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

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

                               Amendment No. 1 to


  |X|    Quarterly  Report under Section 13 or 15(d) of the Securities  Exchange
         Act of 1934 For the quarterly period ended March 31, 2001

                                       OR

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

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

                          Commission File Number 1-5742



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

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

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

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

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

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

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest  practicable date: The registrant had 38,149,942
shares of its $.01 par value common stock outstanding as of March 31, 2001.

     Transitional Small Business Disclosure Format (check one):   Yes   No: X
                                                                     ---   ---
                                       1

<PAGE>


                           FORWARD-LOOKING STATEMENTS

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

                                       2

                          PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements




                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)

                        CONSOLIDATED FINANCIAL STATEMENTS

                      March 31, 2001 and December 31, 2000


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


                                     ASSETS
                                     ------

                                                     March 31,     December 31,
                                                      2001            2000
                                                   -----------     -----------
                                                   (Unaudited)
                                                    (Restated)

CURRENT ASSETS

   Cash                                            $ 2,637,083     $ 2,152,593
   Cash - restricted                                    46,690          23,706
   Advances to employees                               321,957         320,567
   Prepaid expenses                                    133,929         222,235
                                                   -----------     -----------

     Total Current Assets                            3,139,659       2,719,101
                                                   -----------     -----------

EQUIPMENT, NET                                         900,039         922,980
                                                   -----------     -----------

OTHER ASSETS

   Deposits                                             54,948          55,348
   Patents, and licensing agreements, net            7,041,121       7,281,679
   Goodwill, net                                     6,150,439       6,315,183
                                                   -----------     -----------

     Total Other Assets                             13,246,508      13,652,210
                                                   -----------     -----------

     TOTAL ASSETS                                  $17,286,206     $17,294,291
                                                   ===========     ===========


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

                                       3
<PAGE>

<TABLE>
<CAPTION>

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


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

                                                         March 31,      December 31,
                                                         2001                2000
                                                       ------------    ------------
                                                          (Unaudited)
                                                           (Restated)
CURRENT LIABILITIES

<S>                                                     <C>             <C>
   Accounts payable                                     $    793,242    $  1,127,414
   Accrued expenses                                        6,912,055       6,844,282
   Notes payable - related parties                         1,315,527       1,317,618
   Notes payable - current portion                         1,931,656         488,457
   Research advances                                         419,324         473,145
                                                        ------------    ------------

     Total Current Liabilities                            11,371,804      10,250,916
                                                        ------------    ------------

LONG-TERM LIABILITIES

   Convertible debentures payable                            550,000         550,000
   Notes payable                                             629,984         744,588
                                                        ------------    ------------

     Total Long-Term Liabilities                           1,179,984       1,294,588
                                                        ------------    ------------

     Total Liabilities                                    12,551,788      11,545,504
                                                        ------------    ------------

STOCKHOLDERS' EQUITY

   Preferred stock: 20,000,000 shares authorized of
    $0.001 par value; no shares outstanding                     --              --
   Common stock: 500,000,000 shares authorized of
    $0.01 par value; 38,149,942 and 38,149,942 shares
    issued and outstanding, respectively                     381,499         381,499
   Additional paid-in capital                             27,229,034      25,611,288
   Deferred consulting expense                              (405,416)       (410,667)
   Other comprehensive income                                213,414         195,258
   Deficit accumulated during the development stage      (22,684,113)    (20,028,591)
                                                        ------------    ------------

     Total Stockholders' Equity                            4,734,418       5,748,787
                                                        ------------    ------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $ 17,286,206    $ 17,294,291
                                                        ============    ============
</TABLE>

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

                                       4

<PAGE>

<TABLE>
<CAPTION>

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


                                                                                From
                                                                            Inceptiontion
                                              For the Three Months Ended      March 26,
                                                     March 31,              1992 Through
                                           ----------------------------       March 31,
                                               2001            2000             2001
                                           ------------    ------------    ------------
                                                 (Restated)                 (Restated)
<S>                                               <C>             <C>             <C>
REVENUES                                   $       --      $       --      $       --
                                           ------------    ------------    ------------

EXPENSES

   General and administrative                 2,020,799       2,500,051      17,964,087
   Impairment of intangible assets                 --              --           400,000
   Research and development                      61,496          59,549       1,606,952
   Depreciation and amortization                397,191          39,842         880,550
                                           ------------    ------------    ------------

     Total Expenses                           2,479,486       2,599,442      20,851,589
                                           ------------    ------------    ------------

     LOSS FROM OPERATIONS                    (2,479,486)     (2,599,442)    (20,851,589)
                                           ------------    ------------    ------------

OTHER INCOME (EXPENSE)

   Currency gain                                   --              --               522
   Interest income                               17,107          36,173         232,651
   Loss on sale of assets                          --              --          (387,649)
   Interest expense                            (193,143)        (77,376)     (1,843,389)
                                           ------------    ------------    ------------

     Total Other Income (Expense)              (176,036)        (41,203)     (1,997,865)
                                           ------------    ------------    ------------

LOSS BEFORE EXTRAORDINARY ITEM               (2,655,522)     (2,640,645)    (22,849,454)

EXTRAORDINARY ITEM

   Gain on settlement of debt                      --           165,349         165,341
                                           ------------    ------------    ------------

NET LOSS                                     (2,655,522)     (2,475,296)    (22,684,113)
                                           ------------    ------------    ------------

OTHER COMPREHENSIVE INCOME

   Currency translation adjustment               18,156            --           213,414
                                            ------------    ------------    ------------

     TOTAL COMPREHENSIVE LOSS               $ (2,637,366)   $ (2,475,296)   $(22,470,699)
                                            ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these consolidate
                             financial statements.
                                       5

<PAGE>


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


                                             For the Three Months Ended
                                                           March 31,
                                        --------------------------------------
                                                  2001               2000
                                        ------------------  ------------------
                                             (Restated)

BASIC AND DILUTED LOSS PER SHARE

   Operating loss                       $            (0.07) $            (0.07)
   Extraordinary item                                   -                 0.00
                                        ------------------  ------------------

     Total                              $            (0.07) $            (0.07)
                                        ==================  ==================

WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING                                    38,149,942          34,165,608
                                        ==================  ==================


