UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB


              [X] Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the quarterly period ended June 30, 2002

                 [ ] Transition Report under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


             For the transition period from _________ to __________.

                          Commission File No. 333-3074

                             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 Number)


          5000 ROBERT J. MATTHEWS PARKWAY,                  95672
            EL DORADO HILLS, CALIFORNIA                  (Zip Code)
      (Address of principal executive offices)

            REGISTRANT'S TELEPHONE NUMBER,             (916) 933-8100
                INCLUDING AREA CODE:

(1)  Registrant  has filed all  reports  required  to be filed by  Section 13 or
     15(d) of the Securities Exchange Act of 1934 during the preceding 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

         As of September 10, 2002, there were 56,182,746  shares  outstanding of
issuer's common stock.



<PAGE>


PART I

FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS



                                       2
<PAGE>












                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

                        CONSOLIDATED FINANCIAL STATEMENTS

                       JUNE 30, 2002 AND DECEMBER 31, 2001




                                       3
<PAGE>



                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                        Consolidated Financial Statements


                                     ASSETS
                                     ------

                                                 June 30,       December 31,
                                                   2002             2001
                                               -----------      ------------
                                               (Unaudited)

CURRENT ASSETS
  Cash                                         $   12,849        $   2,989
  Advances to employees                                 -          347,259
  Prepaid expenses                                  5,828           44,080
                                               -----------      ------------
  Total Current Assets                             18,677          394,328
                                               -----------      ------------

EQUIPMENT, NET                                    425,993        1,000,892
                                               -----------      ------------

OTHER ASSETS
  Assets of discontinued operations
   (Note 9)                                       909,345        1,194,302
  Debt offering costs                              68,562          108,591
  Deposits                                         42,447           42,447
  Patents, and licensing agreements, net                -        5,675,150
  Goodwill, net                                         -        5,656,207
                                               -----------      ------------
  Total Other Assets                            1,020,354       12,676,697
                                               -----------      ------------

TOTAL ASSETS                                  $ 1,465,024     $ 14,071,917
                                              ============    ==============

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



                                       4
<PAGE>


                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                  Consolidated Financial Statements (Continued)

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                 ----------------------------------------------

                                                    June 30,       December 31,
                                                      2002             2001
                                                 -------------     ------------
                                                  (Unaudited)

CURRENT LIABILITIES
  Accounts payable                               $  2,116,113      $ 2,693,846
  Accrued expenses                                  9,756,385        9,292,865
  Notes payable - related parties                   1,381,527        1,315,277
  Notes and convertible debentures
   payable - current portion                        5,822,717        2,894,114
  Deferred revenue                                     35,550           35,550
  Liabilities of discontinued
   operation (Note 9)                               4,125,346        3,159,806
                                                 -------------     ------------
    Total Current Liabilities                      23,237,638       19,391,458
                                                 -------------     ------------
LONG-TERM LIABILITIES
  Notes payable-related parties                         5,000           65,000
  Convertible debentures payable, net                 769,605        2,293,886
                                                 -------------     ------------
    Total Long-Term Liabilities                       774,605        2,358,886
                                                 -------------     ------------
    Total Liabilities                              24,012,243       21,750,344
                                                 -------------     ------------

STOCKHOLDERS' EQUITY (DEFICIT)
  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;
   43,936,765 and 38,439,094 shares
     issued and outstanding, respectively             439,368          384,391
  Additional paid-in capital                       34,882,613       30,254,067
  Deferred consulting expense and asset
   acquisition                                       (875,128)      (1,141,000)
  Other comprehensive income (loss)                  (403,525)          334,549
  Deficit accumulated during the
   development stage                              (56,590,547)     (37,510,434)
                                                 -------------     ------------
    Total Stockholders' Equity (Deficit)          (22,547,219)      (7,678,427)
                                                 -------------     ------------

    TOTAL LIABILITIES AND STOCKHOLDERS'
     EQUITY (DEFICIT)                             $ 1,465,024     $ 14,071,917
                                                 =============    =============


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


                                       5
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                                               FROM INCEPTION
                                                                                                                     ON
                                                                                                               MARCH 26, 1992
                                             FOR THE SIX MONTHS ENDED          FOR THE THREE MONTHS ENDED          THROUGH
                                                     JUNE 30,                           JUNE 30,                  JUNE 30,
                                          ------------------------------   --------------------------------- ------------------
                                              2002              2001             2002              2001             2002
                                          --------------- --------------   ----------------  --------------- ------------------
<S>                                      <C>      <C>      <C>      <C>      <C>     <C>      <C>      <C>     <C>      <C>
REVENUES                                   $        -        $        -       $        -        $        -       $        -
                                          --------------- --------------   ----------------  --------------- ------------------

EXPENSES
  General and administrative                5,868,308         3,890,557        2,762,658         2,098,105       28,433,153
  Impairment of intangible assets           7,433,043                 -        7,433,043                 -        8,203,589
  Research and development                    666,669                 -          254,036           107,532        3,400,705
  Depreciation and amortization               401,339           736,541          252,208           545,585        2,334,284
                                          --------------- --------------   ----------------  --------------- ------------------
    Total Expenses                         14,369,359         4,627,098       10,701,945         2,751,222       42,371,731
                                          --------------- --------------   ----------------  --------------- ------------------

LOSS FROM OPERATIONS                      (14,369,359)       (4,627,098)     (10,701,945)       (2,751,222)     (42,371,731)
                                          --------------- --------------   ----------------  --------------- ------------------

OTHER INCOME (EXPENSE)
  Currency gain                                     -                 -                -                 -            1,258
  Interest income                               5,799            29,276              173            12,169          295,510
  Loss on sale of assets                            -                 -                -                 -         (387,649)
  Interest expense                         (1,245,073)         (413,646)        (439,389)         (280,794)      (5,676,203)
                                          --------------- --------------   ----------------  --------------- ------------------
    Total Other Income (Expense)           (1,239,274)         (384,370)        (439,216)         (268,625)      (5,767,084)
                                          --------------- --------------   ----------------  --------------- ------------------

LOSS BEFORE DISCONTINUED OPERATIONS       (15,608,633)       (5,011,468)     (11,141,161)       (3,019,847)     (48,138,815)
  Loss from discontinued operations        (6,363,480)       (2,788,509)      (5,880,571)       (2,124,608)     (11,666,895)
                                          --------------- --------------   ----------------  --------------- ------------------

LOSS BEFORE EXTRAORDINARY ITEM            (21,972,113)       (7,799,977)     (17,021,732)       (5,144,455)     (59,805,710)

EXTRAORDINARY ITEM
  Gain on settlement of debt                2,892,000                 -        2,892,000                 -        3,215,163
                                          --------------- --------------   ----------------  --------------- ------------------

NET LOSS                                  (19,080,113)       (7,799,977)     (14,129,732)       (5,144,455)     (56,590,547)
                                          --------------- --------------   ----------------  --------------- ------------------

OTHER COMPREHENSIVE INCOME (LOSS)
  Currency translation adjustment            (738,074)           170,424        (625,279)           152,268        (403,525)
                                          --------------- --------------   ----------------  --------------- ------------------

    TOTAL COMPREHENSIVE LOSS           $  (19,818,187)    $  (7,629,553)  $  (14,755,011)    $  (4,992,187)  $  (56,994,072)
                                          =============== ==============   ================  =============== ==================


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

</TABLE>


                                       6
<PAGE>


<TABLE>
<CAPTION>

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


                                                           FOR THE SIX MONTHS ENDED          FOR THE THREE MONTHS ENDED
                                                                   JUNE 30,                           JUNE 30,
                                                        ------------------------------    --------------------------------
                                                             2002             2001              2002             2001
                                                        ---------------  -------------    ---------------    -------------

BASIC AND DILUTED LOSS PER  SHARE
<S>                                                    <C>              <C>              <C>                <C>
  Loss before discontinued operations                       $(0.40)          $(0.13)           $(0.28)          $(0.08)
  Discontinued operations                                    (0.16)           (0.07)            (0.15)           (0.05)
  Extraordinary item                                          0.07                -              0.07                -
                                                        ---------------  -------------    ---------------    -------------
    Net loss                                                $(0.49)          $(0.20)           $(0.36)          $(0.13)
                                                        ===============  =============    ===============    =============
WEIGHTED AVERAGE NUMBER  OF SHARES OUTSTANDING           39,144,913       38,184,499        39,405,851       38,160,423
                                                        ===============  =============    ===============    =============

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

</TABLE>


                                       7
<PAGE>


<TABLE>
<CAPTION>

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


                                                                                                    DEFERRED      DEFICIT
                                                                                                   CONSULTING   ACCUMULATED
                                                                      ADDITIONAL       OTHER         EXPENSE    DURING THE
                                                  COMMON STOCK          PAID-IN    COMPREHENSIVE    AND ASSET   DEVELOPMENT
                                              SHARES       AMOUNT       CAPITAL    INCOME (LOSS)   ACQUISITION     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)

April 23, 2001, common stock issued for
  conversion of accounts payable at $1.50
  per share                                      50,000          500       74,500               -            -            -

June 8, 2001, common stock issued for
  conversion of research advances at
  $3.20 per share                               119,152        1,192      380,095               -            -            -

June 29, 2001, common stock issued for
  consulting contract at $2.80 per share        120,000        1,200      334,800               -    (334,800)            -

June 29, 2001, warrants granted for
  consulting contract                                 -            -      302,112               -    (302,112)            -

September 1, 2001, options issued below
  market value                                        -            -      861,000               -    (861,000)            -

Valuation adjustment and amortization of
  deferred compensation                               -            -    (571,112)               -      767,579            -

Warrants issued in connection with debt
  obligations                                         -            -    3,261,384               -            -            -

Currency translation adjustment                       -            -            -         139,291            -            -

Net loss for the year ended December 31,
  2001                                                -            -            -               -            -  (17,481,843)
                                             ---------- ------------ ------------  -------------   -----------  ------------

Balance, December 31, 2001                   38,439,094      384,391   30,254,067         334,549  (1,141,000)  (37,510,434)

January 8, 2002, common stock issued for
  consulting contract at $1.06 per share
  (unaudited)                                   200,000        2,000      210,000               -    (212,000)            -

January 8, 2002, options granted to
  employee's below market valve
  (unaudited)                                         -            -      180,447               -            -            -

January 8, 2002, options granted to
  consultants at fair market value
  (unaudited)                                         -            -       90,106               -            -            -

January 8, 2002, common stock issued for
  consulting contract at $1.06 per share
  (unaudited)                                   130,000        1,300      136,500               -    (137,800)            -

January 8, 2002, warrants granted for
  consulting contract (unaudited)                     -            -      120,000               -    (120,000)            -

                                             ---------- ------------ ------------  -------------   -----------  ------------
Balance forward                              38,769,094     $387,691  $30,991,120        $334,549  $(1,610,800) $(37,510,434)
                                             ---------- ------------ ------------  -------------   -----------  ------------


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

</TABLE>


                                       8
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                                    DEFERRED      DEFICIT
                                                                                                   CONSULTING   ACCUMULATED
                                                                      ADDITIONAL       OTHER         EXPENSE    DURING THE
                                                  COMMON STOCK          PAID-IN    COMPREHENSIVE    AND ASSET   DEVELOPMENT
                                              SHARES       AMOUNT       CAPITAL    INCOME (LOSS)   ACQUISITION     STAGE
                                             ----------   ----------  -----------  -------------  ------------- -------------

<S>                                          <C>           <C>        <C>             <C>          <C>          <C>
Balance forward                              38,769,094    $ 387,691  $30,991,120     $   334,549  $(1,610,800) $(37,510,434)

January 8, 2002, warrants granted for
  technology rights (unaudited)                       -            -       84,245               -            -            -

February 7, 2002 options granted for
  consulting contract (unaudited)                     -            -       79,000               -     (79,000)            -

Revaluation of existing warrants
  (unaudited)                                         -            -    1,360,574               -            -            -

February 28, 2002, common stock issued
  for conversion of debt to equity at
  $1.92 per share (unaudited)                   260,270        2,603      497,397               -            -            -

February 28, 2002, common stock issued
  for loan default penalty at $0.75 per
  share (unaudited)                             150,000        1,500      111,000               -            -            -

April 8, 2002, warrants granted as
  incentive to extend debt payment  terms
  (unaudited)                                         -            -      671,700               -            -            -

June 14, 2002, options granted for
  consulting contract (unaudited)                     -            -      128,000               -    (128,000)            -

June 14, 2002, common stock issued for
  services at $0.40 per share (unaudited)       150,000        1,500       58,500               -            -            -

June 21, 2002, common stock issued for
  conversion of convertible debentures at
  $0.15 per share (unaudited)                    85,526          855       12,143               -            -            -

June 25, 2002, common stock issued for
  conversion of convertible debentures
  At $0.06 per share (unaudited)                265,625        2,656       14,344               -            -            -

June 26, 2002, common stock issued for
  purchase of Elektryon assets at $0.11
  per share (unaudited)                       3,500,000       35,000      350,000               -    (385,000)            -

June 27, 2002, common stock issued for
  conversion of debt to equity at $0.08
  per share (unaudited)                         600,000        6,000       42,000               -            -            -

June 28, 2002, common stock issued for
  conversion of convertible debentures At
  $0.06 per share (unaudited)                   156,250        1,563        8,438               -            -            -

Valuation adjustment and amortization of
  deferred compensation (unaudited)                   -            -    (243,000)               -    1,327,672            -

Warrants issued in connection with debt
  obligations (unaudited)                             -            -      717,152               -            -            -
                                             ----------   ----------  -----------  -------------  ------------- -------------

Balance Forward                              43,936,765     $439,368  $34,882,613        $334,549   $(875,128)  $(37,510,434)
                                             ----------   ----------  -----------  -------------  ------------- -------------


                                              The  accompanying  notes are an  integral  part of these
                                                        consolidated financial statements.
</TABLE>


