UNITED STATES SECURITIES AND EXCHANGE COMMISSION


                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB


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

                  For the quarterly period ended MARCH 31, 2002

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

             For the transition period from _________ to __________.

                          Commission File No. 333-3074

                             OCEAN POWER CORPORATION
                             -----------------------
             (Exact name of registrant as specified in its charter)

                    DELAWARE                                   94-3350291
                    --------                                   ----------
  (State or other jurisdiction of incorporation             (I.R.S. Employer
                or organization)                          Number Identification



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

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


(1)   Registrant  has filed all  reports  required  to be filed by Section 13 or
      15(d) of the  Securities  Exchange  Act of 1934  during the  preceding  12
      months (or for such  shorter  period that the  registrant  was required to
      file such reports), and

(2)   has  been  subject to  such  filing  requirements  for  the past  90  days
      [X] Yes [ ] No

      As of May 10, 2002, there were 39,179,364  shares  outstanding of issuer's
      common stock.





<PAGE>



PART I

FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS







                                       2
<PAGE>











                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

                        CONSOLIDATED FINANCIAL STATEMENTS

                      MARCH 31, 2002 AND DECEMBER 31, 2001


                                       3
<PAGE>

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



                                     ASSETS
                                     ------
                                                     March 31,    December 31,
                                                       2002           2001
                                                   ------------  -------------
                                                    (Unaudited)
CURRENT ASSETS

  Cash and cash equivalents                        $        777  $      68,914
  Cash - restricted                                       3,016         75,217
  Advances to employees                                 381,117        370,107
  Prepaid expenses                                       44,683         69,186
  Other receivables                                      30,804         26,853
                                                   ------------  -------------

   Total Current Assets                                 460,397        610,277
                                                   ------------  -------------

EQUIPMENT, NET                                        1,117,758      1,165,567
                                                   ------------  -------------

OTHER ASSETS

  Debt offering costs                                    77,181        108,591
  Deposits                                               52,805         52,663
  Patents, and licensing agreements, net (Note 2)     6,276,492      6,478,612
  Goodwill, net                                       5,656,207      5,656,207
                                                   ------------  -------------

   Total Other Assets                                12,062,685     12,296,073
                                                   ------------  -------------

   TOTAL ASSETS                                    $ 13,640,840  $  14,071,917
                                                   ============  =============



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


                                       4
<PAGE>


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



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

                                                     March 31,    December 31,
                                                       2002           2001
                                                   ------------  -------------
                                                    (Unaudited)
CURRENT LIABILITIES

  Accounts payable                                 $  4,279,597  $   4,527,329
  Accrued expenses (Note 5)                          10,542,828      9,560,522
  Notes payable - related parties                     1,315,277      1,315,277
  Notes and convertible debentures payable -
    current portion                                   3,907,045      3,952,780
  Deferred revenue                                       35,550         35,550
                                                   ------------  -------------

   Total Current Liabilities                         20,080,297     19,391,458
                                                   ------------  -------------

LONG-TERM LIABILITIES

  Notes payable - related parties                        65,000         65,000
  Notes and convertible debentures payable            2,971,000      2,293,886
                                                   ------------  -------------

   Total Long-Term Liabilities                        3,036,000      2,358,886
                                                   ------------  -------------

   Total Liabilities                                 23,116,297     21,750,344
                                                   ------------  -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)

  Preferred stock: 20,000,000 shares authorized of
   $0.001 par value; no shares outstanding                    -              -
  Common stock: 500,000,000 shares authorized of
   $0.01 par value; 39,179,364 and 38,439,094 shares
   issued and outstanding, respectively                 391,794        384,391
  Additional paid-in capital                         33,683,288     30,254,067
  Deferred consulting expense                        (1,311,478)    (1,141,000)
  Other comprehensive income                            221,754        334,549
  Deficit accumulated during the development stage  (42,460,815)   (37,510,434)
                                                   ------------  -------------

   Total Stockholders' Equity (Deficit)              (9,475,457)    (7,678,427)
                                                   ------------  -------------

   TOTAL LIABILITIES AND STOCKHOLDERS'
    EQUITY (DEFICIT)                               $ 13,640,840  $  14,071,917
                                                   ============  =============


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


                                       5
<PAGE>

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


                                                                     From
                                                                  Inception on
                                      For the Three Months Ended    March 26,
                                              March 31,           1992 Through
                                      -------------------------     March 31,
                                          2002         2001           2002
                                      ------------ ------------  -------------


REVENUES                              $          - $          -  $           -
                                      ------------ ------------  -------------

EXPENSES

  General and administrative             3,483,312    2,020,799     27,577,121
  Impairment of intangible assets           84,245            -        770,546
  Research and development                 412,633       61,496      6,102,152
  Depreciation and amortization            252,118      397,191      2,598,091
                                      ------------ ------------  -------------

   Total Expenses                        4,232,308    2,479,486     37,047,910
                                      ------------ ------------  -------------