                                       6


<PAGE>

<TABLE>
<CAPTION>

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



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

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

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

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

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

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

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

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

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

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

March 16, 2000, common stock
 issued for exercise of warrants
 at $0.75 per share                          133,333          1,333         98,667         --       --             --
                                        ------------   ------------   ------------   ----------   ------   ------------

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


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

                                       7

<PAGE>
<TABLE>
<CAPTION>

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


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

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

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

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

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

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

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

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

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

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

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

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

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

Net loss for the year ended
 December 31, 2000                               --             --             --            --       --          (9,104,775)
                                        ------------   ------------   ------------   --------     ------   -    -----------

Balance, December 31, 2000                38,149,942   $     381,499   $ 25,611,288    $  195,258 $(410,667)     $(20,028,592)
                                        ------------   ------------   ------------   ------------- ------       ------------

</TABLE>


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





                                       8





<PAGE>

<TABLE>
<CAPTION>

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



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

<S>                                       <C>          <C>            <C>            <C>           <C>           <C>
Balance, December 31, 2000              38,149,942   $    381,499   $ 25,611,288    $    195,258   $   (410,667) $    (19,985,491)

Valuation adjustment to warrants
 granted for consulting services
 (unaudited)                                  --             --          (45,000)           --               5,251           --

Warrants granted for loan
 consideration (unaudited)                    --             --        3,730,212            --                --             --

Currency translation adjustment
 (unaudited)                                  --             --             --            18,156              --             --

Net loss for the three months ended
 March 31, 2001 (unaudited)                   --             --             --              --                --       (2,655,522))
                                                     ------------   ------------    ------------   -   -----------   ------------

Balance, March 31, 2001 (unaudited)     38,149,942   $    381,499   $ 29,296,500    $    213,414   $   (405,416) $    (22,684,113)
                                       =============  =============   ==============  ===============   ===========  ==============
</TABLE>

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

                                       9
<PAGE>

<TABLE>
<CAPTION>

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

                                                                                        From
                                                                                     Inception on
                                                     For the Three Months Ended        March 26,
                                                                March 31,            1992 Through
                                                     ----------------------------       March 31,
                                                         2001            2000             2001
                                                     ------------    ------------    ------------

<S>                                                  <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net loss                                          $ (2,655,522)    $(2,475,296)   $(22,684,113)
   Adjustments to reconcile net loss to net
    cash used by operating activities:
     Depreciation and amortization                        397,191         139,842         880,550
     Deferred consulting expense                            5,251            --           334,584
     Value of common stock, warrants, options
      and discounts on equity instruments issued
      for services                                           --         1,558,736       3,802,930
     Loss on sale of assets                                  --              --           387,649
     Amortization of debenture discount                     118,442          --           768,442
     Gain on disposition of debt                             --              --          (165,340)
   Impairment loss                                           --              --           400,000
   Change in operating asset and liability
    accounts,  net of amounts acquired in
    business combination:
     (Increase) decrease in overpayment receivable           --           (74,700)           --
     (Increase) decrease in advances to employees,
      prepaid expenses, and deposits                      113,709        (752,500)     (5,772,868)
     (Increase) decrease in other assets                     --           359,110            --
     Increase (decrease) in accounts payable             (334,172)         (4,829)        699,289
     Increase (decrease) in accrued expenses               52,060        (114,387)      6,669,209
                                                     ------------    ------------    ------------

       Net Cash Used by Operating Activities           (2,303,041)     (1,364,024)    (14,679,668)
                                                     ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Payment on license agreement                              --              --          (400,000)
   Cash acquired in Sigma acquisition                        --              --           142,254
   Proceeds from sale of assets                              --              --                 1
   Purchase of fixed assets                                (6,472)       (714,761)       (750,447)
   Equipment procurement costs                               --              --          (564,110)
                                                     ------------    ------------    ------------

       Net Cash (Used) by Investing Activities             (6,472)       (714,761)     (1,572,302)
                                                     ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Proceeds from notes payable                          3,000,000            --         3,000,000
   Repayment of related party notes payable                (2,091)           --        (1,523,291)
   Repayment of note payable                             (180,922)     (1,861,222)     (1,519,996)
   Loans from related parties                                --            48,648       7,224,287
   Issuance of convertible debentures                        --              --           650,000
   Common stock issued for cash                              --         7,201,061      11,131,032
   Stock offering costs                                      --              --           (26,289)
                                                     ------------    ------------    ------------

       Net Cash Provided by Financing Activities     $  2,816,987    $  5,388,487    $ 18,935,743
                                                     ------------    ------------    ------------
</TABLE>



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

                                       10
<PAGE>

<TABLE>
<CAPTION>

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

                                                                                         From
                                                                                      Inception on
                                                          For the Three Months Ended   March 26,
                                                                   March 31,         1992 Through
                                                           -----------------------       March 31,
                                                            2001            2000         2001
                                                           ----------   ----------   ----------
                                                           Restated)                  (Restated)
<S>                                                       <C>              <C>            <C>


NET INCREASE IN CASH AND CASH
 EQUIVALENTS                                               $  507,474   $3,309,702   $2,683,773

CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD                                                  2,176,299      368,276         --
                                                           ----------   ----------   ----------

CASH AND CASH EQUIVALENTS AT END
 OF PERIOD                                                 $2,683,773   $3,677,978   $2,683,773
                                                           ==========   ==========   ==========
CASH PAID FOR:

   Interest                                                $     --     $     --     $     --
   Income taxes                                            $     --     $     --     $     --

NON-CASH FINANCING ACTIVITIES

   Value of common stock, warrants, options and
    discounts on equity instruments issued for
    services                                               $     --     $1,558,736   $3,802,930
   Equity instruments issued for deferred
     consulting expense                                    $     --     $     --     $  740,000
   Common stock issued for recapitalization                $     --     $     --     $2,761,773
   Common stock issued for conversion of debt              $     --     $  531,812   $2,507,225
   Acquisition of licenses through license
    agreement payable                                      $     --     $     --     $6,940,000
</TABLE>

                                       11

<PAGE>




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

NOTE 1 -      BASIS OF FINANCIAL STATEMENT PRESENTATION

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

              The following is a reconciliation  of the March 31, 2001 financial
              statements as originally  reported to the restated  March 31, 2001
              financial statements:
<TABLE>
<CAPTION>

                                                     As Reported         As Adjusted         Difference
                                                   ------------------  -----------------  ------------


<S>                                                <C>                <C>                  <C>            <C>
                      Assets                       $   16,602,806     $   17,286,206       $     683,400    (1)

                      Liabilities                      16,196,092         12,551,788          (3,644,304)   (2)

                      Stockholders' Equity              3,406,714          4,734,418           1,327,704    (3)

                      Net Loss                     $    6,093,792     $    2,655,522       $ ( 3,438,270)   (4)

                      Loss per share               $        (0.16)    $        (0.07)      $        0.09
</TABLE>

              (1)     Difference represents (i) increase of $900,000 in recorded
                      cost of license  agreement  as the  result of  determining
                      that a measurement date for valuation of common stock owed
                      o the related  purchase  obligation  occurred on September
                      21, 2000, net of additional  accumulated  amortization  of
                      $216,600.