                                       9
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                                      DEFERRED      DEFICIT
                                                                                                     CONSULTING   ACCUMULATED
                                                                         ADDITIONAL       OTHER        EXPENSE     DURING THE
                                                    COMMON STOCK          PAID-IN     COMPREHENSIVE   AND ASSET   DEVELOPMENT
                                                SHARES       AMOUNT       CAPITAL     INCOME (LOSS)  ACQUISITION     STAGE
                                               ----------   ----------   -----------  -------------  ------------ -------------
<S>                                            <C>            <C>        <C>             <C>          <C>         <C>
Balance Forward                                43,936,765     $439,368   $34,882,613       $334,549   $(875,128)  $(37,510,434)

Currency translations adjustment (unaudited)            -            -             -      (738,074)            -             -

Net loss for the six months ended, June 30,
  2002 (unaudited)                                      -            -             -              -            -  (19,080,113)
                                               ----------   ----------   -----------  -------------  ------------ -------------

Balance, June 30, 2002 (unaudited)             43,936,765     $439,368   $34,882,613     $(403,525)   $(875,128)  $(56,590,547)
                                               ==========   ==========   ===========  =============  ============ =============

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

</TABLE>

                                       10
<PAGE>


<TABLE>
<CAPTION>
                                              OCEAN POWER CORPORATION AND SUBSIDIARIES
                                                    (A Development Stage Company)
                                                Consolidated Statements of Cash Flows

                                                                                                         FROM INCEPTION ON
                                                                                                           MARCH 26, 1992
                                                                       FOR THE SIX MONTHS ENDED               THROUGH
                                                                              JUNE 30,                        JUNE 30,
                                                                  --------------------------------       ------------------
                                                                       2002                2001                 2002
                                                                  ---------------   --------------       ------------------

CASH FLOWS FROM OPERATING ACTIVITIES
                                                                 <S>                <C>                   <C>
  Net loss                                                        $   (19,080,113)   $  (7,799,977)        $  (56,590,547)
  Adjustments to reconcile net loss to net cash used by
    operating activities:
    Depreciation and amortization                                          401,339          829,216             2,747,312
    Deferred consulting expense                                          1,084,672           98,667             1,611,670
    Value of common stock, warrants, options and discounts on
      equity instruments issued for services                             2,475,326                -             6,278,256
    Loss on sale of assets                                                       -                -               387,649
    Amortization of debenture discount and debt issue costs                688,757          583,282             2,967,143
    Gain on disposition of debt                                         (2,892,000)               -            (3,215,163)
    Impairment loss                                                     13,089,250                -            13,775,551
    Bad debt expense                                                       369,569                -               369,569
  Change in operating asset and liability accounts, net of
    amounts acquired in business combination:
    (Increase) decrease in advances to employees, prepaid
      expenses, deposits and debt offering costs                            48,362           32,011            (5,867,465)
    Increase (decrease) in accounts payable                                914,499        1,276,024             5,099,779
    Increase (decrease) in accrued expenses                              1,837,520          278,891            11,216,441
    Increase in deferred revenue                                                 -                -                35,550
                                                                    ---------------   --------------       ------------------
      Net Cash Used by Operating Activities                             (1,062,819)      (4,701,886)          (21,184,255)
                                                                    ---------------   --------------       ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Cash lost in discontinued operation                                       (4,713)               -                (4,713)
                                                                    ---------------   --------------       ------------------
  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)           (1,164,570)
  Equipment procurement costs                                                    -                -              (564,110)
      Net Cash Used by Investing Activities                                 (4,713)        (310,951)           (1,991,138)

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from notes payable                                              280,000        3,600,000             4,680,000
  Repayment of related party notes payable                                  (5,250)         (81,805)           (1,640,226)
  Repayment of notes payable                                                     -         (346,517)           (1,519,062)
  Loans from related parties                                                11,500                -             7,462,787
  Issuance of convertible debentures                                       650,000                -             3,100,000
  Common stock issued for cash                                                   -                -            11,131,032
  Stock offering costs                                                           -                -               (26,289)
                                                                    ---------------   --------------       ------------------
    Net Cash Provided by Financing Activities                              936,250        3,171,678            23,188,242
                                                                    ---------------   --------------       ------------------



                                       The  accompanying  notes are an  integral  part of these
                                                 consolidated financial statements.
</TABLE>


                                       11
<PAGE>


<TABLE>
<CAPTION>

                                           OCEAN POWER CORPORATION AND SUBSIDIARIES
                                                (A Development Stage Company)
                                       Consolidated Statements of Cash Flows (Continued)

                                                                                                            FROM INCEPTION
                                                                                                             ON MARCH 26,
                                                                                FOR THE SIX MONTHS               1992
                                                                                       ENDED                    THROUGH
                                                                                     JUNE 30,                  JUNE 30,
                                                                          ------------------------------- ---------------------
                                                                              2002              2001             2002
                                                                          ----------------  ------------- ---------------------
<S>                                                                       <C>              <C>             <C>
NET INCREASE (DECREASE) IN CASH                                                (131,282)     (1,841,159)          12,849

CASH AT BEGINNING OF PERIOD                                                      144,131      2,176,299                -
                                                                          ----------------  ------------- ---------------------

CASH AT END OF PERIOD                                                       $     12,849    $   335,140     $     12,849
                                                                          ================  ============= =====================
CASH PAID FOR:
  Interest                                                                  $          -    $    68,459     $     81,405
  Income taxes                                                              $          -    $         -     $          -

NON-CASH FINANCING ACTIVITIES
  Value of common stock, warrants, options and discounts on equity
    instruments issued for services                                         $  2,475,326    $         -     $  6,278,256
  Equity instruments issued for deferred consulting expense/asst
    acquisition                                                             $    818,800    $   672,000     $  1,558,800
  Common stock issued for recapitalization                                  $          -    $         -     $  2,761,773
  Common stock issued for conversion of debt                                $    106,000    $   456,287     $  3,069,511
  Acquisition of licenses through license agreement payable                 $          -    $         -     $  6,940,000
  Warrants granted in conjunction with debt instruments                     $    717,149    $         -     $  3,978,535


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

</TABLE>



                                       12
<PAGE>



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  includes  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, 2001 Annual Report on Form 10-KSB.
         Operating  results  for the six  months  ended  June  30,  2002 are not
         necessarily indicative of the results that may be expected for the year
         ending December 31, 2002.


NOTE 2 - PATENTS AND LICENSING AGREEMENT

         The Company's patents and license agreement  consisted of the following
         at June 30, 2002 and December 31, 2001:

                                               JUNE 30,        DECEMBER 31,
                                                 2002              2001
                                              -----------      ------------
                                              (UNAUDITED)

         Licensing Agreement - Aquamax
          and Keeran                           $6,540,000       $6,540,000
         Licensing Agreement - STM              2,000,000          500,000
         Accumulated amortization              (8,540,000)      (1,364,850)
                                              ------------     ------------

                                               $        -       $5,675,150
                                              ============     ============

         As part of the purchase of Sigma (Note 3), the Company acquired patents
         valued at their fair value of $1,006,670, 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.  See
         also  Note  9  for  a  discussion  about  the  Sigma  operations  being
         discontinued.  The patents at their net value of $719,421  are included
         in net assets of discontinued operations. The license agreement relates
         to rights to patents and patent  applications  pertaining to technology
         acquired  from  Aquamax  and Keeran  (Note 7). The cost of the  license
         agreement  was being  amortized  over its  estimated  useful life of 10
         years.  Because of the  Company's  cash flow  shortages  and  uncertain
         future,  the Company  recorded  amortization  expense of  $163,500  and
         elected to record an impairment  expense of $5,348,150  associated with
         the remaining value of the Aquamax and Keeran rights and technology.



                                       13
<PAGE>


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 acquisition 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 was being  amortized  over 10 years by the  straight-line
         method.  Amortization  expense  amounted to $-0- and  $329,488  for the
         three months ended June 30, 2002 and 2001, respectively.

         Because  of the  adoption  of SFAS No.  142,  the  Company is no longer
         amoritizing the goodwill generated from the purchase of Sigma.  Instead
         the  goodwill  is  subject  to  impairment  testing.   Because  of  the
         bankruptcy  of Sigma as  discussed  in Note 9, the Company  recorded an
         impairment  of  goodwill of  $5,656,207  which is part of the loss from
         discontinued operations.


NOTE 4 - NOTES AND DEBENTURES PAYABLE

         During the quarter ended June 30, 2002,  the Company  received  $80,000
         from the issuance of notes payable to various  individuals.  All of the
         notes  bear  interest  at  12.00%,  are  unsecured  and due on  demand.
         Additionally,  a creditor of the Company converted $542,717 in accounts
         payable to a note payable, the note bears interest at 10% per annum, is
         unsecured and due upon demand.

         During the quarter ended June 30, 2002,  the Company  received  $11,500
         from the  issuance  of notes  payable to a related  party.  The note is
         non-interest bearing,  unsecured and due on demand.  Additionally,  the
         Company repaid $5,250 on a note payable to a related party.

         During the quarter ended June 30, 2002, the Company  received  $100,000
         from  the  issuance  of  a  convertible  debenture.  The  debenture  is
         convertible  at a price of $0.65 per share for a period of five  years,
         bears interest at 12.00%, is unsecured and is due 5 years from the date
         of issue. As additional  consideration  for $100,000 of the convertible
         debenture  payable,  the Company  granted  warrants to acquire  769,231
         shares of common stock at an exercise  price of $0.65 per share with an
         expiration  date 5 years  from the date of  grant.  The  warrants  were
         valued at $676,923  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 $100,000 or 100%.

         During the  quarter  ended  June 30,  2002,  a holder of a  convertible
         debenture elected to convert $40,000 in principle for 507,401 shares of
         common stock at a rate equal to 80% of the lowest  closing bid price of
         the  Company's  common  stock  for the five  trading  days  immediately
         proceeding the conversion date.


                                       14
<PAGE>


NOTE 5 - ACCRUED EXPENSES

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

                                                    JUNE 30,        DECEMBER 31,
                                                      2002              2001
                                                  -----------       ------------
                                                  (UNAUDITED)

         Accrued payroll taxes payable            $   72,430          $      -
         Accrued interest payable - payroll           52,717            52,717
         Accrued payroll tax penalty                  98,845            98,845
         Accrued franchise taxes payable             100,274            97,828
         Accrued payroll payable                   1,244,417                 -
         Accrued vacation payable                          -           127,142
         Accrued other expenses                          615            15,149
         Aquamax/Keeran contingency accrual        1,131,000           934,800
         Aquamax/Keeran license fee payable        3,600,000         6,540,000
         Accrued STM license fee payable           2,000,000           500,000
         Accrued deferred compensation - Moard       143,516           115,824
         Accrued legal settlement - Mchargue          63,400            63,400
         Accrued interest payable                  1,249,171           747,160
                                                 -----------       -----------
                  Total                          $ 9,756,385       $ 9,292,865
                                                 ===========       ===========

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 operating  revenues,  and planned  principal
         operations have not yet commenced.

         The Company has  incurred  losses from its  inception  through June 30,
         2002  of  approximately  $56,600,000.  The  Company  does  not  have an
         established  source of funds  sufficient to cover its operating  costs,
         has a working capital deficit of approximately $23,200,000,  has relied
         exclusively on debt and equity  financing.  Additionally  the Company's
         wholly-owned  subsidiary  Sigma was forced into  bankruptcy  because of
         non-payment  of employee  salaries.  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 private  placement  sales of
         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  approximately  $9,000,000  of  additional  funds for
         operations and expansion over the next 12 months.  However,  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
         preceding  paragraph and eventually attain profitable  operations.  The
         accompanying  consolidated  financial  statements  do not  include  any
         adjustments  that  might be  necessary  if the  Company  is  unable  to
         continue as a going concern.


                                       15
<PAGE>



NOTE 7 - COMMITMENTS AND CONTINGENCIES

         a. Consulting Agreements

         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.  At January 1, 2000, the consulting
         agreement was valued at  $1,500,000,  representing  the market value of
         100,000 shares of the Company's common stock and 100,000  warrants.  As
         of December 31, 2000, the  consulting  contract was valued at $740,000,
         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 at December 31, 2000 of $340,000,  as  determined by the Black
         Scholes pricing model.

         For the year  ended  December  31,  2000,  the  Company  had  amortized
         $279,334 of the  contract , leaving a remaining  balance of $410,667 at
         December  31, 2000 which is included  as a reduction  of  stockholders'
         equity.  At December 31, 2001, the remaining balance was $152,166 which
         is included as a reduction of  stockholders  equity.  At June 30, 2002,
         the remaining balance was $66,833 which as a reductions of stockholders
         equity.

         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
         Company  issued  120,000  shares of common  stock and  granted  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.  The  unamortized  fair value at
         December  31, 2001 was  $271,833  which is  included as a reduction  of
         stockholders  equity.  The  unamortized  value  at June  30,  2002  was
         $168,600 which is included as a reduction of stock holders equity.

         On June 20, 2001, the Company (through its subsidiary Powerco US, Inc.)
         entered into an employment  agreement with David Moard (Moard)  wherein
         Moard  would  serve  as the  president  of the  Powerco.  Terms  of the
         agreement are as follows:  (1) Moard's base salary will be $240,000 per
         year with the first and second years  salary  being  deferred to future
         years,(later amended to deferring $60,000 per year starting November 1,
         2001) and (2) Moard was granted  820,000 stock options  exercisable  at
         $1.50 per share of which 260,000 vest in year one, 360,000 vest in year
         two and 200,000  vest in year three.  The  employment  agreement  is in
         effect for three  years.  The Company has  accrued  wages of  $115,824,
         which represents the deferred salary through December 31, 2001, and has
         expensed $270,593, which represents amortization of the intrinsic value
         of the stock  options as well as the payroll  expense.  At December 31,
         2001, the unamortized  intrinsic value of the stock options amounted to
         $717,000,  which  is  included  as an  offset  to  equity  as  deferred
         compensation  expense and will be amortized  over the vesting period of
         the options.  At June 30, 2002, the unamortized  intrinsic value of the
         stock  options was $-0-  because the  Company  fully  vested all of the
         options.

