointly owned limited liability company for the production of the
SWRO desalination subsystem of the H2OkW System, with the understanding that the
new arrangement will supersede the Exclusive Distribution Agreement currently in
effect.


    Baxi Group Ltd.

On March 6, 2001, the Company's wholly owned subsidiary,  SIGMA,  entered into a
collaboration  agreement with Baxi Group Ltd. (a manufacturer of heating systems
in Europe). See "The  Business--Distributed  Power  Generation/Renewable  Energy
Technologies--Strategic  Relationships--Baxi  Group Ltd".  The  objective of the
agreement is for Sigma and Baxi to  collaborate  in  developing  and marketing a
prototype  combined heat and power product  (micro-CHP)  package for residential
use in the  United  Kingdom  consisting  of the Sigma  Energy  Converter  (Sigma
Stirling  engine) in a metal  cabinet which also  contains  controls,  tanks and
electrical  connections  to both heating and power  systems.  The purpose of the
collaboration  agreement  is to  design  a  prototype  micro-CHP  package  to be
installed in compliance with  applicable  regulations in older and larger houses
as replacements for boilers that have reached the end of their service life. The
parties will work  together in  assigning  sufficient  priority  and  allocating
necessary  resources  (which have already been budgeted by Sigma) to the project
to develop the package in a mutually  agreeable  time frame,  which is currently
anticipated  to be by  mid-2002.  Pursuant  to the  terms  of the  collaboration
agreement,  each  party  pays  its own  expenses.  The  agreement  has no  fixed
termination  date,  but can be  terminated  at any time by either party on three
months notice.  The costs incurred by the Company which are associated  with the
Baxi collaboration have been expensed when incurred. During the six-month period
ended June 30,  2001,  such costs  consisted  of travel  costs and  research and
development  costs.  For the six-month  period ended June 30, 2001,  the Company
expensed  $4,615 of travel  costs for monthly  planning  and update  meetings in
connection   with  the   collaboration   which  is   included   in  general  and
administrative  expenses  and $12,444 of engineer  compensation  costs which are
included in the research and development expenses.
                                       43
<PAGE>

ITEM 6.   Exhibits and Reports on Form 8-K

     (a)          Exhibits

Exhibit
Number                        Description
<TABLE>
<CAPTION>
<S>         <C>

2.01        Sigma Share Purchase Agreement dated July 25, 2000****
----------- -----------------------------------------------------------------------------------------
3.01        Certificate of Incorporation of Ocean Power Corporation, a Delaware Corporation, Dated
            July 21, 1999 **
----------- -----------------------------------------------------------------------------------------
3.02        Bylaws of the Registrant**
----------- -----------------------------------------------------------------------------------------
3.03        Articles of Incorporation of Kaniksu American Mining Company (Idaho), predecessor of
            registrant**
----------- -----------------------------------------------------------------------------------------
3.04        Company (Idaho) Certificate of Amendment Kaniksu American Mining Dated August 28, 1995
            name change to Kaniksu Ventures, Inc.**
----------- -----------------------------------------------------------------------------------------
3.05        Certificate of Amendment Kaniksu Ventures, Inc., Dated April 2, 1997 name change to
            Intryst, Inc.**
----------- -----------------------------------------------------------------------------------------
3.06        Articles of Amendment of Intryst, Inc., name change Dated December 24, 1997 to PTC
            Group, Inc.**
----------- -----------------------------------------------------------------------------------------
3.07        Articles of Amendment of PTC Group, Inc., name change Dated July 14, 1999 to Ocean
            Power Corporation**
----------- -----------------------------------------------------------------------------------------
3.08        Articles of Merger of Ocean Power Corporation Idaho With Ocean Power Corporation
            Delaware Dated July 28, 1999**
----------- -----------------------------------------------------------------------------------------
3.09        Certificate of Merger of Foreign and Domestic Corporation Dated July 28, 1999**
----------- -----------------------------------------------------------------------------------------
10.01       STM/GSI-Ocean Power Licensing Agreement***
----------- -----------------------------------------------------------------------------------------
10.02       Employment Agreement (Joseph P. Maceda)**
----------- -----------------------------------------------------------------------------------------
10.03       Employment Agreement (J. Michael Hopper)**
----------- -----------------------------------------------------------------------------------------
10.04       Employment Agreement (Lori L. O'Brien)**
----------- -----------------------------------------------------------------------------------------
10.05       Employment Agreement (Robert Campbell)**
----------- -----------------------------------------------------------------------------------------
10.06       Memorandum of Understanding with HyPerTech dated 15 June, 2000***
----------- -----------------------------------------------------------------------------------------
10.07       Purchase Order Memorandum of Understanding with Ecological Engineering & Monitoring,
            Inc. dated 16 January, 2000.***
----------- -----------------------------------------------------------------------------------------
10.8        Design and Procurement agreement between Sigma and Ricardo, Inc. dated February 23,
            2001*****
----------- -----------------------------------------------------------------------------------------
10.9        Letter of Intent with Hadwaco Oy dated March 8, 2001*****
----------- -----------------------------------------------------------------------------------------
10.10       Letter of Intent with Hadwaco Oy dated November 28, 2000*****
----------- -----------------------------------------------------------------------------------------
10.11       Letter of Intent with Organic Power dated March 14, 2001*****
----------- -----------------------------------------------------------------------------------------
10.12       Memorandum of Understanding with Organic Power dated December 20, 2000*****
----------- -----------------------------------------------------------------------------------------
10.13       Memorandum of Understanding with Ecological Engineering & Monitoring, Inc. dated
            November 15, 2000*****
----------- -----------------------------------------------------------------------------------------
10.14       Memorandum of Understanding with Battelle Memorial Institute, Pacific Northwest
            Division dated October 12, 2000*****
----------- -----------------------------------------------------------------------------------------
10.15       Licensing Agreement with Aquamax/Keeran dated September 21, 2000*****
----------- -----------------------------------------------------------------------------------------
10.16       Project Collaborative with EPRIsolutions dated February 20, 2001*****
----------- -----------------------------------------------------------------------------------------
10.17       Heads of Agreement and Affiliate System Guidelines with CIMA Capital, LLC dated March
            30, 2000*****
----------- -----------------------------------------------------------------------------------------
10.18       Joint Venture Agreement with Apollo Water and Power International, Inc. dated February
            23, 2001*****
----------- -----------------------------------------------------------------------------------------
10.19       Joint Venture Agreement with Caribbean Water and Power, Inc. dated February 23, 2001*****
----------- -----------------------------------------------------------------------------------------
10.20       Cooperation Agreement between Sigma and Kockums AB dated November 14, 2000 *****