              (2)     Difference  represents  (i) and  increase  of  $900,000 in
                      recorded  liability for license agreement as the result of
                      determining  that a  measurement  date  for  valuation  of
                      common  stock  owed  on the  related  purchase  obligation
                      occurred  on  September  21,  2000 and (ii) a decrease  of
                      $1,544,304  representing  discount on debt  resulting from
                      allocation  of  proceeds  to  additional  paid-in  capital
                      relative  to  warrants  issued  to  the  lenders,  net  of
                      amortization of $118,442.

              (3)     Difference  represents (i) a net decrease of $2,067,466 in
                      additional  paid-in  capital  due to  change  in method of
                      reporting  warrants  issued  with  debt  instruments  (ii)
                      increase of $3,438,270  due to reductions of net loss (see
                      item (4) below) and (iii) decrease in beginning  equity of
                      $43,100 resulting from additional  amortization expense in
                      restated fiscal 2000 financial statements.
                                       12

<PAGE>


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


NOTE 1 -      BASIS OF FINANCIAL STATEMENT PRESENTATION (Continued)

              (4)     Differences represents (i) reduction of loss by $3,611,770
                      reversal of immediate amortization of amount attributed to
                      warrants  issued with debt  obligation in accordance  with
                      EITF No. 00-27 and related  change in method of allocating
                      debt proceeds to warrants and  amortization  over the term
                      of the debt of the amount  allocated  to warrants and (ii)
                      increase  in  loss  due  to  additional   amortization  of
                      $173,500 in connection with license  agreement  intangible
                      assets.

NOTE 2 -      PATENTS AND LICENSING AGREEMENTS

              The  Company's  patents and license  agreements  consisted  of the
              following at March 31, 2001 and December 31, 2000:
<TABLE>
<CAPTION>
                                                                                     March 31,      December
                                                                                                    31,
                                                                                         2001
                                                                                                    2000
                                                                                    (Unaudited)

<S>                                                                              <C>                <C>
                      Patents                                                    $         919,514  $          973,658
                      Licensing Agreement - Aquamax and Keeran                           6,540,000           6,540,000
                      Accumulated amortization                                            (418,393)           (231,979)
                                                                                 -----------------  ------------------

                                                                                 $       7,041,121  $        7,281,679
                                                                                 =================  ==================
</TABLE>

              As part of the  purchase of Sigma,  the Company  acquired  patents
              valued  at their  fair  value of  $919,514.  The  patents  have an
              estimated  remaining  life of 90  months  from  the  date of Sigma
              acquisition. The patents are pledged as collateral for obligations
              of $479,564 at March 31, 2001.  The license  agreement  represents
              rights to patent and patent  applications for technology  acquired
              from  Aquamax  and  Keeran  (Note  7).  The  cost  of the  license
              agreement is being amortized over its estimated  useful life of 10
              years. Amortization expense for the period ended Mach 31, 2001 and
              accumulated amortization at March 31, 2001 amounted to $12,914 and
              $54,043,   respectively   (Patents)  and  $173,500  and  $364,350,
              respectively (Licensing Agreement).

NOTE 3 -      BUSINESS COMBINATION

              In August 2000,  the Company  acquired  SIGMA  Elektroteknisk,  AS
              (SIGMA) by exchanging 1,718,748 shares of its common stock for all
              of the common stock of SIGMA.  The purchase was accounted for as a
              purchase in accordance with APB 16, "Business  Combinations."  The
              excess of the total  acquisition  cost over the fair  value of the
              net assets acquired of $6,589,756 is being amortized over 10 years
              by the  straight-line  method.  Amortization  expense  amounted to
              $164,744 and $-0- at March 31, 2001 and 2000, respectively.


                                       13


<PAGE>


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


NOTE 4 -      NOTES PAYABLE

              Notes  payable at March 31, 2001 and  December 31, 2000 consist of
the following:

<TABLE>
<CAPTION>

                                                                                         March 31,                December 31,
                                                                                          2001                     2000
                                                                                     -----------------      ------------------
                                                                                         (Unaudited)

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

              Less discount resulting from allocation of proceeds
               to warrants issued with debt                                                 (1,544,304)

              Note payable to SND bearing a variable  interest  rate,  (10.9% a t
               December 31, 2000) due in equal semi-annual
               payments which began May 1, 2000, uncollateralized.                             116,405                 121,049

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began May 10, 2000, uncollateralized.                            476,635                 569,964

              Note payable to Silent Clean Power bearing interest at 12.00%, due
               in equal semi-annual payments, collateralized
               by patents and licenses                                                         479,565                 498,696

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began April 3, 2000, uncollateralized.                            33,339                  43,336
                                                                                     -----------------      ------------------

              Total Notes Payable                                                    $       2,561,640      $        1,233,045
                                                                                     =================      ==================

              Annual maturities of notes payable are as follows:

                      Years Ending
                      December 31,

                            2002                                                     $       1,931,656
                            2003                                                               629,984
                            ----                                                     -----------------

                                                                                     $       2,561,640
                                                                                     =================

</TABLE>

              The  Company  granted  1,200,000  warrants  valued  at  $3,730,212
              pursuant  to the Black  Scholes  pricing  model  using a risk-free
              interest rate of 6.43% expected volatility of 228% and an expected
              life of 3 years as  additional  consideration  for the  $3,000,000
              loans. The proceeds of the loans have been allocated  between debt
              and additional  paid-in capital in proportion to the relative fair
              value of the debt  and the  warrants.  The  portion  allocated  to
              equity was  $1,662,746  and the balance of $1,337,254 was recorded
              as debt,  net of  discount.  the  discount  will be  amortized  to
              interest  expense  over the term of the debt  using the  effective
              interest rate method.
                                       14