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         b. Options for Consulting Services

         On February 7, 2002, the Company  entered into a three year  consulting
         agreement  for  assistance  in  preparing  material  to be used in fund
         raising activities,  and business development  activities as well as to
         introduce the Company to potential strategic partners and investors. In
         consideration  for the consulting  services,  the Company has agreed to


                                       16
<PAGE>

         grant  100,000  options  with an exercise  price  $1.10 per share.  The
         options have a three year life.

         The unamortized  portion of the deferred  compensation at June 30, 2002
         was $68,028 and is included as a reduction of stockholders equity.

         c. Extension of Consulting Agreement

         On January 8, 2002,  pursuant to an Extension and  Expansion  Agreement
         with  Weckstein,  the Company  extended the  consulting  agreement with
         Weckstein  for a minimum  period of six months and up to three years at
         the option of the Company.  As  compensation  for this  extension,  the
         Company has issued to Weckstein  200,000  shares of common stock valued
         at  $1.06  per  share.   The   unamortized   portion  of  the  deferred
         compensation at June 30, 2002 was $-0-.

         On June 14, 2002, the Company  extended the  consulting  agreement with
         Weckstein for a period of one year from June 30, 2002. As  compensation
         for this extension, the Company has issued to Weckstein 400,000 options
         with an exercise price of $0.40 per share.  The unamortized  portion of
         the deferred compensation at June 30, 2002 was $128,000 and is included
         as a reduction of stockholders' equity.

         d. Investor Relations Agreement

         On January 8, 2002,  the Board of Directors  authorized  management  to
         execute a consulting agreement with Synergy International Partners S.A.
         (Synergy).  Synergy  will  provide  investor  relations  consulting  in
         Europe.  As payment  for the  consulting  agreement,  the  Company  has
         authorized  the issuance of 130,000  shares of common stock and 300,000
         warrants with an exercise  price of $1.25 per share for the term of the
         agreement.

         The unamortized  portion of the deferred  compensation at June 30, 2002
         was $58,667 and is included as a reduction of stockholders equity.

         e. License Agreements

         STM
         ---

         During April 2000, the Company entered into a licensing  agreement with
         STM  to  obtain   exclusive  rights  to  STM  patented  and  unpatented
         technology related to Stirling cycle heat engines. The agreement is for
         thirty years and calls for annual payments.  The payment due in each of
         the next three  years is set and is open for  negotiation  after  three
         years.


                   YEAR                              AMOUNT
                   ---------------------         --------------

                   2002                            $1,500,000
                   2003                             2,000,000
                   2004                             3,000,000
                                                 --------------
                                                   $6,500,000
                                                 ==============


                                       17
<PAGE>

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         e. License Agreements (Continued)

         STM (Continued)
         ---

         The Company paid an initial  amount of $500,000 that was amortized over
         twelve months.  The second annual payment in the amount of $500,000 was
         due and  payable on April 20,  2001 and the third  payment  was due and
         payable on April 20,  2002.  The  Company  defaulted  on the second and
         third  annual  payments and under the terms of the  contract,  lost the
         exclusive  rights to the  Technology,  but has retained the rights on a
         non  exclusive  basis.  Due to this  default and the  inability  of the
         Company to raise sufficient capital to develop the Company's  products,
         the  technology  was deemed to be impaired as of September 23, 2001, or
         60 days after notification of default. As of June 30, 2002, the Company
         has  recognized  a payable  in the amount of  $2,000,000,  amortization
         expense in the amount of $213,670 and loss on  impairment in the amount
         of $1,786,330.

         AQUAMAX/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  Agreement  provide  a 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 and has issued  600,000  shares of
         common stock to the Licensors.

         The remaining amount payable under the License Agreement was $6,540,000
         at September 30, 2000,  which  consisted 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),  and 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, and  $2,940,000  paid through the
         issuance  of  common  stock.  The  asset,  with  a cost  of  $6,940,000
         ($6,540,000  after an impairment  adjustment of $400,000),  is has been
         amortized  over  its  estimated  useful  life of ten  years  using  the
         straight-line method.




                                       18
<PAGE>

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         e. License Agreements (Continued)

         AQUAMAX/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
         parties and dated on the original September signing date) were extended
         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 2000. 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  were 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  2000  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 as of
         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.

         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 an  exclusive
         basis, but actually  licensed on a non-exclusive  basis.  Consequently,
         the value 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 its  (potentially
         competitive) use.



                                       19
<PAGE>

NOTE 7 - COMMITMENTS AND CONTINGENCIES

         e. License Agreements (Continued)

         AQUAMAX/KEERAN (Continued)
         --------------

         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 and $2,940,000 paid
         through  the  issuance  of common  stock in June 2002 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.

         The full purchase  price has been recorded as a liability and offset by
         the  $400,000  and  $2,940,000  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,  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 Company's
         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
         the Company.

         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, was as
         follows:  The  Company  would form a new  company  (Newco) in  Finland.
         Because it would  control  Newco,  the Company's  financial  statements
         would  report its  investment  in Newco on a  consolidated  basis.  The
         Company would 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 would include technology,  which Hadwaco
         has licensed to Aquamax/Keeran and which is the source of the Company's
         dispute with Aquamax/Keeran.



                                       20
<PAGE>


NOTE 7 - COMMITMENTS AND CONTINGENCIES

         e. License Agreements (Continued)

         AQUAMAX/KEERAN (Continued)
         --------------

         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 would have, if closing had occurred
         as   stipulated,   resolved   the  dispute   between  the  Company  and
         Aquamax/Keeran.  The  Agreements  provided  that the Company would make
         payments to  Aquamax/Keeran of $1,800,000 in cash and 600,000 shares of
         common  stock on or before  September  28,  2001,  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.  The agreements  also provided that the Company would
         grant back to Aquamax/Keeran an 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 was to be exclusive for a term of five
         years  and  non-exclusive  thereafter.  The  agreements  also  included
         release of liability provisions, whereby all parties would 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 was as follows: The Company
         was to  form a new  company  (Newco)  in  Finland.  The  Company  would
         immediately  provide  Newco with  $1,500,000 to purchase from Hadwaco a
         100%  interest in  Hadwaco's  existing  and ongoing  water  remediation
         business, including all related intellectual property. Newco's purchase
         price for  Hadwaco's  water  remediation  business was to be $1,500,000
         plus a 19% interest in Newco's common stock. The Company was 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.

         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 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
         $43,050 and 20,000 shares of the Company's common stock.


                                       21
<PAGE>


NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         e. License Agreements (Continued)

         AQUAMAX/KEERAN (Continued)

         On September 11, 2001, the terrorist  attack on New York and Washington
         D.C.  occurred  which  disrupted  the  financial  markets in the United
         States and abroad.  That event  significantly  affected and delayed the
         Company's  efforts to obtain the investment money necessary to complete
         the  transactions  described  above for the  formation  of  Newco,  the
         purchase of the ongoing water remediation  business of Hadwaco, and the
         purchase of the Aquamax/Keeran technology connected to water treatment.
         Because of the  funding  delays,  the  Company was not able to fund the
         closing  of the  transactions  by the due date and the  agreements  for
         those  transactions  are now null and void,  including the  agreements,
         which included the release of liability  provisions between the Company
         and Aquamax/Keeran.  As a consequence,  the September license agreement
         between  the  Company  and  Aquamax/Keeran  remains  in effect  and the
         disputes  between  the  parties  as  to  their  respective  rights  and
         obligations under the license agreement remain unresolved.  The Company
         has  recommenced  discussions  with  Aquamax/Keeran  in an  attempt  to
         resolve their disputes amicably and intends to arbitrate  resolution of
         those disputes if a settlement cannot be reached.

         Because its  agreements  with  Hadwaco  Ltd. Oy and Hackman Oy Abp were
         non-binding,  the  Company  does not  believe  that it has a  liability
         arising  out of its  failure to  complete  the  transactions  described
         above,  other than the loss of  amounts  the  Company  agreed to pay in
         connection with obtaining  extensions of the agreements.  In connection
         with its dispute with Aquamax/Keeran, the Company still believes it has
         the right to a  purchase  price  reduction  because  of the  failure of
         Aquamax/Keeran  to deliver  exclusive rights to all of the patents and,
         while no claim has been  asserted,  might be subject to a damage  claim
         related to the Company's  withholding of payment on the  Aquamax/Keeran
         license  agreement.  The Company has  recorded  expenses of  $1,131,000
         related to the costs of the terminated  agreements with Hadwaco/Hackman
         and the  possible  costs  associated  with the  Aquamax/Keeran  license
         agreement dispute.

         On June 27, 2002,  the Company  issued  600,000 shares as stipulated in
         the  acquisition  agreement.  At the date of  issuance,  the  Company's
         common  stock  closed  at $0.08  per  share.  Accordingly  the  Company
         recorded the issuance as a reduction of the Aquamax/Keeran liability of
         $48,000 and a gain on  extinguishment of debt of $2,892,000 as required
         by APB No. 29 "Accounting for Non Monetary  Transactions".  The Company
         recorded an  impairment  loss of  $5,348,150  to write the value of the
         asset  down to zero  because of the  uncertainty  of being able to fund
         future  development of the  technology.  The Company is in negotiations
         with Aquamax/Keeran regarding the balance due of $3,600,000.




                                       22
<PAGE>


NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         e. License Agreements (Continued)

         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,  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  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-2003 if the Company can
         raise sufficient  capital to fund completion of its Stirling engine and
         pay its  portion  of the  costs in  connection  with the  collaboration
         agreement.  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.  Sigma,
         because of its bankruptcy, it is no longer performing on this contract.

         SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (SAIC)
         -----------------------------------------------------

         Effective  April 4, 2001,  the  Company  signed a  Technology  License,
         Consulting  Services,  and Asset Purchase Agreement with SAIC. Terms of
         the  agreement  are as  follows:  SAIC  will  grant  to the  Company  a
         non-exclusive   royalty-bearing   right  and  license  under  the  SAIC
         Technology to make, use,  import,  offer to sell, and sell  components,
         sub-assemblies or systems for concentrating solar energy  incorporating
         SAIC  Technology  in the  United  States  and  Canada.  The term of the
         agreement will continue until the date of the expiration of the last of
         the SAIC  Patents.  The  Company's  obligation  to pay  royalties  will
         continue  until the sooner of either 30 years or the  expiration of the
         last SAIC patent.  SAIC will have the right to terminate this agreement
         if the  Company  has  failed  to  fund  the  $4,000,000  in  SAIC  dish
         development  in two  years or to timely  make any  royalty  or  minimum
         royalty  payment,  SAIC  shall  also have the right to  terminate  this
         agreement or  renegotiate  the royalty of this agreement if the Company
         has  failed to deliver  equity in a new  business  entity to SAIC.  The
         Company will be obligated to pay the following  royalties  based on the
         net  selling  price of any  licensed  product  in  accordance  with the
         following schedule:  (a) Three percent of the set selling price for all
         sales made during the royalty term until after the cumulative  total of
         royalties exceeds $100,000, (b) Two and One-Half percent of net selling
         price for all sales made during the royalty  term after the  cumulative
         total paid to SAIC exceeds  $100,000,  and until the  cumulative  total
         exceeds  $500,000 and, (c) Two percent of the net selling price for all
         sales made during the royalty term once the  cumulative  total  royalty
         exceeds  $500,000.  During the royalty term, the Company shall make the
         following  minimum royalty  payments:  Contract year 1: no amounts due,
         Contract  year 2:  minimum  amount  due is  $25,000,  Contract  year 3:
         minimum  amount due is $50,000,  and  Contract  year 4 and  thereafter:
         minimum  amount due is  $100,000.  Within 30 days after the end of each
         quarter,  the Company will  deliver to SAIC a report of its  activities
         relating to the preceding calendar quarter.


                                       23
<PAGE>


NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         e. License Agreements (Continued)

         Science Applications International Corporation (SAIC) (Continued)
         -----------------------------------------------------

         On September 1, 2001,  the Company and SAIC entered into a Professional
         Services  Agreement as it relates to time and  materials.  The terms of
         the agreement  are as follows:  (1) the period of  performance  is from
         September 1, 2001 to August 31, 2003. (2) SAIC will consult and develop
         a program to create a viable  near-term solar dish  concentrator  power
         system for electrical  power  production.  This program will consist of
         four tasks:  Task 1 will relate to advanced  dish  development,  Task 2
         will consist of marketing and business development, Task 3 will consist
         of receiver  development and Task 4 will consist of product testing and
         specification.  The  estimated  costs of these four tasks  combined  is
         $7,700,000. The Company will pay SAIC monthly on a `time and materials'
         basis for labor expended and costs and expenses incurred.

         The Company was to make an initial  payment of working  capital to SAIC
         of $200,000 and shall thereafter replenish the level of working capital
         by making  payments to keep the balance of working capital at $200,000.
         The Company is to maintain the $200,000  working  capital balance until
         SAIC has been paid  $6,800,000.  Thereafter  SAIC will draw down on the
         working capital until the $7,700,000 is expended. SAIC will have a lien
         upon  and may  retain  or  repossess  any and all  deliverables  if the
         Company does not make the full payment to SAIC.

         At December  31,  2001,  the Company  had accrued  $42,864  relating to
         expenses  incurred  by SAIC.  The  Company  has not  made the  required
         $200,000  working capital  deposit.  Amounts expensed as they relate to
         SAIC Professional Services Agreement will be classified as research and
         development expenses.