   LOSS FROM OPERATIONS                 (4,232,308)  (2,479,486)   (37,047,910)
                                      ------------ ------------  -------------

OTHER INCOME (EXPENSE)

  Currency gain                                  -            -          1,780
  Interest income                            5,626       17,107        295,337
  Loss on sale of assets                         -            -       (387,649)
  Interest expense                        (723,699)    (193,143)    (5,645,536)
                                      ------------ ------------  -------------

   Total Other Income (Expense)           (718,073)    (176,036)    (5,736,068)
                                      ------------ ------------  -------------

LOSS BEFORE EXTRAORDINARY ITEM          (4,950,381)  (2,655,522)   (42,783,978)

EXTRAORDINARY ITEM

  Gain on settlement of debt                     -            -        323,163
                                      ------------ ------------  -------------

NET LOSS                                (4,950,381)  (2,655,522)   (42,460,815)
                                      ------------ ------------  -------------

OTHER COMPREHENSIVE INCOME

  Currency translation adjustment         (112,795)      18,156        221,754
                                      ------------ ------------  -------------

   TOTAL COMPREHENSIVE LOSS           $ (5,063,176)$ (2,637,366) $ (42,239,061)
                                      ============ ============  =============



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


                                       6
<PAGE>

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





                                      For the Three Months Ended
                                                March 31,
                                      ---------------------------
                                           2002           2001
                                      ------------    ------------

BASIC AND DILUTED LOSS PER SHARE

  Loss before extraordinary item      $     (0.13)   $      (0.07)
  Extraordinary item                            -               -
                                      ------------    ------------

   Total                              $     (0.13)   $      (0.07)
                                      ============    ============

WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING                           38,881,076      38,149,942
                                      ============    ============



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


                                       7
<PAGE>

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

<CAPTION>
                                                                                                                           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 consolidated financial statements.

                                        8

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

<CAPTION>
                                                                                                                           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) $  (20,028,591)
                                       -------------  -------------   --------------  ---------------   -----------  --------------
</TABLE>


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

                                       9
<PAGE>
<TABLE>
                                              OCEAN POWER CORPORATION AND SUBSIDIARIES
                                                    (A Development Stage Company)
                                Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<CAPTION>
                                                                                                                        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)  $  (20,028,591)

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

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

June 29, 2001, common stock issued
for consulting contract at $2.80 per
share                                       120,000         1,200         334,800              -       (338,800)

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

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

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

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

Currency translation adjustment                   -             -               -        139,291              -                -

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

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

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

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

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

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

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

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


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

                                       10
<PAGE>
<TABLE>
                                              OCEAN POWER CORPORATION AND SUBSIDIARIES
                                                    (A Development Stage Company)
                                Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

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

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

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

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

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

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

Valuation adjustment and amortization
Of deferred compensation (unaudited)              -             -         (57,200)             -        378,322                 -

Warrants issued in connection with
Debt obligations (unaudited)                      -             -         617,152              -              -                 -

Currency translations adjustment
(unaudited)                                       -             -               -       (112,795)             -                 -

Net loss for the three months ended,
March 31, 2002 (unaudited)                        -             -                -             -              -        (4,950,381)
                                      -------------  ------------ ---------------- -------------  -------------   ---------------

Balance, March 31, 2002 (unaudited)      39,179,364  $    391,794 $    33,683,288  $     221,754  $` (1,311,478)  $   (42,460,815)
                                      =============  ============ ===============  =============  =============   ===============
</TABLE>

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


                                       11
<PAGE>

<TABLE>

                                              OCEAN POWER CORPORATION AND SUBSIDIARIES
                                                    (A Development Stage Company)
                                                Consolidated Statements of Cash Flows
                                                             (Unaudited)
<CAPTION>
                                                                                     From
                                                                                 Inception on
                                          For the Three Months Ended              March 26,
                                                      March 31,                  1992 Through
                                          ---------------------------------        March 31,
                                                2002               2001              2002
                                          ----------------     ------------      ------------

CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                         <C>                 <C>             <C>
  Net loss                                  $   (4,950,381)     $(2,655,522)    $(42,460,815)
  Adjustments to reconcile net loss to net
  cash used by operating activities:
   Depreciation and amortization                   252,118          397,191        2,598,091
   Deferred consulting expense                     321,122            5,251          848,120
   Value of common stock, warrants, options
    and discounts on equity instruments
    issued for services                          2,243,630                -        6,046,560
   Loss on sale of assets                                -                -          387,649
   Amortization of debenture discount              481,976          118,442        2,760,362
   Gain on settlement of debt                            -                -         (323,163)
   Impairment loss                                  84,245                -          770,546
  Change in operating asset and liability
   accounts, net of amounts acquired in
   business combination:
   (Increase) decrease in advances to
    employees, prepaid expenses, and deposits       13,493          113,709       (5,793,743)
   (Increase) decrease in debt offering costs       31,410                -          (77,181)
   Increase (decrease) in accounts payable        (277,333)        (334,172)       3,907,947
   Increase in accrued expenses                    909,382           52,060       10,288,303
   Increase in deferred revenue                          -                -           35,550
                                              ------------     ------------      ------------