<PAGE>


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


NOTE 5 -      ACCRUED EXPENSES

              The  Company's  accrued  expenses are  comprised of the  following
items:
<TABLE>
<CAPTION>

                                                                                    March 31,         December 31,
                                                                                      2001               2000
                                                                              -----------------  -----------------
                                                                                 (Unaudited)

<S>                                                                           <C>                <C>
                  Accrued payroll taxes payable                               $          24,481  $          26,657
                  Accrued interest payable - payroll                                     52,717             52,717
                  Accrued payroll tax penalty                                            98,845             98,845
                  Accrued interest payable - notes                                      136,229            118,155
                  Other accrued items                                                    59,783              7,908
                  Accrued license agreement (Note 7)                                  6,540,000          5,910,000
                                                                              -----------------  -----------------

                                Total                                         $       6,912,055  $       6,214,282
                                                                              =================  =================
</TABLE>
NOTE 6 -       GOING CONCERN

               The Company's  financial  statements are prepared using generally
               accepted  accounting  principles  applicable  to a going  concern
               which  contemplates  the realization of assets and liquidation of
               liabilities in the normal course of business. The Company has had
               limited   activities   since   inception   and  is  considered  a
               development stage company because it has no significant operating
               revenues  and,   planned   principal   operations  have  not  yet
               commenced.  The Company has  incurred  losses from its  inception
               through March 31, 2001 of approximately $22,684,000.  The Company
               does not have an established  source of funds sufficient to cover
               its operating costs and, accordingly,  there is substantial doubt
               about its ability to continue as a going concern.

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

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

                                       15


<PAGE>


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

NOTE 7 -       COMMITMENTS AND CONTINGENCIES

               Wohlreich

               During  January  2000,  the  Company  entered  into a  three-year
               consulting   agreement  with  Clement  J.  Wohlreich  to  receive
               financial,  marketing  and  management  services.  The  agreement
               called for the Company to issue 100,000 units, each consisting of
               one share of the Company's  common stock and one attached warrant
               granting  the  right  for three  years to  purchase  one share of
               common  stock for an exercise  price of $1.50.  As the  agreement
               provided for issuance of the units upon commencement of services,
               the Company accrued a liability and deferred  consulting  expense
               as a reduction of shareholders'  equity in an amount equal to the
               value of the common  stock and  warrant at the  inception  of the
               agreement. The liability was converted to equity upon issuance of
               the  units  and the  value  of the  stock  and  warrants  will be
               expensed  over  the  term of the  agreement  upon  completion  of
               services each quarter.  Pursuant to EITF 96-18,  "Accounting  For
               Equity  Instruments  That Are Issued To Other Than  Employees For
               Acquiring Or In Conjunction With Selling, Goods Or Services", the
               Company will  continue to revalue the warrants  until earned upon
               completion  of  services.  As of March 31, 2000,  the  consulting
               contract was valued at $695,000,  representing the 100,000 shares
               of common stock issued on July 25, 2000 at the then trading price
               of $4.00 per share and the value of the warrants of $295,000,  as
               determined by the Black  Scholes  pricing  model.  For the period
               ended March 31, 2001,  the Company had amortized  $289,584 of the
               contract , leaving a  remaining  balance of $405,416 at March 31,
               2001 which is included as a reduction of stockholders' equity.

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


                                       16


<PAGE>


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

NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

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

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


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

                                       17

<PAGE>


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

NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

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

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

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

                                       18

<PAGE>


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

NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

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

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

                                       19

<PAGE>


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

NOTE 7 -       COMMITMENTS AND CONTINGENCIES (Continued)

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

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

               SIGMA

               On March 6, 2001, the Company's wholly owned  subsidiary,  SIGMA,
               entered into a  collaboration  agreement  with Baxi Group Ltd. (a
               manufacturer  of heating  systems in Europe) for the  development
               and marketing of a combined  heat and power  product  (micro-CHP)
               for the residential  market in the United Kingdom.  The objective
               of the agreement is to form a joint working  arrangement  for the
               development  of a  micro-CHP  package,  consisting  of the  Sigma
               Energy  Converter  (Sigma Stirling  engine) and the metal cabinet
               for domestic use, into which each unit will be mounted, including
               controls  and  connections  to both  systems and the  electricity
               supply network. The purpose of the collaboration  agreement is to
               design  a  prototype   micro-CHP   package  to  be  installed  in
               compliance with applicable regulations in older and larger houses
               as  replacements  for boilers  that have reached the end of their
               service  life.  The  parties  will  work  together  in  assigning
               sufficient  priority and allocating  necessary  resources  (which
               have  already  been  budgeted by Sigma) to the project to develop
               the  package  in  a  mutually  agreeable  time  frame,  which  is
               currently anticipated to be by mid-2002. Pursuant to the terms of
               the  collaboration  agreement,  each party pays its own expenses.
               The  agreement  has  no  fixed   termination  date,  but  can  be
               terminated  at any time by either party on three  months  notice.
               The costs incurred by the Company which are  associated  with the
               Baxi collaboration  have been expensed when incurred.  During the
               three-month  period ended March 31, 2001, such costs consisted of
               travel costs and research and  development  costs.  For the three
               months  ended  March 31,  2001,  the Company  expensed  $2,998 of
               travel  costs  for  monthly   planning  and  update  meetings  in
               connection  with the  collaboration  which is included in general
               and administrative  expenses and $3,511 of engineer  compensation
               costs  which  are  included  in  the  research  and   development
               expenses.