         In its Form  10-KSB for the year ended  December  31,  2001 the company
         reported  in its  discussion  of  Strategic  Relationships  that it had
         entered  into  a  Technology  License  Consulting  Services  and  Asset
         Purchase Agreement with Science application  International  Corporation
         and a related Professional Service Agreement. The Company and SAIC have
         agreed to suspend both agreements  based on the decision of the Company
         to focus more of its  distributed  energy  efforts  toward its Stirling
         engine and related Home Power Unit business and the decision of SAIC to
         independently pursue its solar photovoltaic dish development  business.
         However,  the parties have agreed that, once the Company has raised the
         funds  necessary to proceed with its business  plan as described in the
         Form  10-KSB the  parties  will  either  reinstate  the  agreements  or
         negotiate a new contract as appropriate under the circumstances at that
         time.

         f. License Option Agreement

         During March 2001, the Company entered into a License Option  Agreement
         with the Defence  Evaluation  and Research  Agency  (DERA),  an English
         Corporation, whereby the Company purchased for $42,855 an option to use
         certain fuel cell  technology  for nine months with an option to extend
         the  agreement  by up to three  months  upon  written  request  and the
         payment of a $14,285 fee made at least one month prior to expiration of
         the  Agreement.  The  Company  opted not to extend  the  agreement  and
         recorded  $42,855 in  amortization  expense for the year ended December
         31, 2001 related to this agreement.


                                       24
<PAGE>


NOTE 8 - EQUITY TRANSACTIONS

         On January 8, 2002,  the Company  issued 200,000 shares of common stock
         for prepaid consulting services (See Note 7). The shares were valued at
         the closing price of $1.06 per share on the date of issue.

         On January 8, 2002, the Company granted  3,007,456 options to employees
         with an exercise  price of $1.00 per share and a term of 10 years.  The
         Company  recorded  $180,447 of expense which related to the  difference
         between the closing price of the stock of $1.06 per share on January 8,
         2002 and the exercise price of the options.

         On January 8, 2002,  the Company  granted 87,132 options to consultants
         of the Company  which had a fair market value of $90,106 as computed by
         the  Black-Scholes  pricing  model using a risk free  interest  rate of
         3.48%, volatility of 137.25% and a term of 10 years.

         On January 8, 2002,  the Company  issued 130,000 shares of common stock
         for prepaid consulting services (See Note 7). The shares were valued at
         the closing  price of $1.06 per share on the date of issue.  Concurrent
         with the issuance of the shares,  the Company granted 300,000  warrants
         with an exercise price of $1.25 per share. The fair market value of the
         warrants as determined by the Black-Scholes pricing model was $120,000.

         On February 7, 2002, the Company granted  100,000  warrants for prepaid
         consulting services (See Note 7). The fair market value of the warrants
         as determined by the Black-Scholes pricing model was $79,000.

         On February 19, 2002,  the Company  cancelled a total of  $3,554,015 of
         warrants  which  had  been   previously   granted  in  various  private
         placements and debt  financings  which had exercise prices of $1.50 and
         $2.04 per share and reissued new warrants with a new exercise  price of
         $0.50 per share. This was done as additional consideration for amending
         the  terms of the  debt  instruments  to  extend  the due  dates of the
         accrued but unpaid  interest and to leave the interest rates at 10% per
         annum. The cancellation and reissuance of the warrants  resulted in the
         recognition  of  $1,360,574  of  additional  expense  relating  to  the
         cancellation  of the previous  warrants and the  reissuance  of the new
         warrants as determined by the Black-Scholes pricing model.

         On February 28, 2002, the Company issued 260,270 shares of common stock
         for the  conversion  of $500,000 of debt relating to the equity line of
         credit  commitment fee which had been accrued at December 31, 2001. The
         shares were  valued at $1.92 per share  which was the closing  price on
         November  29, 2001 which was the date that the  liability  was incurred
         and the number of shares was determined.

         On February 28, 2002, the Company issued 150,000 shares of common stock
         for a loan  penalty  cost.  The shares  were  valued at $0.75 per share
         which was the  closing  price on the date of  issue.  The  shares  were
         issued pursuant to a penalty clause for non-payment of a loan.

         On April 8, 2002, the Company  granted  750,000  warrants to Ricardo as
         part of an agreement to extend debt payment terms. The warrants have an
         exercise price of $0.50 per share,  are  exercisable for four years and
         are fully vested. The Company used the Black Scholes model to determine
         fair market value of $671,700 with a risk free interest rate of $4.09%,
         volatility of 191% and no expected dividends.

         On June 14,  2002,  the  Company  granted  400,000  options  valued  at
         $128,000 for consulting services to be performed.

         On June 14, 2002, the Company issued 150,000 shares of common stock for
         consulting  services.  The shares  were  valued at $0.40 per share,  or
         $60,000

         On June 21, 2002,  the Company issued 85,526 shares of common stock for
         the conversion of $13,000 in principle of a debenture payable, or $0.15
         per share.



                                       25
<PAGE>

         On June 25, 2002, the Company issued 265,625 shares of common stock for
         the  conversion  of $17,000 in  principle  of a  convertible  debenture
         payable, or $0.06 per share.


                                       26
<PAGE>


NOTE 8 - EQUITY TRANSACTIONS (Continued)

         On June 26, 2002, the Company issued  3,500,000  shares of common stock
         for the  acquisition  of certain  specified  assets of  Elektryon.  The
         shares were  valued at $0.11 per share.  Since the assets have not been
         received  by the  Company,  their  value of  $385,000  is  included  in
         deferred  consulting  expense and asset  acquisition as a contra equity
         account.

         On June 27, 2002, the Company issued 600,000 shares of common stock for
         the conversion of a portion of the Aquamax/Keeran  payable.  The shares
         were valued at $0.08 per share.

         On June 28, 2002, the Company issued 156,250 shares of common stock for
         the  conversion  of $10,000 in  principle  of a  convertible  debenture
         payable, or $0.06 per share.


NOTE 9 - DISCONTINUED OPERATIONS

         On August 9, 2002, the Company's wholly-owned  subsidiary SIGMA was put
         into bankruptcy  because if its inability to pay employee  salaries and
         was declared a  discontinued  operation.  All officers and directors of
         SIGMA  have  resigned  and  operations  have  completely   closed.   In
         accordance  with FASB Statement No. 144, the Company has classified all
         prior  operations of SIGMA as  discontinued  and has restated all prior
         income  statements.  No income tax benefit has been  attributed  to the
         transaction.

         A summary of the Discontinued Operations are as follows:


<TABLE>
<CAPTION>
                                                                                                            FROM INCEPTION
                                                                                                             ON MARCH 26,
                                                                                                                 1992
                                          FOR THE SIX MONTHS ENDED          FOR THE THREE MONTHS ENDED          THROUGH
                                                  JUNE 30,                           JUNE 30,                  JUNE 30,
                                      ----------------------------------- --------------------------------  ---------------
                                           2002              2001             2002              2001             2002
                                      ----------------  ----------------- ----------------   -------------  ---------------
<S>                                     <C>                <C>             <C>                <C>             <C>
REVENUES                                   $        -        $        -       $        -        $        -       $        -
                                      ----------------  ----------------- ----------------   -------------  ---------------

EXPENSES

General and administrative                    436,620           949,750           81,866           547,903        2,483,102
Impairment of intangible  assets            5,656,207                 -        5,656,207                 -        5,656,207
Research and development                       14,687         1,671,974                -         1,502,946        2,955,483
Depreciation and  amortization                111,966            92,675           60,513            59,940          352,518
                                      ----------------  ----------------- ----------------   -------------  ---------------

Total Expenses                              6,219,480         2,714,399        5,798,586         2,110,789       11,447,310
                                      ----------------  ----------------- ----------------   -------------  ---------------

LOSS FROM OPERATIONS                       (6,219,480)       (2,714,399)      (5,798,586)       (2,110,789)     (11,447,310)
                                      ----------------  ----------------- ----------------   -------------  ---------------

OTHER INCOME (EXPENSE)

Currency gain                                     156                 -                -                 -              522
Interest income                                     -                 -                -                 -           30,783
Interest expense                             (144,156)          (74,110)         (81,985)          (13,819)        (408,712)
                                      ----------------  ----------------- ----------------   -------------  ---------------

Total Other Income  (Expense)                (144,000)          (74,110)         (81,985)          (13,819)        (377,407)
                                      ----------------  ----------------- ----------------   -------------  ---------------

</TABLE>


                                       27
<PAGE>


NOTE 9 - DISCONTINUED OPERATIONS (Continued)

<TABLE>
<CAPTION>
                                                                                                FROM INCEPTION
                                                                                               ON MARCH 26, 1992
                                  FOR THE SIX MONTHS ENDED        FOR THE THREE MONTHS ENDED         THROUGH
                                          JUNE 30,                         JUNE 30,                 JUNE 30,
                                ----------------------------    ------------------------------  ----------------
                                   2002             2001             2002            2001             2002
                                -------------   ------------    --------------   -------------  ----------------


<S>                              <C>              <C>             <C>            <C>             <C>
 LOSS BEFORE EXTRAORDINARY        (6,363,480)      (2,788,509)     (5,880,571)    (2,124,608)     (11,824,717)
  ITEM

 EXTRAORDINARY ITEM

 Gain on settlement of debt                -                -               -              -          157,822
                               -------------   ------------    --------------   -------------  ----------------

 NET LOSS                        $(6,363,480)     $(2,788,509)    $(5,880,571)   $(2,124,608)    $(11,666,895)
                               =============   ============    ==============   =============  ================

    At June  30,  2002 and  December  31,  2001,  the  assets  and liabilities of the  discontinued  operations
    consisted of the following:

</TABLE>


                                                 JUNE 30,          DECEMBER 31,
                                                   2002                2001
                                              ---------------     -------------
                                                (UNAUDITED)
      ASSETS
        Cash and restricted cash                  $4,713            $141,142
        Advances and pre-aids                     19,326              64,591
        Fixed assets                             165,885             164,675
        Deposits                                       -              10,216
        Patents, net                             719,421             813,678
                                              ---------------     -------------
                                                $909,345          $1,194,302
                                              ===============     =============

      LIABILITIES
        Accounts payable                      $2,312,828          $1,833,483
        Accrued expenses                         548,994             267,657
        Notes payable                          1,263,524           1,058,666
                                              ---------------     -------------
                                              $4,125,346          $3,159,806
                                              ===============     =============


NOTE 10- SUBSEQUENT EVENTS

         During July 2002, the Company issued  7,465,888  shares of common stock
         for a $125,000  in draws on its equity  line of credit at a price equal
         to 95% of the lowest  closing bid price of the  Company's  common stock
         for the 5 days immediately following the notice date.

         During July 2002, the Company  issued  925,926 and 3,854,167  shares of
         common  stock at $0.022 and $0.096  per  share,  respectively,  for the
         conversion of $57,000 in principle of a convertible debenture payable.



                                       28
<PAGE>

         During July 2002, the Company  received  $50,000 from the issuance of a
         note payable bearing  interest at 13% per annum,  unsecured,  quarterly
         interest  payments due in the amount of $1,625 with  principle  due one
         year from the date of issue. As additional  consideration,  the Company
         granted  50,000  warrants with an exercise price of $0.75 per share and
         expire one year from the date of issuance.


                                       29
<PAGE>


NOTE 10- SUBSEQUENT EVENTS (Continued)

         During  July  2002,  the  Company  entered  into an  agreement  for the
         purchase by Synergy  International  S.A.  (Synergy)  of all the rights,
         titles and  interests  of the Company in and to the  distributed  power
         generation technology and products owned,  developed and created by the
         Company for the territory of Europe. The agreement calls for Synergy to
         provide a $68,000  bridge loan, the grant of 20% interest in and to the
         common  stock of the  EuropeCo.,  to further  develop  and market  this
         technology,  and a  royalty  interest  on the sale of any  products  as
         produced by EuropeCo.

         During  August 2002,  the Company  entered into a consulting  agreement
         with an  individual to assist the Company in obtaining  financing.  The
         agreement  calls for cash  compensation  of 10% of the total  financing
         raised, payable in two payments,  in-kind compensation in the amount of
         7 1/2% of funds raised and a retainer of $5,000 per month.

         During August 2002,  the Company  amended its agreement  with Weckstein
         that the 400,000  options  granted on June 14,  2002,  have an exercise
         price of $0.05 per share instead of $0.40 per share.

         During August 2002, the Company received $25,000 from the issuance of a
         note payable to an individual.  The note bears  interest at 12.00%,  is
         unsecured and due on demand.

         During August and September 2002, the Company received $60,000 from the
         issuance  of notes  payable  to an  individual.  All of the notes  bear
         interest at 15.00%, are secured by assets of the Company and are due on
         demand.

         During   September  2002,  the  Company  entered  into  a  three  month
         consulting  agreement  with an  individual to provide  assistance  with
         overall management of the Company.  The agreement calls for the payment
         of a monthly  retainer  in the amount of $20,000  and the  issuance  of
         options to purchase  50,000  shares of the  Company's  common  stock at
         $0.02 per share, vesting at the end of the three month term.


                                       30
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Forward-Looking Statements

         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  express,  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.

GOING CONCERN

         The  Company's  auditors  stated  in  their  reports  on the  financial
statements of the Company for the years ended December 31, 2001 and December 31,
2000 that the Company is dependent on outside financing and has had losses since
inception that raise  substantial doubt about its ability to continue as a going
concern.  For the years ended December 31, 2001 and 2000,  the Company  incurred
net annual losses of $17,481,843  and 9,104,775,  respectively,  and the Company
had  an  accumulated  deficit  of  $37,510,434  and  $20,028,591,  respectively.
Management  believes that resources  will be available  from private  sources in
2002 and 2003 to continue  to develop  the  Company's  products,  pay  operating
expenses  and  pursue  acquisitions  and  strategic  alliances.   The  financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.

         Due to the changes in the capital  markets since 9/11,  Ocean Power has
been  forced to scale back its  fund-raising  goals.  Ocean  Power is  currently
focused on two major funding  options.  The first is an  approximate  $3 million
round needed to finish the  manufacturing  prototypes of the Stirling engine for
its Home Power Unit. The second is an effort to  restructure  its water business
as a stand-alone activity for either retention or sale.

         Management intends to seek new capital from loans and private or public
sale of stock  needed to  increase  liquidity,  fund  growth and  implement  its
business plan;  however, no assurance can be given that the Company will be able
to raise any additional capital.