----------- -----------------------------------------------------------------------------------------
10.21       Agreement for an Initial  Collaboration  Development MCHP between Sigma and Baxi Group
            Ltd, dated March 2, 2001.******

----------- -----------------------------------------------------------------------------------------
10.22       Agreement  for  the  purchase  of  certain  intellectual  property  by  and  among  Aquamax
            (International)  Holdings,  B.V. , Keeran  Corporation N.V.  Balantum Oy (Newco) and Ocean
            Power Corporation dated July 20, 2001*
----------- -----------------------------------------------------------------------------------------
10.23       Mutual Release by and among Aquamax  (International)  Holdings,  B.V., Keeran  Corporation
            N.V. and Ocean Power Corporation dated July 20, 2001*
----------- -----------------------------------------------------------------------------------------

10.24       Co-operation  and Sales  Agreement  by and among  Aquamax  (International)  Holdings  B.V.,
            Keeran Corporation N.V., and Balantum Oy (Newco) dated July 20, 2001*
----------- -----------------------------------------------------------------------------------------
10.25       License Agreement by and among Aquamax (International)  Holdings,  B.V., Keeran Corporation
            N.V., and Balantum Oy (Newco) dated July 20, 2001*
----------- -----------------------------------------------------------------------------------------
10.26       Side Leter by and among Aquamax  (International)  Holdings,  B.V., Keeran Corporation N.V.,
            Balantum Oy (Newco), Ltd. Oy and Ocean Power Corporation dated July 20, 2001*
----------- -----------------------------------------------------------------------------------------
10.27       Asset  Purchase  Agreement by and among  Hadwaco  Ltd.  Oy,  Hackman OYJ AP and Balantum Oy
            (Newco) dated July 20, 2001*
----------- -----------------------------------------------------------------------------------------
</TABLE>


                                       44
<PAGE>
  *  Filed herewith
  ** Incorporated  by reference to the Company's Form 10-SB as filed February 8,
     2000.
 *** Incorporated  by reference to the Company's Form 10-SB as amended and filed
     February 6, 2001.
 ****Incorporated  by reference to the  Company's  Form 8-K as amended and filed
     October 19, 2000.
*****Incorporated  by reference to the  Company's  Form  10-KSB/A as amended and
     filed September 4, 2001.
*****Incorporated  by reference to the  Company's  Form  10-QSB/A for the period
     ended March 31, 2001, as amended and filed September 4, 2001.

     (b)   Reports on Form 8-K.

     Not applicable.



                                       45
<PAGE>

                                   SIGNATURES
                                   ----------

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.





                                         OCEAN POWER CORPORATION


Date: September 4, 2001                  By: /s/ Joseph P. Maceda
                                         ------------------------
                                                 Joseph P. Maceda
                                                 President



Date: September 4, 2001

                                          By: /s/ J. Michael Hopper
                                          -------------------------
                                                  J. Michael Hopper
                                                  Secretary/Treasurer
                                                  (chief accounting officer)


                                       46
<PAGE>