                                       20

<PAGE>


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


NOTE 8 -       SUBSEQUENT EVENT

               On April 2, 2001, the Company  received  $600,000 in exchange for
               convertible  promissory  notes  payable of $240,000 and $360,000.
               Each note bears interest at 10% per annum and are due by April 2,
               2003.  Each note is  convertible  at any time by the note  holder
               into the Company's  common stock at $4.00 per share.  On April 2,
               2001,  the  Company's  common  stock  closed at $2.73 per  share.
               Concurrent with the promissory notes, the Company granted 200,000
               warrants  with an  exercise  price  of  $1.50  per  share  and an
               expiration  date of April 1, 2003.  The warrants were granted for
               the funding of the  promissory  notes and will be valued at $2.73
               per share  ($546,000  in  total)  pursuant  to the Black  Scholes
               pricing  model.  The proceeds will be allocated  between debt and
               additional  paid-in  capital in  proportion  to the relative fair
               value  of the debt  and the  warrants.  Also,  a  portion  of the
               resulting amount assigned to debt will be allocated to additional
               paid-in  capital to  reflect  as equity  the value of  beneficial
               conversion  features of the debt.  The portion to be allocated to
               equity  will be  $381,228  and the  balance of  $218,772  will be
               recorded as debt,  net of discount.  The discount of $381,228 and
               debt issue costs of $12,000 will be amortized to interest expense
               over the term of the  debt  using  the  effective  interest  rate
               method.

                                       21
<PAGE>



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

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

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

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

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

Plan Of Operation

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

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

The Company has had no profit to date.  It  experienced a total of $9,104,775 in
losses for the year ended  December 31,  2000.  For the three months ended March
31, 2001, the Company experienced a total of $2,655,522 in losses. The Company's
losses have  resulted  from the fact that its products are still in  development
and no sales have been generated.

The  Company  currently  has  enough  cash to  continue  its  present  level  of
operations for about 3 months.  Due to the increased level of activity projected
during  the next three  years,  additional  funding  will be needed and is being
sought.

The Company does not have an established source of revenues  sufficient to cover
its  operating  costs and,  accordingly,  there is  substantial  doubt about the
ability of the Company to continue as a going concern.
                                       22
<PAGE>

In order to continue as a going concern,  develop a reliable source of revenues,
and achieve a profitable level of operations, the Company will need, among other
things, additional capital resources.  Management's plans to continue as a going
concern include raising  additional  capital through private  placement sales of
the  Company's  common stock and/or  loans from third  parties,  the proceeds of
which will be used to develop the Company's products, pay operating expenses and
pursue  acquisitions and strategic  alliances.  The Company expects that it will
need $20,000,000 to $30,000,000 of additional funds for operations and expansion
in 2001. 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  financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.

The Company currently has outstanding debt with an aggregate principal amount of
$12,551,788 as of March 31, 2001. Of this amount, $1,006,284 was incurred during
the three months ended March 31, 2001.

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

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

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

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


As  part  of our  monitoring  the  progress  of  Sigma  on its  Stirling  engine
development program, we assess whether circumstances indicate that an impairment
of the value of the assets of Sigma,  including its patents and goodwill.  There
are no  circumstances  as of March  31,  2001  that  indicate  that  there is an
impairment of Sigma's assets.


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

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

                  Maximization  of  shareholder  value is the basic lens through
                  which all investment  and other  business  decisions are made.
                  One of the major reasons that the Company prefers to enter
                                       23
<PAGE>

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

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

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

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

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

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

         (iv)     Although the Company plans to subcontract  out as much work as
                  possible, during the next year it still anticipates increasing
                  the  number  of  employees  from the  current  37 full time to
                  approximately 50 full time.

             Aquamax International Holdings BV and Keeran Corporation

                  Our License from Aquamax/Keeran

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

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

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

                                       24
<PAGE>

                  Our Dispute with Aquamax/Keeran

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

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

                  Potential Resolution of the Dispute

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

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

The  agreements  with  Aquamax/Keeran  entered into on July 20, 2001 represent a
renegotiation of the terms of the original license agreement entered into by the
Company and  Aquamax/Keeran in September 2000. Under the July agreements (a) the
Company will make payments to  Aquamax/Keeran  of $1,800,000 in cash and 600,000
shares of common stock on or before  September 28, 2001,  unless extended by the
parties, in addition to the $400,000 already paid to Aquamax/Keeran, in exchange
for ownership of all the Aquamax/Keeran technology in any way connected to water
treatment;  (b) the Company will grant back to  Aquamax/Keeran  a royalty  free,
exclusive,  worldwide license to exploit Newco's water  desalination  technology
for  applications  where the volume of water  processed is less than 1,000 cubic
meters per day, except that after five years such license will be non-exclusive;
(c) the parties  release each other from all claims and  liabilities,  including
amounts due in connection with the Company's obligation under the September 2000
License  Agreement as well as the Company's  claim for a price  reduction due to
the non-exclusivity of the Hadwaco license.

                                       25
<PAGE>

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


The agreement with Aquamax/Keeran remains subject to the satisfaction of certain
conditions,  including:  (a) the Company's formation of "Newco" in Finland;  (b)
the Company's  funding of Newco with enough  working  capital so that Newco will
pay to Hadwaco,  on or before  September  28, 2001  (pursuant  to the  extension
agreement  described  below),  $1,5000,000  for the purchase by Newco of certain
assets  constituting  the water  remediation  business of  Hadwaco;  and (c) the
Company must also pay to  Aquamax/Keeran  $1,800,000  and 600,000  shares of the
Company's common stock on or before August 31, 2001.

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

On  August  29,  2001,  the  Company  entered  into an  agreement  with  Aquamax
(International) Holdings B.V. and Keeran Corporation N.V.  ("Aquamax/Keeran") to
extend  the  deadline  for  consummation  of the  transactions  set forth in the
agreement executed on July 20, 2001 by and among Aquamax/Keeran, Balantum Oy and
the  Company.  As  amended,  the closing of the  transaction  shall occur on the
earlier to occur of  September  28, 2001 or the first  practically  possible day
after the Company becomes listed on the Nasdaq OTC Bulletin Board. Additionally,
after August 31, 2001, the Company shall take  responsibility for paying for the
processing  and  maintenance of patents and patent  applications  which shall be
transferred to Balantum Oy pursuant to the terms of the July 20, 2001 agreement.
In  connection  with the  extension  agreement,  the  Company  has  assumed  the
obligation  of  Aquamax/Keeran  to  compensate a finder in  connection  with the
transactions  between  Aquamax/Keeran  and the Company an amount of $105,080 and
31,040 shares of the Company's  common  stock.  On August 30, 2001,  the Company
entered  into an  agreement  with  Hadwaco  OYJ ABP  ("Hadwaco")  to extend  the
deadline  for  consummation  of the  transaction  set forth in the July 20, 2001
agreement  by and  among  Hadwaco  OYJ ABP,  Hadwaco  Ltd.  Oy and the  Company.
Pursuant  to the terms of the  extension,  the  Company  will pay to  Hadwaco an
aggregate  amount of $150,000 in four  weekly  installments:  $50,000 on each of
September 7 and  September 14, and $25,000 on each of September 21 and September
28. In the event that the closing of the  transaction in the July 2001 agreement
does not take  place by  September  28,  2001 and that is not the sole  fault of
Hadwaco, the amount paid will remain with Hadwaco as compensation for the delay.
In the event that the closing in the July 2001  agreement  does take place on or
before September 28, 2001,  Newco's payment  obligations under the July 20, 2001
agreement shall be reduced by the amount paid for the extension.
                                       26

<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 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.