CERTAIN BUSINESS DEVELOPMENTS

         Effective July 31, 2002, the company laid off most of its employees due
to a severe  cash-flow  shortage.  The  Company's  operation  continue  with the
remaining staff. In addition, effective August 9, 2002, Sigma Elektroteknisk AS,
the wholly-owned  subsidiary of the Company was placed under  administration  of
the Ytre Follo Bankruptcy Court in Norway. Mr. Trygue Tonnessen was appointed as
trustee of the estate by the Ytre Follo Bankruptcy Court.

         The Company is a development  stage company,  which is still  dependent
upon its ability to raise  capital  through  loans and private or public sale of
stock.  The Company  believes that prior to recent events  described  above, the
Company's ability to raise  significant  operating capital had been hindered due
to delays in obtaining relisting on the NASDAQ Over-the-Counter  Bulletin Board.
On Friday  September 7, 2001 the Company was successful in becoming  relisted on
the OTC Bulletin  Board.  Three  working days later,  on Tuesday,  September 11,


                                       31
<PAGE>

2001,  an act of war was  committed  on the United  States  with the World Trade
Center devastation. That event disrupted the financial markets and significantly
affected and  consequently  delayed the Company's  efforts to obtain  investment
funds necessary to carry out its business plans within the time lines previously
projected by the  Company.  While the delays in raising  operating  capital have
caused the Company to re-assess the timelines for implementation of its business
plan, the Company  continues to believe that it will be able to raise sufficient
capital to meet its core business plan  objectives as more fully detailed below.
However,  management  cannot  provide any  assurances  that the Company  will be
successful  in  accomplishing  any of its  plans.  Failure  to raise  sufficient
capital to meet its  business  plan  objectives  could  have a material  adverse
effect  on  the  Company's  results  of  operations,   financial  condition  and
liquidity.

PLAN OF OPERATION

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

         Ocean Power,  like many companies today has been confronted with market
and financing  realities  that have forced the company to reevaluate  its plans,
budgets and  activities.  As a development  stage  company,  the Company  relies
solely on investor support to survive until it is able to book sales and have an
ongoing  revenue stream.  Both past and  prospective  investors have indicated a
need for a revised  corporate  focus that will speed up the  momentum  towards a
fairly immediate commercial product line. Likewise,  the synergistic approach on
which the company  was founded of  integrated  water and power  systems,  though
technologically  valid,  has proven  confusing  and  distracting  to the capital
markets  and  institutional  investors.  This  was  further  evidenced  when the
company's former Financial  Advisor ABN AMRO (no longer in the equity markets in
the U.S.)  advised that water and power be separated to enhance the  possibility
of major funding.

         Given the message from the capital markets,  our financial  advisor and
individual  investors along with the Boards concurrence,  management has been in
the process of  dramatically  revising  its plans to  accomplish  a more focused
company and its near term goals to secure  contracts,  customers and thus market
penetration.  Very tough  decisions have already  occurred  including  workforce
reductions, overhead reductions, and ultimately the consolidation of engineering
to the El Dorado Hills facility by virtue of the company's Norwegian subsidiary,
Sigma,  filing for  bankruptcy.  These and other  decisions have forced a leaner
more focused operation to come into place.

         The  Company  has also  determined  that  shareholders,  investors  and
customers will best be served by product and service focus. Finally two distinct
markets have emerged more fully  worldwide - that of Distributed  Generation and
Power and Desalinated Water Services.

         To  respond  to the  distinct  market  and  investor  base that is only
interested in water and desalination services,  Ocean Power is in the process of
identifying and securing equity  sufficient to consummate a transaction that may
result in the divesture of the water assets and transfer of  liabilities  of the
business into a new entity.

WATER

         As a result of investor  preference  and market  demand,  the Company's
Plan of  Operation  is being  revised  to  accommodate  a leaner  operation  and
ultimately  clearer  distinctions  between  its power and water  divisions.  The
Company is  seriously  evaluating  the merits of  divesting or selling the water
division.  The Board will be working with its advisors over the next 3 months to
chart a path for the possible divestiture of the water division. The company has
had  preliminary  discussion  with  prospective  purchasers and has developed an
Assets & Liabilities  Schedule as necessitated by most deal structures.  As yet,
no  formal  offer  from a  prospective  buyer  has  been  made  though  they are
anticipated.

POWER

         The  power  division  has been  very  active  in  securing  prospective
customers  for its  Stirling  engine  Home  Power  Units  (HPU's).  A  prototype
development  budget of approximately $3 million has been set and current and new
investors  are  beginning  to address the terms by which they would  support the
prototype development of Ocean Powers unique Stirling system.

         Ocean Power's Plan of Operations for the next three quarters follow:



                                       32
<PAGE>

         1.  Complete the internal  transition  and  streamlining  activities to
reduce burn rate, clarify commercial goals,  establish management and consultant
priorities and secure customers.

         2.  Complete HPU  prototype  planning  for the purpose of  establishing
baseline performance.

         3. Develop and  complete an array of  Distributed  Generation  projects
using  currently  available   technology.   The  interim  step  of  conventional
technology moving toward distributed power systems is anticipated to render near
term sales.

         4. Secure strategic  partner funding to complete work underway with the
company's hydrogen generation and alkaline fuel cell activity.

         5. Focus  engineering  activities that moves technology into commercial
products in the areas of:

            a.   Platelet hot end;

            b.   ejectors;

            c.   enhanced heat transfer in plastic heat exchangers;

            d.   chemical-free water pretreatment;

            e.   low-temperature hydrogen generation;

            f.   high-performance alkaline fuel cells; and

            g.   Plasma chemical reactors.

         This work is all aimed at improving  the  performance  and reducing the
capitol of Ocean Power's products.

         Ocean Power 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.

         Although  the  company  has  radically  reduced  its  work  force,  the
engineers  and talent to conduct the  described  work  remains  available to the
company either through reemployment or subcontract.

         Ocean Power has had no profit to date.  It has  experienced  a total of
$56,590,547 in losses from inception on March 26, 1992 through to June 30, 2002.
Ocean Power's  losses have resulted from the fact that our products are still in
development and planned principle operations have not commenced.

         At June 30, 2002, Ocean Powers  unrestricted cash position increased to
$12,849 as compared to $2,989 at December 31,2001 and we have incurred  accounts
payable, notes payable and other current obligations aggregating $23,237,638. At
June 30, 2002 aggregate  liabilities were $24,012,243 as compared to $21,750,344
at December 31, 2001, an increase of $2,261,899 or 10.4%

         On November 13, 2001,  Ocean Power obtained an extension of the payment
due date which was due to Silent Clean Power (SCP) from May 2001 to December 31,
2001. Payment of approximately $7,600 in accrued interest,  was made in December
2001 in Swedish Kroner.  Principal in the amount of approximately  $83,000, plus
accrued interest from December 1 was due on December 31, 2001 in Swedish Kroner.
Silent Clean Power agreed to extend the payment due date to May 31, 2002 and the
company is currently in default on its payment to SCP.

         In order to continue as a going concern,  develop  reliable revenue and
achieve a  profitable  level of  operation,  Ocean  Power will need among  other
things, additional capital resources.  Management's plans to continue as a going
concern include raising  additional  capital through private placements sales of


                                       33
<PAGE>

Ocean Powers common stock and/or loans from third parties, the proceeds of which
will be used to develop  Ocean Powers  products and pay operating  expense.  All
funds raised will be used to pay current debts and fund operations and expansion
consistent with Ocean Powers revised  business plan. The Company expects that it
will need  approximately  $9,000,000  of  additional  funds for  operations  and
expansion over the next twelve months.  However,  management  cannot provide any
assurances that we will be successful in accomplishing any of our plans. Failure
to raise  sufficient  capital  could have a  materials  adverse  effect on Ocean
Powers results of operations, financial conditions and liquidity.

         The ability of Ocean Power to continue as a going concern are dependent
on our ability to  successfully  accomplish  the plan described in the preceding
paragraphs  and  eventually  attain  profitable  operations.   The  accompanying
financial  statements do not include any adjustments  that might be necessary if
Ocean Power is unable to continue as a going concern.

         As a development stage company, Ocean Power continues to have a limited
operating  history  on which to  evaluate  prospects.  The risks,  expenses  and
difficulties  encountered  must  be  considered  when  evaluating  Ocean  Powers
prospects.  All  development  efforts share the risk that the  technology  being
pursued may not perform to expectations. Also the cost to manufacture may exceed
the products value in the market.  Changing market conditions and new technology
breakthroughs by competitors also pose risks.

         Due to these  uncertainties,  the exact costs of the development  plans
described  cannot  be  guaranteed.  Difficulties  and  setbacks  occur  and  can
adversely effect ocean Power. If market conditions change, financial performance
projections  may prove  unreachable.  All of these factors must be weighted when
evaluating the future prospects of a development stage company.

         Finally,  Ocean  Power does not have an  established  source of revenue
sufficient to cover our  operating  costs and to allow us to continue as a going
concern.  Also,  management  cannot  provide  any  assurances  that  we  will be
successful  in  accomplish  any of out  plans.  The  ability  of Ocean  Power to
continue  as a going  concern is  dependent  upon our  ability  to  successfully
accomplish the plan described in the preceding  paragraphs and eventually attain
profitable operations.

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 US Dollars and have issued 600,000 shares
of common stock pursuant to the license. The total purchase price, including the
value  of the  shares  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.


                                       34
<PAGE>

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
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.

         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.  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.

ATTEMPTED RESOLUTION OF THE DISPUTE

         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
LOI's, was as follows.  The Company would form a new company (Newco) in Finland.
Because it would control Newco, the Company's financial  statements would report
its investment in Newco on a consolidated  basis. The Company would  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  would  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 would have,  if closing had  occurred as  stipulated,
resolved  the dispute  between the Company and  Aquamax/Keeran.  The  Agreements
provided that the Company would make to Aquamax/Keeran payments of $1,800,000 in
cash on or before  September  28,  2001,  unless  extended  by the  parties,  in
addition to the  $400,000 and 600,000  shares of common  stock  already paid and
issued 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. The agreements also provided
that the Company would 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  was to be exclusive for a
term of five years and  non-exclusive  thereafter.  The agreements also included
release of liability provisions, whereby all parties would 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 was as
follows:  The Company was to form a new company (Newco) in Finland.  The Company
would 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 was to be $1,500,000 plus a 19% interest in Newco's common
stock.  The  Company  was 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.

         On  September  7,2001 the  Company  became  relisted  on the NASDAQ OTC
Bulletin Board which enhanced its ability to raise funds; however, three working
days later,  on Tuesday,  September  11, 2001 an act of war was committed on the
United  States with the World Trade  Center  devastation  occurring.  That event
significantly   affected  and  delayed  the  Company's  efforts  to  obtain  the
investment money necessary to complete the transactions  described above for the
formation of Newco,  the purchase of the ongoing water  remediation  business of
Hadwaco and the  purchase of the  Aquamax/Keeran  technology  connected to water
treatment.  Because of the funding delays,  the Company was not able to fund the
closing of the  transactions  and the agreements for those  transactions are now
null and void,  including the agreements which included the release of liability
provisions  between  the  Company  and  Aquamax/Keeran.  As a  consequence,  the
September license agreement  between the Company and  Aquamax/Keeran  remains in
effect and the disputes  between the parties as to their  respective  rights and
obligations under the license agreement remain unresolved.


                                       35
<PAGE>


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 and 600,000  shares of common stock issued 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.  Because  the  agreements  with  Hadwaco  Ltd. Oy and Hackman Oy Abp were
non-binding,  the Company does not believe that it has liability  arising out of
its failure to complete the transactions under the agreements described above as
the Company's attempt to resolve the dispute, other than the loss of amounts the
Company agreed to pay in connection with obtaining extensions of the agreements.
In connection with its dispute with  Aquamax/Keeran,  the Company still believes
it has the  right to a  purchase  price  reduction  because  of the  failure  of
Aquamax/Keeran  to deliver  exclusive rights to all of the patents and, while no
claim has been  asserted,  might be  subject  to a damage  claim  related to the
Company's  withholding of payment on the Aquamax/Keeran  license agreement.  The
Company has recorded expenses of $800,000 related to the costs of the terminated
agreements  with  Hadwaco/Hackman  and the possible  costs  associated  with the
Aquamax/Keeran license agreement dispute.

         The related asset was 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 was appropriate.

         Our methodology for determining  whether an impairment  existed at each
balance  sheet date was to monitor our  progress  against our vapor  compression
desalination  development program described in the next paragraph.  However, due
to cash  flow  shortages  and  the  uncertainty  of  being  able to fund  future
development of the technology,  the Company  wrote-off the remaining asset value
of $5,348,150  during the second quarter of 2002.  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


                                       36
<PAGE>

enables us to assess whether any market conditions threaten the viability of our
planned business.

         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  (provisional  patents
filed August 2000 and patent pending  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
pending) 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  pending.)  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 have our common stock traded on the NASDAQ
OTC Bulletin Board 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.  On September 7, 2001 the Company became relisted on the NASDAQ
OTC Bulletin Board. The following Tuesday,  September 11, 2001 an act of war was
committed on the United  States with the World Trade Center  devastation,  which
further delayed the funding necessary to pursue the PPI.

         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


                                       37
<PAGE>

from  naturally  occurring  saline water in units of less than 1000 cubic meters
per day. In consideration for such license, Aquamax/Keeran is 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 is an  advanced
technology  development  program,  the amount of future royalties due from sales
will be determined  once the product is fully  developed and the actual value of
the technology can be determined.

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
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 the  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 Ocean
Power's  potential  capital needs to produce a commercially  viable  distributed
power product.

         Since the acquisition of Sigma, Ocean Power has worked  aggressively on
the  development of additional  technology to improve the performance and reduce
the cost of the basic Sigma design. As in all other Stirling  engines,  the most
expensive and complex  section of the engine is the "hot end". This is this part
where the  combustion  air is preheated,  fuel is injected  into the  combustion
chamber,  heat is  transferred  to the working  fluid (helium in this case) and,
after the expanding gas has done its work,  the remaining heat is recovered in a
device  called a  regenerator.  These  components  have  traditionally  been the
majority of the engine's cost and major limits on performance.