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

                                       27
<PAGE>

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

The  Company  has  accomplished  the first  two  steps of its vapor  compression
desalination   development   program:  (1)  acquisition  of  the  Aquamax/Keeran
technology;  and (2) obtaining  patent rights on its own technology that will be
combined with the Aquamax/Keeran  technology  (preliminary  patents filed August
2000 and  nonpreliminary  patents filed August 2001).  The remaining  step is to
complete a PPI which  consists of 14 projects,  the combined  effect of which is
projected to yield a more economically viable seawater desalination system, with
lower energy and operating costs for both the projected vacuum vapor compression
system and the existing seawater reverse osmosis technology.  The formal PPI was

                                       28
<PAGE>


initially  designed in 1997, after the first physical  assessment of the Aquamax
equipment in Finland.  The program was  thereafter  continuously  developed  and
refined to reflect new information  gathered from the Aquamax  equipment we have
acquired  and have  under  testing  in  Malta,  as well as data  gathered  about
competitive  technologies  from our  consultants,  and our own monitoring of the
market.  The planning,  scheduling and cost estimating of the formal program was
finalized  in October of 2000.  The PPI is expected to require  approximately  4
full-time  employees and 18 to 20 months to complete once additional  funding of
approximately $5 million is arranged. Neither the time, manpower requirements or
cost necessary for the PPI have changed.  Two of the projects represent critical
path projects on which the 18 to 20 month time line will be  dependent.  The two
critical path projects are: "High Efficiency Steam Ejector Development" Project,
the goal of which is to replace a mechanical  compressor  with a high efficiency
hypercritical  ejector (OPC has a U.S.  patent  application  in process) and the
"Evaporator-Condenser  Efficiency  Increase"  Project,  the  goal of which is to
increase the overall  efficiency of the vapor  compression cycle by at least 30%
(OPC has a U.S.  patent  application in process).  Timely  completion of the two
critical path projects will be benchmarks for measuring  progress for impairment
testing purposes.  Management believes the seawater desalination products market
continues to be large, the competitive  environment is  substantially  unchanged
from that of September 2000 when the Aquamax/Keeran  patent rights were obtained
and continues to have the potential to generate  substantial  profits from which
the investment in the Aquamax/Keeran patents can be recovered.  The commencement
of the PPI has been delayed until funding is arranged. Losing our eligibility to
have our common stock traded on the Nasdaq OTC Bulletin  Board has resulted in a
delay to our  arranging  funding  for the PPI for two  reasons:  first,  because
potential  investors  have elected not to invest until we are again  eligible to
trade on the OTC Bulletin  Board;  and second,  as a result of the  diversion of
management  resources to the task of amending the SEC filings and other  efforts
necessary to re-attain  eligibility to trade on the OTC Bulletin  Board.  During
the period that the PPI has been delayed by the  unavailability of funding,  the
Company has assessed  impairment of the carrying value of its assets employed in
the  desalination  business  by  monitoring   developments  in  the  market  for
desalination  products to  determine  if  technological,  competitive  or market
conditions  indicate that the value of the assets  (including the amortized cost
of the licensed patents and the value of the research and development activities
that were expensed as incurred including research leading to Ocean Power's three
additional  patents and the "know how" resulting from our testing of the unit in
Malta)  is  less  than  the  carrying  value  of the  related  asset  consisting
principally  of  the  cost  of the  Aquamax/Keeran  patent  net  of  accumulated
amortization and the previous impairment adjustment.  Management's assessment of
market  conditions  described above leads  management to conclude that there has
been no impairment of the  Aquamax/Keeran  related license agreement asset other
than the  $400,000  that was  recorded  in  connection  with  the  dispute  with
Aquamax/Keeran over exclusivity of one of the patents, as described below.
                                       29

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

                  Our License to Aquamax/Keeran

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



                                       30
<PAGE>

   Sigma  Elektroteknisk AS Acquisition

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

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

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

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

Another  factor  drawing us to Sigma was its focus on what we believe could be a
profitable  business in the growing  distributed  power market in Europe -- home
heat and power  generation.  We  believe  that  Sigma's  focus can  enable us to
develop a source of revenue from Sigma's Stirling engine design within as few as
15 months from acquisition  (November 2001). We are seeking to configure Sigma's
basic engine design for a range of other uses in the  commercial  and industrial
power  markets,  as well as adapting these engines as a power source for our H20
kW sea water  desalination  systems.  We believe that Sigma's basic one-cylinder
model can be  expanded  from the  current  3 kW to up to a 25 kW engine  with no
basic design  change.  Our  long-term  plan,  ultimately,  is to seek to combine
several 25 kW engine  systems in  parallel  arrays that will allow us to install
distributed power systems from kilowatts to megawatts with one basic design that
can share many  common  parts;  thereby  reducing  the cost to produce the power
systems. This manufacturing efficiency, coupled with the inherent flexibility of
                                       31

<PAGE>


the fuel  sources  for a Stirling  engine (any heat source will do, such as oil,
gas, solar power or any biomass) we believe will cause Stirling  engines to have
significant  commercial  advantages as a source of distributed  power over other
distributed  technologies  such as fuel cells,  with their more  stringent  fuel
requirements.