         Ocean power has patents pending on a different  implementation of these
functions for its Stirling engine. This new approach involves the integration of
all of these  functions into a compact,  single  component  called a "platelet".
This is done through a process similar to what the  electronics  industry did in
the development of the integrated  circuit.  The only difference is that in this
case it is  fluid  functions  (gases)  that  are  being  integrated  instead  of
electronic functions.

         In the  course of the  Company's  extensive  market  research  into the
various potential  customers for the Home Power Unit it became apparent that the
differentiation  between Ocean Power and any other Stirling  manufacturer is our
platelet technology.  The combination of this with the basic SIGMA design offers
the potential for a leap in cost and performance.



                                       38
<PAGE>

         With this in mind and the existing shortage of funds, Ocean Power began
planning  for the  consolidation  of  Sigma's  engineering  functions  with  the
platelet  development  at our  facility  in  California.  Due  to the  worsening
financial situation of Sigma, it became necessary for the Board of Sigma to file
the company for  bankruptcy on August 9, 2002. As a result of the  bankruptcy of
SIGMA, the Company recorded an impairment of goodwill of $5,656,207. For further
description, see footnotes 2, 3, and 9 of the Financial Statements.

         The focus of this  revised  program is far  narrower  than our original
plans. The initial target market is for  multi-family  dwellings in the U.S. The
first phase of the  project,  which is projected to take six months from closing
of a funding will cost approximately $3 million.

         Once  the  manufacturing  prototypes  are  completed  approximately  $7
million will be necessary to put these units into production.

         Once we have completed the production  prototype hurdle,  other markets
and products will follow as funding allows.  Boiler  replacement,  single-family
homes,  etc.  will all follow as they can be externally  supported.  The Company
believes  that it can attract  these funds  because the platelet  technology  is
applicable to any Stirling engine and therefore any application.

ACCOUNTING PRONOUNCEMENTS

         SFAS  No.'s  141 and  142 -- In June  2001,  the  Financial  Accounting
Standards Board ("FASB")  adopted  Statement of Financial  Accounting  Standards
("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 was  applied  in its  entirety,  which is January 1, 2002 by Ocean
Power.  SFAS No. 142 is effective,  generally,  in fiscal years  beginning after
December 15, 2001 which is the year ending December 31, 2002 by Ocean Power.

         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.

         The adoption of these new pronouncements had no effect on the Company.

         SFAS No. 143 -- On August  16,  2001,  the FASB  issued  SFAS No.  143,
Accounting for Asset Retirement Obligations, which is effective for fiscal years
beginning after June 15, 2002. It requires that obligations  associated with the
retirement  of a tangible  long-lived  asset to be recorded as a liability  when
those  obligations  are  incurred,  with the amount of the  liability  initially
measured at fair value.  Upon  initially  recognizing a liability for an accrued
retirement  obligation,  an entity must  capitalize  the cost by  recognizing an
increase in the carrying amount of the related  long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability,  an entity either settles the  obligation for its recorded  amount or
incurs a gain or loss upon  settlement.  While Ocean Power has not completed the
process of determining  the effect of this new accounting  pronouncement  on its
financial statements,  Ocean Power currently expects that the effect of SFAS No.
143 on Ocean Power's financial statements,  when it becomes effective,  will not
be significant.

         SFAS No. 144 -- On October 3, 2001, the Financial  Accounting Standards
Board  issued  SFAS No.  144,  Accounting  for the  Impairment  or  Disposal  of
Long-Lived Assets which is effective for financial  statements issued for fiscal
years beginning after December 15, 2001 and, generally, its provisions are to be
applied  prospectively.  SFAS 144 supersedes SFAS Statement No. 121 ("FAS 121"),
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be  Disposed  Of.  SFAS  144  applies  to  all  long-lived   assets   (including
discontinued  operations) and consequently  amends  Accounting  Principles Board


                                       39
<PAGE>

Opinion No. 30 ("APB 30"), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business.

         SFAS 144 develops one accounting model (based on the model in SFAS 121)
for  long-lived  assets that are to be disposed of by sale, as well as addresses
the principal  implementation  issues.  SFAS 144 requires that long-lived assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less cost to sell. That  requirement  eliminates APB 30's requirement
that  discontinued  operations  be  measured  at net  realizable  value  or that
entities  include under  discontinued  operations  in the  financial  statements
amounts for operating losses that have not yet occurred.  Additionally,  FAS 144
expands the scope of  discontinued  operations  to include all  components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be  eliminated  from the  ongoing  operations  of the  entity  in a
disposal transaction.

         The adoption of this new pronouncement had no effect on the Company.

RISK FACTORS

         Our Company is subject to various risks which may  materially  harm our
business,  financial  condition  and results of  operations.  Certain  risks are
discussed below.

         WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE

         We have  historically  lost  money.  For the six months  ended June 30,
2002, we sustained  net losses from  operations  of $14.4  million.  In the year
ended  December  31, 2001 and year ended  December 31,  2000,  we sustained  net
losses from operations of $14.4 million and $9.2 million,  respectively.  Future
losses are likely to occur. Accordingly, we may experience significant liquidity
and cash flow problems if we are not able to raise additional  capital as needed
and on acceptable  terms.  No assurances can be given that we will be successful
in reaching or maintaining profitable operations.

         WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

         Our  operations  have relied almost  entirely on external  financing to
fund our operations.  Such financing has historically come from a combination of
borrowings  from and sale of common stock to third parties and funds provided by
certain officers and directors. We will need to raise additional capital to fund
our anticipated  operating  expenses and future  expansion.  Among other things,
external  financing  will be required to cover our  operating  costs.  We cannot
assure you that financing  whether from external sources or related parties will
be available if needed or on  favorable  terms.  The sale of our common stock to
raise capital may cause dilution to our existing shareholders.  Our inability to
obtain  adequate   financing  will  result  in  the  need  to  curtail  business
operations.  Any of these events would be materially harmful to our business and
may result in a lower stock price.

         THERE IS  SUBSTANTIAL  DOUBT  ABOUT OUR  ABILITY TO CONTINUE AS A GOING
         CONCERN DUE TO RECURRING  LOSSES AND WORKING CAPITAL  SHORTAGES,  WHICH
         MEANS THAT WE MAY NOT BE ABLE TO CONTINUE  OPERATIONS  UNLESS WE OBTAIN
         ADDITIONAL FUNDING

         The report of our  independent  accountants  on our  December  31, 2000
financial  statements,  as noted in Note 11 and our December 31, 2001  financial
statements, as noted in Note 9 included an explanatory paragraph indicating that
there is substantial  doubt about our ability to continue as a going concern due
to recurring losses and working capital shortages.  Our ability to continue as a
going concern will be determined  by our ability to obtain  additional  funding.
Our financial  statements do not include any adjustments  that might result from
the outcome of this uncertainty.

         OUR COMMON  STOCK MAY BE  AFFECTED  BY LIMITED  TRADING  VOLUME AND MAY
         FLUCTUATE SIGNIFICANTLY

         Prior to this offering,  there has been a limited public market for our
common stock and there can be no assurance that an active trading market for our
common  stock  will  develop.  As a result,  this  could  adversely  affect  our
shareholders'  ability  to sell  our  common  stock in short  time  periods,  or
possibly at all. Our common stock has  experienced,  and is likely to experience
in the future,  significant price and volume  fluctuations which could adversely
affect the market  price of our common  stock  without  regard to our  operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial  results and changes in the overall economy or the condition of
the  financial  markets  could cause the price of our common  stock to fluctuate
substantially.

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<PAGE>


         OUR COMMON STOCK IS DEEMED TO BE "PENNY  STOCK," WHICH MAY MAKE IT MORE
         DIFFICULT  FOR  INVESTORS  TO RESELL  THEIR  SHARES DUE TO  SUITABILITY
         REQUIREMENTS

         Our common stock is deemed to be "penny  stock" as that term is defined
in Rule 3a51-1  promulgated  under the  Securities  Exchange Act of 1934.  Penny
stocks are stock:

         o    With a price of less than $5.00 per share;

         o    That are not traded on a "recognized" national exchange;

         o    Whose  prices  are not quoted on the  Nasdaq  automated  quotation
              system  (Nasdaq  listed  stock must still have a price of not less
              than $5.00 per share); or

         o    In issuers with net tangible assets less than $2.0 million (if the
              issuer has been in continuous  operation for at least three years)
              or $5.0 million (if in  continuous  operation  for less than three
              years), or with average revenues of less than $6.0 million for the
              last three years.

         Broker/dealers   dealing  in  penny  stocks  are  required  to  provide
potential  investors  with a  document  disclosing  the  risks of penny  stocks.
Moreover,  broker/dealers  are required to determine  whether an investment in a
penny  stock  is  a  suitable  investment  for  a  prospective  investor.  These
requirements  may reduce the  potential  market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third  parties or to otherwise  dispose of
them. This could cause our stock price to decline.

         OUR PROJECTS ARE EXPECTED TO REQUIRE SUBSTANTIAL  UP-FRONT COSTS BEFORE
         ANY REVENUES WILL BE REALIZED

         A  significant  portion of our revenue is  expected to be derived  from
substantial long-term projects which require significant up-front expense to us.
There can be no assurance  that revenues will be realized until the projects are
completed or certain significant milestones are met. Our failure, or any failure
by a  third-party  with which we may  contract,  to perform  services or deliver
interactive  video products on a timely basis could result in a substantial loss
to us.

         In addition,  difficulty  in completing a project could have a material
adverse effect on our reputation, business and results of operations. In certain
instances,  we may be  dependent on the efforts of third  parties to  adequately
complete  our  portion of a project  and,  even if our  products  and  processes
perform as  required,  a project may still fail due to other  components  of the
project supplied by third parties.

         WE MAY NOT BE ABLE TO  EFFECTIVELY  PROTECT OUR  INTELLECTUAL  PROPERTY
         RIGHTS

         We regard  certain  aspects of our  products,  processes,  services and
technology  as  proprietary.  We have taken steps to protect them with  patents,
copyrights,  trademarks,  restrictions on disclosure and other methods.  Despite
these precautions,  we cannot be certain that third parties will not infringe or
misappropriate   our   proprietary   rights  or  that  third  parties  will  not
independently   develop  similar   products,   services  and   technology.   Any
infringement,   misappropriation  or  independent  development  could  harm  our
business and future financial results.

         We have filed patent applications for certain aspects of our technology
and processes, but these may not be issued to us, and if issued, may not protect
our intellectual  property from competition which could seek to design around or
invalidate  these  patents.  Our failure to adequately  protect our  proprietary
rights in our  products,  services  and  technology  could harm our  business by
making it easier for our competitors to duplicate our services.

         We own several Internet domain names,  including  www.powerco.com.  The
regulation  of domain names in the United  States and in foreign  countries  may
change. Regulatory bodies could establish additional top-level domains or modify
the  requirements  for holding domain names,  any or all of which may dilute the
strength  of our  name.  We may not  acquire  or  maintain  our  domain  name or
additional  common names in all of the countries in which our marketplace may be
accessed, or for any or all of the top-level domains that may be introduced. The
relationship  between  regulations  governing  domain names and laws  protecting
proprietary  rights is unclear.  Therefore,  we may not be able to prevent third
parties  from  acquiring  domain names that  infringe or otherwise  decrease the
value of our trademarks and other proprietary rights.

         We may  have to  resort  to  litigation  to  enforce  our  intellectual
property rights, protect our trade secrets,  determine the validity and scope of
the  proprietary   rights  of  others,   or  defend  ourselves  from  claims  of
infringement,  invalidity or  unenforceability.  Litigation may be expensive and


                                       41
<PAGE>

divert  resources  even if we win.  This could  adversely  affect our  business,
financial condition and operating results.

         RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT

         Technology-based  industries,  such as ours,  are  characterized  by an
increasing  number of patents and frequent  litigation  based on  allegations of
patent  infringement.  From  time to time,  third  parties  may  assert  patent,
copyright  and  other  intellectual  property  rights to  technologies  that are
important to us. While there  currently are no outstanding  infringement  claims
pending by or against  us, we cannot  assure  you that  third  parties  will not
assert  infringement  claims against us in the future,  that  assertions by such
parties will not result in costly  litigation,  or that they will not prevail in
any such litigation.  In addition,  we cannot assure you that we will be able to
license  any valid and  infringed  patents  from third  parties on  commercially
reasonable  terms  or,  alternatively,   be  able  to  redesign  products  on  a
cost-effective  basis to avoid  infringement.  Any  infringement  claim or other
litigation against or by us could have a material adverse effect on us.

         NO ASSURANCE OF TECHNOLOGICAL SUCCESS

         Our  ability  to  commercialize   our  products  is  dependent  on  the
advancement  of our  existing  technology.  In order to obtain  and  maintain  a
significant  market share we will  continually  be required to make  advances in
technology.  We cannot assure you that our research and development efforts will
result in the  development  of such  technology on a timely basis or at all. Any
failures in such research and  development  efforts could result in  significant
delays in  product  development  and have a  material  adverse  effect on us. We
cannot  assure  you  that  we will  not  encounter  unanticipated  technological
obstacles  which either delay or prevent us from  completing the  development of
our products and processes.

         We believe there are certain technological  obstacles to be overcome in
order to develop  future  products.  In the field of water  desalination,  these
obstacles  include  proof  of  long-term  stability  of  hydrophilic   coatings,
long-term  effective  control of water chemistry  through  physical  effects and
efficient  operations of the  hypercritical  ejector.  In the distributed  power
field,  these  obstacles  include  successful  testing for materials,  equipment
endurance  and overall  system  performance  and the  development  of repeatable
manufacturing   processes.   In  certain  cases,   we  will  be  dependent  upon
technological advances which must be made by third parties. We cannot assure you
that they or such third parties will not encounter technological obstacles which
either  delay or  prevent  us from  completing  the  development  of our  future
products. Such obstacles could have a material adverse effect on us.