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

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

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

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

With  frequent  contact  among  the CEO of  Sigma,  Ocean  Power's  Director  of
Manufacturing,  Chief  Scientist and other staff,  as well as regular visits and
internal  reports,  management  concluded that all activities  were  progressing
                                       32
<PAGE>

acceptably.  Continuous  monitoring of competing  technologies and review of our
development  progress led management to believe that the new technologies  Sigma
was applying to Stirling engines could result in competitive  advantages and the
total value of their basic patents has not decreased.

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

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

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


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------
               Targeted Completion Date                                      Benchmark
------------------------------------------------------- -----------------------------------------------------
<S>                                                     <C>
First Quarter of 2001                                   Prime customer agrees to collaborate in
                                                        development efforts
------------------------------------------------------------------------------------------------------------
Fourth Quarter of 2001                                  Second generation prototype available to Sigma for
                                                        testing
------------------------------------------------------------------------------------------------------------
Fourth Quarter 2001 or First Quarter 2002               First proceeds from sale of prototypes
------------------------------------------------------------------------------------------------------------
Late First Quarter or early Second Quarter of 2002      Release of second generation prototype for external
                                                        testing
------------------------------------------------------------------------------------------------------------
Second Quarter 2002                                     Micro combined heat and power system ready for
                                                        internal testing
------------------------------------------------------------------------------------------------------------
Third Quarter 2002                                      Freezing (finalization) of design of the second
                                                        generation prototype
------------------------------------------------------------------------------------------------------------
Fourth Quarter 2003                                     Commence production of product (small energy
                                                        converter with electrical output of 3 kW and
                                                        thermal output of 9 kW)
------------------------------------------------------------------------------------------------------------
</TABLE>
                                       33

<PAGE>

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

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

Our  initial  anticipated  time-line  to develop  our 3 kW  Stirling  engine for
commercial  use was three years from the date of initial  funding of the capital
necessary  to continue  the work  already  begun by Sigma before the date of the
acquisition.  The initial  funding and  commencement  of work began in September
2000  and,  as of  August  2001,  there  has  been  no  change  to the  plan  of
development.  To reduce the risk that the time  necessary for  development  will
have to be extended,  the Company has contracted for outside engineering support
from Ricardo Inc. Our initial  estimate of our funding  requirements  to achieve
the benchmarks  set forth above was  approximately  $19.9 million,  which amount
continues to be the estimate.  The $19.9 million  aggregate amount needed over a
three  year  period  to fund the  activities  in the Plan of  Development  is as
follows:  $700,000 in 2000,  $9.0 million in 2001, $6.7 million in 2002 and $3.5
million in 2003. As of August 2001, the Company has provided  approximately $3.0
million of the $9.7 million originally  projected to be needed in 2000 and 2001.
While the remaining $6.7 million has not yet been provided to Sigma, it has been
able to meet the Stirling engine  benchmarks to date by (1) focusing on the core
activity of designing,  developing and engineering a production prototype of the
first  generation  Sigma 3kW electric/9 kW thermal  Stirling  engine;  (2) using
available  funds of $3.0 million;  (3) obtaining  vendor credit of $1.0 million;
(4) deferring  development  tasks (and the related  costs) that were not part of
the core activity and could be deferred  without  causing delay to the time line
for development; and (5) converting of debt to stock of Ocean Power. By focusing
on the designing,  developing and  engineering of a production  prototype of the
engine,  we have been able to complete a pre-mass  production  engine  ready for
manufacture. We have also been able to have Ricardo, our engineering consultant,
begin  planning the design and  manufacture of the second  generation  prototype
engine,  which is intended to be lighter,  simpler in design and less  expensive
that  the  first  generation  engine.  Thirty  units  of the  second  generation
prototype  units have been  ordered  and are under  production.  The first three
units are scheduled for delivery (subject to the availability of funding) in the
fourth  quarter  2001.  In fourth  quarter 2001 or first quarter 2002, we expect
(subject to the  availability of funding) to start generating cash flow from the
release of second generation  prototype engines to utilities and other potential
customers for testing. Because of the low volume of production, pricing of these
second generation engines will only cover the high initial manufacturing cost of
the initial thirty units.  Therefore,  early stage  production will not generate
sufficient  cash  flow to fund  other  development  tasks  such as the  deferred
activities and other second generation development activities such as marketing.

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

During the course of discussions with potential customers relating to a possible
business  relationship,  such  as  related  to  marketing,   manufacturing,  and
installation  of our  products,  some of our  potential  customers  expressed an
interest in  purchasing  equity  securities  of the  Company.  While we have had
preliminary  discussions with potential customers  concerning the possibility of
such an equity investment in the Company,  we are not currently  discussing with
any  potential  customer  the terms of any such  investment.  The Company has no
intention of issuing equity  securities to acquire customers for no, or nominal,
cash consideration.
                                       34
<PAGE>

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

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

                           PART II. OTHER INFORMATION


ITEM 1.   Legal Proceedings

     Not applicable.


ITEM 2.   Changes in Securities and Use of Proceeds

     Previously  reported on the  Company's  Form 10-SB as filed with the SEC on
April 12, 2001.


ITEM 3.   Defaults Upon Senior Securities

     Not applicable.


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

     No matters  were  submitted to a vote of the  security  holders  during the
thirteen-week period ended March 31, 2001.

ITEM 5.   Other Information


   Baxi Group Ltd.

On March 6, 2001, the Company's wholly owned subsidiary,  SIGMA,  entered into a
collaboration  agreement with Baxi Group Ltd. (a manufacturer of heating systems
in Europe).  The objective of the agreement is for Sigma and Baxi to collaborate
in  developing  and  marketing  a  prototype  combined  heat and  power  product
(micro-CHP)  package for residential use in the United Kingdom consisting of the
Sigma Energy  Converter  (Sigma  Stirling  engine) in a metal cabinet which also
contains  controls,  tanks and electrical  connections to both heating and power
systems.  The purpose of the  collaboration  agreement  is to design a prototype
micro-CHP  package to be installed in compliance with applicable  regulations in
older and larger houses as replacements for boilers that have reached the end of
their  service  life.  The parties will work  together in  assigning  sufficient
priority and allocating necessary resources (which have already been budgeted by
Sigma) to the project to develop the package in a mutually agreeable time frame,
which is currently  anticipated to be by mid-2002.  Pursuant to the terms of the
collaboration agreement,  each party pays its own expenses. The agreement has no
fixed  termination  date,  but can be  terminated at any time by either party on
three months notice. The costs incurred by the Company which are associated with
the Baxi collaboration have been expensed when incurred.  During the three-month
period ended March 31, 2001,  such costs  consisted of travel costs and research
and  development  costs.  For the  three-month  period ended March 31, 2001, the
Company expensed $2,998 of travel costs for monthly planning and update meetings
in  connection  with  the  collaboration   which  is  included  in  general  and
administrative  expenses  and $3,511 of  engineer  compensation  costs which are
included in the research and development  expenses.

                                       35
<PAGE>


ITEM 6.   Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>

     (a)          Exhibits

----------------------------------------------------------------------------------------------------------------
Exhibit
Number                                                         Description

----------------------------------------------------------------------------------------------------------------
<S>                     <C>
 2.01                   Sigma Share Purchase Agreement dated July 25, 2000****
----------------------------------------------------------------------------------------------------------------
 3.01                   Certificate of Incorporation of Ocean Power Corporation, a Delaware Corporation, Dated
                        July 21, 1999 **
----------------------------------------------------------------------------------------------------------------
 3.02                   Bylaws of the Registrant**
----------------------------------------------------------------------------------------------------------------
3.03                    Articles of Incorporation of Kaniksu American Mining Company (Idaho), predecessor of
                        registrant**
----------------------------------------------------------------------------------------------------------------
3.04                    Company (Idaho) Certificate of Amendment Kaniksu American Mining Dated August 28, 1995
                        name change to Kaniksu Ventures, Inc.**
----------------------------------------------------------------------------------------------------------------
3.05                    Certificate of Amendment Kaniksu Ventures, Inc., Dated April 2, 1997 name change to
                        Intryst, Inc.**
----------------------------------------------------------------------------------------------------------------
3.06                    Articles of Amendment of Intryst, Inc., name change Dated December 24, 1997 to PTC
                        Group, Inc.**
----------------------------------------------------------------------------------------------------------------
3.07                    Articles of Amendment of PTC Group, Inc., name change Dated July 14, 1999 to Ocean
                        Power Corporation**
----------------------------------------------------------------------------------------------------------------
3.08                    Articles of Merger of Ocean Power Corporation Idaho With Ocean Power Corporation
                         Delaware Dated July 28, 1999**
----------------------------------------------------------------------------------------------------------------
3.09                    Certificate of Merger of Foreign and Domestic Corporation Dated July 28, 1999**
----------------------------------------------------------------------------------------------------------------
10.01                   STM/GSI-Ocean Power Licensing Agreement***
----------------------------------------------------------------------------------------------------------------
10.02                   Employment Agreement (Joseph P. Maceda)**
----------------------------------------------------------------------------------------------------------------
10.03                   Employment Agreement (J. Michael Hopper)**
----------------------------------------------------------------------------------------------------------------
10.04                   Employment Agreement (Lori L. O'Brien)**
----------------------------------------------------------------------------------------------------------------
10.05                   Employment Agreement (Robert Campbell)**
----------------------------------------------------------------------------------------------------------------
10.06                   Memorandum of Understanding with HyPerTech dated 15 June, 2000***
----------------------------------------------------------------------------------------------------------------
10.07                   Purchase Order Memorandum of Understanding with Ecological Engineering & Monitoring,
                         Inc. dated 16 January, 2000.***
----------------------------------------------------------------------------------------------------------------
10.8                    Design and Procurement agreement between Sigma and Ricardo, Inc. dated February 23,
                        2001*****
----------------------------------------------------------------------------------------------------------------
10.9                    Letter of Intent with Hadwaco Oy dated March 8, 2001*****
----------------------------------------------------------------------------------------------------------------
10.10                   Letter of Intent with Hadwaco Oy dated November 28, 2000*****
----------------------------------------------------------------------------------------------------------------
10.11                   Letter of Intent with Organic Power dated March 14, 2001*****
----------------------------------------------------------------------------------------------------------------
10.12                   Memorandum of Understanding with Organic Power dated December 20, 2000*****
----------------------------------------------------------------------------------------------------------------
10.13                   Memorandum of Understanding with Ecological Engineering & Monitoring, Inc. dated
                        November 15, 2000*****
----------------------------------------------------------------------------------------------------------------
10.14                   Memorandum of Understanding with Battelle Memorial Institute, Pacific Northwest
                      Division dated October 12, 2000*****
----------------------------------------------------------------------------------------------------------------
10.15                   Licensing Agreement with Aquamax/Keeran dated September 21, 2000*****
----------------------------------------------------------------------------------------------------------------
10.16                   Project Collaborative with EPRIsolutions dated February 20, 2001*****
----------------------- -----------------------------------------------------------------------------------------
10.17                   Heads of Agreement and Affiliate System Guidelines with CIMA Capital, LLC dated March
                        30, 2000*****
----------------------------------------------------------------------------------------------------------------
10.18                   Joint Venture Agreement with Apollo Water and Power International, Inc. dated February
                        23, 2001*****
----------------------------------------------------------------------------------------------------------------
10.19                   Joint Venture Agreement with Caribbean Water and Power, Inc. dated February 23,
                        2001*****
----------------------------------------------------------------------------------------------------------------
10.20                 Cooperation Agreement between Sigma and Kockums AB dated November 14, 2000 *****
----------------------------------------------------------------------------------------------------------------
10.21                   Agreement for an Initial Collaboration Development mCHP between Sigma and Baxi Group
                        Ltd, dated March 2, 2001*
 ----------------------------------------------------------------------------------------------------------------
</TABLE>
                                      36
<PAGE>

*         Filed herewith

**  Incorporated  by reference to the Company's  Form 10-SB as filed February 8,
    2000.
***  Incorporated  by reference to the Company's Form 10-SB as amended and filed
     February 6, 2001.
**** Incorporated  by reference to the Company's  Form 8-K as  amended and filed
     October 19, 2000.
*****Incorporated  by reference to the Company's  Form 10-K as amended and filed
     September 4, 2001.

     (b)   Reports on Form 8-K.

     Not applicable.

                                      37

<PAGE>



                                   SIGNATURES
                                   ----------

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





                                         OCEAN POWER CORPORATION


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



Date: September 4 , 2001

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


                                       38
<PAGE>