         CERTAIN OF OUR PRODUCTS AND SERVICES ARE  REGULATED BY THE  GOVERNMENT,
         WHICH MAY IMPOSE BURDENSOME REGULATIONS ON US

         Both  the  distribution  of water  industry  and the  power  generation
industry  are  subject  to  governmental  regulation.  However,  because  of the
uncertainties  surrounding  the  applicability  of these rules to our current or
future business activities,  we cannot be sure that we have been and will remain
in compliance  with all applicable laws and  regulations.  Our failure to comply
with all applicable  laws and regulations may result in the revocation or denial
of required  licenses and approvals,  government or private legal action,  civil
and criminal  liability and  indemnification  liability to third parties,  among
other  consequences.  Such consequences  could have a material adverse effect on
us.

         We rely upon, and  contemplate  that we will continue to rely upon, our
corporate partners to comply with applicable regulatory requirements.  We cannot
assure you that such  regulations  will not  materially  adversely  affect us by
jeopardizing the projects in which we are participating,  by imposing burdensome
regulations  on the users of our products,  by imposing  sanctions that directly
affect us, or otherwise.  Changes in the regulatory  environment relating to the
industries  in which we compete could have a material  adverse  effect on us. We
cannot predict the effect that future regulation or regulatory  changes may have
on our business.

         OUR LIMITED  OPERATING  HISTORY AND OUR EVOLVING BUSINESS MODEL MAKE IT
         DIFFICULT TO EVALUATE OUR PROSPECTS

         Our company  began  pursuing  operations in the  distributed  water and
distributed  power  industries in 1997. Our limited  operating  history makes it
difficult  to predict  our  future  prospects,  which are  subject to the risks,
expenses  and  uncertainties  encountered  by early stage  companies  in new and
rapidly evolving markets. These risks include:

         o    our unproven and evolving business model;

         o    the potential development of comparable services by competitors;



                                       42
<PAGE>

         o    whether we can  maintain  and improve our  technology  to meet the
              needs of our  customers  and to  facilitate  the  offering  of the
              products and services contemplated in our business model; and

         o    our ability to manage our growth.

         INCREASING  COMPETITION  COULD  ADVERSELY  AFFECT OUR MARKET  SHARE AND
         FINANCIAL PERFORMANCE

         Although we do not currently  believe there are any direct  competitors
in the  industries or markets in which we are operating or in which we intend to
operate,  we expect  competition from various other companies to occur and grow.
Many of our  potential  competitors  are more  established  than we are and have
greater  financial  resources than we do. Some of our  competitors  have greater
marketing  capabilities and technological and personnel resources than we do. As
a result, compared to us, these competitors may:

         o    develop and expand their offerings more quickly;

         o    adapt more swiftly to new or emerging technologies;

         o    take  advantage  of  acquisitions  and  other  opportunities  more
              effectively;

         o    devote more resources to sales and marketing; and

         o    more  effectively  use  existing  relationships  with  clients and
              strategic  partners with recognized brand names to market and sell
              their services.

         OUR STRATEGY DEPENDS IN PART UPON OUR ABILITY TO SUCCESSFULLY INTRODUCE
         NEW PRODUCTS

         We  intend  to  expand  the  range  of  water  desalination  and  power
production  through the development of new  technologies,  including fuel cells.
New products may require us to expand our operations or make improvements to our
technology  in ways  that  cannot be  completed  in a  cost-effective  or timely
manner.  They may also  subject  us to  additional  and  potentially  burdensome
regulatory requirements. Additionally, we may not be able to attract significant
interest in trading these new products through our  marketplace.  Our failure to
successfully introduce new products could harm our business.

         WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES

         The   distributed   water  and   distributed   power   industries   are
characterized  by  rapid   technological   change,   varying  usage  and  client
requirements  and  preferences,  frequent  introduction of products and services
embodying  new  technologies  and the  emergence of new industry  standards  and
practices that could render our existing  technology and systems  obsolete.  Our
future   success  will  depend  on  our  ability  to  enhance  and  improve  the
responsiveness,  functionality,  accessibility  and  features  of  our  software
transaction  processing  systems.  We expect that our  marketplace  will require
extensive technological upgrades and enhancements to accommodate many of the new
products and services that we anticipate  adding to our  marketplace.  We cannot
assure  you  that we will be able to  expand  and  upgrade  our  technology  and
systems, or successfully integrate new technologies or systems we develop in the
future, to accommodate such increases in a timely manner.

         WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH

         In order to achieve the critical mass of business activity necessary to
successfully  execute our  business  plan,  we must  significantly  increase the
number of strategic partners and customers that use our technology.  This growth
will place significant strain on our personnel, systems and resources. We cannot
be sure that we will  manage our growth  effectively,  and our  failure to do so
could have a material  adverse effect on our business,  financial  condition and
operating  results.  We also  expect that we will  continue  to hire  employees,
including  technical,  management-level  employees,  and  sales  staff  for  the
foreseeable   future.  This  growth  will  require  us  to  improve  management,
technical,  information and accounting systems,  controls and procedures. We may
not be able to  maintain  the  quality  of our  operations,  control  our costs,
continue  complying  with all  applicable  regulations  and expand our  internal
management, technical information and accounting systems in order to support our
desired growth.


                                       43
<PAGE>

         DELAWARE LAW AND OUR CHARTER MAY INHIBIT A TAKEOVER OF OUR COMPANY THAT
         STOCKHOLDERS MAY CONSIDER FAVORABLE

         Provisions of Delaware law, such as its business  combination  statute,
may have the effect of delaying,  deferring or preventing a change in control of
our company.  In addition,  our  Certificate  of  Incorporation  authorizes  the
issuance of blank check  preferred  stock  (that is,  preferred  stock which our
board of directors can create and issue without prior stockholder approval) with
rights senior to those of our common stock. These provisions may have the effect
of delaying or preventing changes of control or management of our company,  even
if such transactions would have significant  benefits to our stockholders.  As a
result,  these  provisions could limit the price some investors might be willing
to pay in the future for shares of our common stock.


         WE ARE  CONTROLLED  BY A  GROUP  OF OUR  EXISTING  STOCKHOLDERS,  WHOSE
         INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS

         Joe Maceda, Robert Campbell and Gloria Rose Ott currently  beneficially
own approximately  18.7%,  12.8% and 5.1% of our common stock. In addition,  our
executive   officers  and  directors,   in  the  aggregate,   beneficially   own
approximately  38.7%  of  our  common  stock.  Accordingly,  our  directors  and
executive  officers,  whether  acting alone or together,  will have  significant
influence  in  determining  the outcome of any  corporate  transaction  or other
matter  submitted  to  our  stockholders   for  approval,   including   mergers,
acquisitions,  consolidations  and the sale of all or  substantially  all of our
assets,  and also the  power to  prevent  or  cause a  change  in  control.  The
interests  of these  stockholders  may differ  from the  interests  of the other
stockholders.

         WE MAY BE EXPOSED TO INTERNATIONAL BUSINESS AND CURRENCY FLUCTUATION

         Although we are not currently  dependent on international sales for any
of our revenue, we still face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results. These
risks include  potential  regulation of our  technology by foreign  governments,
general  geopolitical risks associated with political and economic  instability,
changes in diplomatic  and trade  relationships,  and foreign laws affecting our
industry generally.  Our risks of doing business abroad also include our ability
to develop and maintain  distribution  relationships  on favorable terms. To the
extent we are unable to favorably develop and maintain  distribution  agreements
or make alternative  arrangements,  any future revenue may be decreased from our
international operations.

         WE HAVE BEEN INFORMED OF AN INFORMAL SECURITIES AND EXCHANGE COMMISSION
         INVESTIGATION

         We have been informed that the staff of the Division of  Enforcement of
the Securities and Exchange  Commission is conducting an informal  investigation
concerning  our company and past sales of  securities  and  accounting  policies
relating  to  the  company's   acquisition  of  Sigma   Electroteknisk  and  our
transactions with Aquamax International Holdings, BV and Keeran Corporation N.V.
We are  cooperating  with the  inquiry.  We cannot  predict  the  length nor the
potential  outcome of this informal  investigation,  nor any potential impact on
our company or our operations.

         EXISTING  SHAREHOLDERS  WILL EXPERIENCE  SIGNIFICANT  DILUTION FROM OUR
         SALE OF  SHARES  UNDER  THE  EQUITY  LINE  OF  CREDIT  AND THE  SALE OF
         CONVERTIBLE DEBENTURES

         On November 29, 2001,  we entered into an Equity Line of Credit with an
investor. Pursuant to the Equity Line of Credit, we may, at our discretion, sell
to the investor shares of common stock for a total purchase price of up to $10.0
million. The sale of shares pursuant to the Equity Line of Credit had a dilutive
impact on our stockholders.  As a result, our net loss per share increased,  and
the market price of our common stock declined. In addition,  the lower our stock
price is the more shares of common  stock we will have to issue under the Equity
Line of Credit to draw down the full amount. Since our stock price is lower, our
existing  stockholders  experience  greater  dilution.  On February 13, 2002, we
filed a registration statement on Form SB-2 registering 13,720,270 shares of our
common stock on behalf of certain  selling  shareholders.  As of  September  10,
2002,  we have  issued  12,753,382  shares of our  common  stock  registered  on
February 13, 2002  pursuant to the  conversion  of  convertible  debentures  and
advances under the Equity Line of Credit.

         THE  INVESTOR  UNDER THE EQUITY  LINE OF CREDIT  WILL PAY LESS THAN THE
         THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK

         The common stock issued under the Equity Line of Credit was issued at a
5% discount to the lowest  closing  bid price on the  Over-the-Counter  Bulletin
Board or other principal market on which our common stock is traded for the five
consecutive  trading days after the notice date.  These  discounted sales caused
the price of our common stock to decline.



                                       44
<PAGE>

         SELLING  STOCKHOLDERS  IN OUR MOST RECENT OFFERING INTEND TO SELL THEIR
         SHARES OF COMMON  STOCK IN THE MARKET,  WHICH SALES MAY CAUSE OUR STOCK
         PRICE TO DECLINE

         Selling  stockholders intend to sell in the public market the shares of
common  stock  registered  in our most  recent  offering.  That means that up to
13,720,270  shares of common stock, the number of shares being registered in our
most  recent  offering,  may be sold.  Such  sales may cause our stock  price to
decline.

         THE SIGNIFICANT  DOWNWARD  PRESSURE ON THE PRICE OF OUR STOCK CAUSED BY
         THE SALE OF  MATERIAL  AMOUNTS OF COMMON  STOCK  UNDER OUR MOST  RECENT
         OFFERING  COULD  ENCOURAGE  SHORT SALES BY THIRD  PARTIES,  WHICH COULD
         CONTRIBUTE TO THE FURTHER DECLINE OF OUR STOCK PRICE

         The significant downward pressure on our stock price caused by the sale
of stock  registered in our most recent  offering could encourage short sales by
third  parties.  Such short sales could place further  downward  pressure on our
stock price.

         OUR  COMMON  STOCK  HAS BEEN  RELATIVELY  THINLY  TRADED  AND WE CANNOT
         PREDICT THE EXTENT TO WHICH A TRADING MARKET WILL DEVELOP

         Our common stock is traded on the Over-the-Counter  Bulletin Board. Our
common stock is thinly traded  compared to larger more widely known companies in
our industry.  Thinly traded common stock can be more volatile than common stock
trading in an active  public  market.  We cannot  predict the extent to which an
active  public  market for the common stock will  develop or be sustained  after
this offering.

         THE PRICE AN INVESTOR PAYS IN OUR MOST RECENT  OFFERING WILL  FLUCTUATE
         AND MAY BE  HIGHER  OR LOWER  THAN  THE  PRICES  PAID BY  OTHER  PEOPLE
         PARTICIPATING IN THE OFFERING

         The  price  paid  by an  investor  in our  most  recent  offering  will
fluctuate  based  on the  prevailing  market  price of the  common  stock on the
Over-the-Counter Bulletin Board. Accordingly,  the price an investor pays in our
most recent offering may be higher or lower than the prices paid by other people
participating in that offering.


PART II

ITEM 1.  LEGAL PROCEEDINGS

         Effective August 9, 2002, Sigma  Elecktroteknisk,  AS, the wholly-owned
subsidiary of Ocean Power was placed under the  administration of the Ytre Follo
Bankruptcy Court in Norway. Mr. Trygue Tonnessen was appointed as trustee of the
estate by the Ytre Follo Bankruptcy Court.

         On October 5, 2001,  Ricardo Inc. filed a lawsuit against Ocean Power's
subsidiary,  Sigma  Elektroteknisk  AS in the  Forliksklage  Court  (Minor Civil
Court) of Norway.  The lawsuit sought a judgment for costs incurred and services
rendered by Ricardo Inc. pursuant to a contract with Sigma related to the design
and procurement of prototype parts for the Sigma MCHP Stirling engine lower end.
A judgment was awarded in December  2001 without  opposition in the total amount
of  $1,458,248.  The  Company  has  accrued  $1,458,248,  which is  included  in
liabilities  of  discontinued  operations.  Ocean Power has since entered into a
forbearance  agreement with Ricardo,  which  establishes a payment  schedule for
repayment of the full sums owed by the end of June 2002. The agreement  provides
for the payment of interest  on the debt at the rate of 6%, to be  increased  to
12%, if any of the  payments  are late.  The  agreement  also  provides  for the
issuance to Ricardo of  warrants  for the  purchase of 750,000  shares of common
stock of the Company at a price of $.50 per share,  exercisable  for a period of
four years from the date of issuance,  April 8, 2002. The Company failed to make
the first  installment  payment of $600,000,  which was due by the end of April,
2002,  and the  remainder  of  $858,248  which was due by the end of June  2002,
resulting in an increase in the interest rate payable to 12%.

         The Aquamax/Keeran dispute described above in "Management's  Discussion
and  Analysis  of  Financial  Condition  and  Results  of  Operations  - Aquamax
International  Holdings BV and Keeran Corporation" is the subject of negotiation
by the Company.  Neither party has filed an arbitration  proceeding  pursuant to
the terms of the September,  2000 license agreement because the negotiations for
settlement of all claims are ongoing.




                                       45
<PAGE>


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         1)   Issuance of Common Stock to XCEL Associates, Inc.

         On June 14 the Board of Directors agreed to issue to XCEL & Associates,
Inc. ("XCEL"), a total of 150,000 shares. This issuance is per the terms of that
certain  Agreement  between XCEL and Ocean Power  Corporation  dated October 23,
2001  wherein  Ocean Power  acknowledged  XCEL's  continued  and ongoing work to
develop Terra Systems Inc.,  technology and establish a new fuel source.  At the
request of XCEL the shares were broken down into three certificates.  The market
price for the Company's common stock on June 14 was $0.40.

               Edward Myer, Jr.                   75,000 shares
               Grace Holding, Inc.                50,000 shares
               Atlantic Investment Trust          25,000 shares

         2)   Issuance of Promissory Note to Cokomodo Investments, LLP.

         On June 24,  2002 the  Company  issued a  one-year  promissory  note to
Cokomodo  Investments  LLP for $50,000  received July 1, 2002.  The note accrues
interest at a rate of 13% per annum.  If the principal and interest are not paid
when due, then these shall bear interest  thereafter at a rate of 13.5%.  If the
Company  elects to pre-pay any  principal  or  interest  then the lender has the
right  convert any of the amount of the  prepayment of the principal or interest
into the Company's common stock at $.75 per share. As additional  consideration,
the  Company  granted  50,000  warrants  to  Cokomodo  Investments,  LLP with an
exercise  price of $.75 per share and an expiration  date of June 23, 2003.  The
market price for the Company's common stock on June 24 was $.09.

         3)   Issuance of Common Stock to ELEKTYRON

         On June 26,  2002 the  Board of  Directors  approved  the  issuance  of
3,500,000 of common stock to ELEKTRYON to purchase certain specified assets from
ELEKTRYON  pursuant to the Asset  Purchase  Term Sheet dated January 29, 2002 as
amended on June 25,  2002.  The market price for the  Company's  common stock on
June 26 was $0.11.

         4)   Vesting of Granted Options:

         On June  26,  2002 the  Board of  Directors  authorized  the  immediate
vesting of the following  employee stock options that have not vested as of this
date at a price of $1.50 per share.  These options were originally  granted when
they became employees of the Company.  The Options have a life of ten (10) years
and are  exercisable  at any time until 5:00 p.m.  (PST) on June 26,  2012.  The
market price of the Company's common stock on June 26 was $0.11.

          -------------------------------------------------------
                 OPTION HOLDER        AMOUNT OF OPTIONS
          -------------------------------------------------------
                Eric Adema                 150,000
          -------------------------------------------------------
                Blair Aiken                500,000
          -------------------------------------------------------
                John Grimes                100,000
          -------------------------------------------------------
                Gustavo Guzman              35,000
          -------------------------------------------------------
                David Moard                820,000
          -------------------------------------------------------
                Michael Quah               500,000
          -------------------------------------------------------
                Wendy Kwok                  15,000
          -------------------------------------------------------
                Kevin Tyson                250,000
          -------------------------------------------------------
                Thomas G. Redmon           500,000
          -------------------------------------------------------
                Philip M. Johnson          100,000
          -------------------------------------------------------

         5)   On  June 26, 2002  the  Board  of  Directors  also  authorized and
approved  extending  the options  granted to J. Michael  Hopper in the amount of
598,680 that were due to expire in 2003 for a period of ten years from this date
and are now  exercisable at any time until 5:00 p.m. (PST) on June 26, 2012. The
market price for the Company's common stock on June 26 was $0.11.

         6)   Issuance of Common Stock to Keeran Corporation, N.V.



                                       46
<PAGE>

         On June 27 the Company  issued 600,000 shares of common stock to Keeran
Corporation,  N.V. pursuant to the Aquamax-Keeran-Ocean  Power License Agreement
dated  September 19, 2000.  The market price for the  Company's  common stock on
June 27 was $0.08.

         7)   Granting of Options to the Employees of Ocean Power:

         On August 2, 2002,  the Board of  Directors  authorized  387,694  stock
options to the employees of Ocean Power as additional compensation for the delay
in the payment of their salary.  The employees have the right to purchase shares
of the Company's common stock,  $.01 par value at a price of $.05 per share. The
Options have a life of ten (10) years and are exercisable at any time until 5:00
p.m. (PST) on August 2, 2012. The market price for the Company's common stock on
August 2 was $0.04.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.


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

         None.


ITEM 5.  OTHER INFORMATION

         None.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits.


<TABLE>
<CAPTION>

Exhibit No.          Description                                                  Location
-------------        --------------------------------------------------------     -------------------------------------------
<S>                  <C>                                                          <C>
2.01                 Sigma Share Purchase Agreement dated July 25, 2000           Incorporated by reference to the
                                                                                  Registrant's Report filed on Form 8-K/A on
                                                                                  October 19, 2000

3.01                 Certificate of Incorporation of Ocean Power Corporation      Incorporated by reference to Exhibit 3.01
                     Dated July 21, 1999                                          to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

3.02                 Bylaws of the Registrant                                     Incorporated by reference to Exhibit 3.02
                                                                                  to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

3.03                 Articles of Incorporation of Kaniksu American Mining         Incorporated by reference to Exhibit 3.03
                     Company (Idaho), predecessor of registrant                   to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

3.04                 Company (Idaho) Certificate of Amendment Kaniksu American    Incorporated by reference to Exhibit 3.04
                     Mining Dated August 28, 1995 name change to Kaniksu          to the Registrant's Registration Statement
                     Ventures, Inc.                                               on Form 10-SB filed on February 8, 2000

3.05                 Certificate of Amendment Kaniksu Ventures, Inc., Dated       Incorporated by reference to Exhibit 3.05
                     April 2, 1997 name change to Intryst, Inc.                   to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

3.06                 Articles of Amendment of Intryst, Inc., name change Dated    Incorporated by reference to Exhibit 3.06
                     December 24, 1997 to PTC Group, Inc.                         to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000



                                       47
<PAGE>


Exhibit No.          Description                                                  Location
-------------        --------------------------------------------------------     -------------------------------------------

3.07                 Articles of Amendment of PTC Group, Inc., name change        Incorporated by reference to Exhibit 3.07
                     Dated July 14, 1999 to Ocean Power Corporation               to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

3.08                 Articles of Merger of Ocean Power Corporation Idaho With     Incorporated by reference to Exhibit 3.08
                     Ocean Power Corporation Delaware Dated July 28, 1999         to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

3.09                 Certificate of Merger of Foreign and Domestic Corporation    Incorporated by reference to Exhibit 3.09
                     dated July 28, 1999                                          to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

10.01                STM/GSI-Ocean Power Licensing Agreement                      Incorporated by reference to Exhibit 10.01
                                                                                  to Registrant's Amendment to Registration
                                                                                  Statement on Form 10-SB/A filed on February
                                                                                  6, 2001

10.02                Employment Agreement (Joseph P. Maceda)                      Incorporated by reference to Exhibit 10.02
                                                                                  to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

10.03                Employment Agreement (J. Michael Hopper)                     Incorporated by reference to Exhibit 10.03
                                                                                  to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

10.04                Employment Agreement (Lori L. O'Brien)                       Incorporated by reference to Exhibit 10.04
                                                                                  to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

10.05                Employment Agreement (Robert Campbell)                       Incorporated by reference to Exhibit 10.05
                                                                                  to the Registrant's Registration Statement
                                                                                  on Form 10-SB filed on February 8, 2000

10.06                Memorandum of Understanding with HyPerTech dated 15 June,    Incorporated by reference to Exhibit 10.06
                     2000                                                         to Registrant's Amendment to Registration
                                                                                  Statement on Form 10-SB/A filed on February
                                                                                  6, 2001

10.07                Purchase Order Memorandum of Understanding with Ecological   Incorporated by reference to Exhibit 10.07
                     Engineering & Monitoring, Inc. dated 16 January, 2000        to Registrant's Amendment to Registration
                                                                                  Statement on Form 10-SB/A filed on February
                                                                                  6, 2001

10.08                Design and Procurement agreement between Sigma and           Incorporated by reference to Exhibit 10.08
                     Ricardo, Inc. dated February 23, 2001                        to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.09                Letter of Intent with Hadwaco Oy dated March 8, 2001         Incorporated by reference to Exhibit 10.09
                                                                                  to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.10                Letter of Intent with Hadwaco Oy dated November 28, 2000     Incorporated by reference to Exhibit 10.10
                                                                                  to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001



                                       48
<PAGE>


Exhibit No.          Description                                                  Location
-------------        --------------------------------------------------------     -------------------------------------------

10.11                Letter of Intent with Organic Power dated March 14, 2001     Incorporated by reference to Exhibit 10.11
                                                                                  to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.12                Memorandum of Understanding with Organic Power dated         Incorporated by reference to Exhibit 10.12
                     December 20, 2000                                            to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.13                Memorandum of Understanding with Ecological Engineering &    Incorporated by reference to Exhibit 10.13
                     Monitoring, Inc. dated November 15, 2000                     to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.14                Memorandum of Understanding with Battelle Memorial           Incorporated by reference to Exhibit 10.14
                     Institute, Pacific Northwest Division dated October 12,      to the Registrant's Annual Report on
                     2000                                                         Form 10-KSB filed on September 4, 2001

10.15                Licensing Agreement with Aquamax/Keeran dated September      Incorporated by reference to Exhibit 10.15
                     21, 2000                                                     to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.16                Project Collaborative with EPRIsolutions dated               Incorporated by reference to Exhibit 10.16
                     February 20, 2001                                            to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.17                Heads of Agreement and Affiliate System Guidelines with      Incorporated by reference to Exhibit 10.17
                     CIMA Capital, LLC dated March 30, 2000                       to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.18                Joint Venture Agreement with Apollo Water and Power          Incorporated by reference to Exhibit 10.18
                     International, Inc. dated February 23, 2001                  to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.19                Joint Venture Agreement with Caribbean Water and Power,      Incorporated by reference to Exhibit 10.19
                     Inc. dated February 23, 2001                                 to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.20                Co-operation Agreement between Sigma and Kockums AB dated    Incorporated by reference to Exhibit 10.20
                     November 14, 2000                                            to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001

10.21                Employment Agreement dated September ___, 2001, between      Incorporated by reference to Exhibit 10.21
                     Ocean Power and Cheng-guan (Michael) Quash                   to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.22                Securities Purchase Agreement dated November 29, 2001        Incorporated by reference to Exhibit 10.22
                     between Ocean Power and Cornell Capital Partners, L.P.       to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.23                Investor Registration Rights Agreement dated November 29,    Incorporated by reference to Exhibit 10.23
                     2001 between Ocean Power and Cornell Capital Partners, L.P.  to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.24                Escrow Agreement dated November 29, 2001 between Ocean       Incorporated by reference to Exhibit 10.24
                     Power, Cornell Capital partners, L.P., Butler Gonzalez,      to the Registrant's Registration Statement
                     LLP and First Union National Bank                            on Form SB-2 filed on February 13, 2002



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<PAGE>


Exhibit No.          Description                                                  Location
-------------        --------------------------------------------------------     -------------------------------------------

10.25                Form of Debenture                                            Incorporated by reference to Exhibit 10.25
                                                                                  to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.26                Transfer Agent Instructions dated November 29, 2001          Incorporated by reference to Exhibit 10.26
                     between Ocean Power, Cornell Capital Partners, L.P.,         to the Registrant's Registration Statement
                     Butler Gonzalez LLP and Interstate Transfer Company          on Form SB-2 filed on February 13, 2002

10.27                Equity Line of Credit Agreement dated November 29, 2001      Incorporated by reference to Exhibit 10.27
                     between Ocean Power and Cornell Capital Partners, L.P.       to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.28                Registration Rights Agreement dated November 29, 2001        Incorporated by reference to Exhibit 10.28
                     between Ocean Power and Cornell Capital Partners, L.P.       to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.29                Escrow Agreement dated November 29, 2001 between Ocean       Incorporated by reference to Exhibit 10.29
                     Power, Cornell Capital Partners, L.P., Butler Gonzalez LLP   to the Registrant's Registration Statement
                     and First Union National Bank                                on Form SB-2 filed on February 13, 2002

10.30                Placement Agent Agreement between Ocean Power and Westport   Incorporated by reference to Exhibit 10.30
                     Advisors, Inc.                                               to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

10.31                Consulting Agreement, dated September 1, 2002 between        Provided herewith
                     Ocean Power and Carl A. P. Fricke

21.01                Subsidiaries of the Registrant                               Incorporated by reference to Exhibit 21.01
                                                                                  to the Registrant's Annual Report on
                                                                                  Form 10-KSB filed on September 4, 2001
</TABLE>

         (b)      REPORTS ON FORM 8-K.

         On August 23, 2002,  the Company filed a Current Report with respect to
Item 3 and Item 9 on Form 8-K.


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<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.

Dated:   September 13, 2002            OCEAN POWER CORPORATION

                                       By: /s/Joseph J. Maceda
                                           -------------------
                                              Joseph J. Maceda
                                              President


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Ocean Power Corporation (the
"Company")  on Form 10-QSB for the period  ended June 30, 2002 as filed with the
Securities and Exchange  Commission on the date hereof (the  "Report"),  each of
the  undersigned,  in the capacities and on the dates  indicated  below,  hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:

         1. The Report fully complies with the  requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

         2. The  information  contained in the Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of  operation of the
Company.



/s/Joseph J. Maceda
--------------------------------
Joseph J. Maceda
President


/s/Michael Hopper
--------------------------------
Michael Hopper
Chief Accounting Officer





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