     Net Cash Used by Operating Activities        (890,338)      (2,303,041)     (21,011,774)
                                              ------------     ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES

  License agreement payments                             -                -          (400,000)
  Cash acquired in Sigma acquisition                     -                -           142,254
  Proceeds from sale of assets                           -                -                 1
  Purchase of fixed assets                               -           (6,472)       (1,164,570)
  Equipment procurement costs                            -                -          (564,110)
                                              ------------     ------------      ------------

     Net Cash Used by Investing Activities               -           (6,472)       (1,986,425)
                                              ------------     ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES

  Repayment of related party notes payable               -           (2,091)       (1,634,976)
  Repayment of note payable                              -         (180,922)       (1,519,062)
  Loans from related parties                             -                -         7,451,287
  Proceeds from notes payable                      200,000        3,000,000         4,600,000
  Issuance of convertible debentures               550,000                -         3,000,000
  Common stock issued for cash                           -                -        11,131,032
  Stock offering costs                                   -                -           (26,289)
                                              ------------     ------------      ------------

     Net Cash Provided by Financing
       Activities                                $750,000      $ 2,816,987       $23,001,992
                                              ------------     ------------      ------------


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


                                                                 12
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                           From
                                                                                                       Inception on
                                                                For the Three Months Ended               March 26
                                                                        March 31,                      1992 Through
                                                          -------------------------------------          March 31
                                                               2002                    2001                2002
                                                          -------------------------------------        -------------

<S>                                                       <C>                       <C>                <C>
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                              $   (140,338)             $  $507,474        $     3,793

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

CASH AND CASH EQUIVALENTS AT END
 OF PERIOD                                                $      3,793              $ 2,683,773         $    3,793
                                                          ============              ===========        =============

CASH PAID FOR:

  Interest                                                $          -              $          -        $   16,488
  Income taxes                                            $          -              $          -        $        -

NON-CASH FINANCING ACTIVITIES

  Value of common stock, warrants, options and
   discounts on equity instruments issued for
   services                                               $  2,243,630              $          -        $6,046,560
  Equity instruments issued for deferred
    consulting expense                                    $    160,000              $          -        $  900,000
  Common stock issued for recapitalization                $          -              $          -        $2,761,773
  Common stock issued for conversion of debt              $          -              $          -        $2,963,511
  Acquisition of licenses through license
   agreement payable                                      $          -              $          -        $6,940,000
  Warrants granted in conjunction with debt
   instruments                                            $    617,149              $          -        $3,878,535



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


                                                                 13

<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001



NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION

         The accompanying  unaudited condensed consolidated financial statements
         have been prepared by the Company pursuant to the rules and regulations
         of the  Securities and Exchange  Commission.  Certain  information  and
         footnote disclosures normally included in financial statements prepared
         in accordance with generally accepted  accounting  principles have been
         condensed or omitted in accordance with such rules and regulations. The
         information furnished in the interim condensed  consolidated  financial
         statements  includes  normal  recurring  adjustments  and  reflects all
         adjustments,  which, in the opinion of management,  are necessary for a
         fair  presentation of such financial  statements.  Although  management
         believes the disclosures and information presented are adequate to make
         the  information  not  misleading,  it is suggested  that these interim
         condensed consolidated financial statements be read in conjunction with
         the  Company's  most  recent  audited  financial  statements  and notes
         thereto included in its December 31, 2001 Annual Report on Form 10-KSB.
         Operating  results  for the three  months  ended March 31, 2002 are not
         necessarily indicative of the results that may be expected for the year
         ending December 31, 2002.

NOTE 2 - PATENTS AND LICENSING AGREEMENT

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

<TABLE>
<CAPTION>
                                                                  March 31,         December 31,
                                                                    2002                2001
                                                               --------------      ---------------
                                                                  (Unaudited)
<S>                                                            <C>                 <C>
               Patents                                         $    973,658        $    973,658
               Licensing Agreement - Aquamax and Keeran           6,540,000           6,540,000
               Licensing Agreement - STM                            500,000             500,000
               Accumulated amortization                          (1,737,166)         (1,535,046)
                                                               ------------          ------------
                                                               $  6,276,492        $  6,478,612
                                                               ============          ============
</TABLE>

         As part of the purchase of Sigma (Note 3), the Company acquired patents
         valued at their fair value of $1,006,670, adjusted for foreign currency
         fluctuations since the date of purchase.  The patents have an estimated
         remaining  life of 90 months  from the date of Sigma  acquisition.  The
         patents are pledged as collateral for  obligations of $494,396 at March
         31, 2002. The license agreement relates to rights to patents and patent
         applications  pertaining to technology acquired from Aquamax and Keeran
         (Note 7). The cost of the license agreement is being amortized over its
         estimated useful life of 10 years.  Amortization expense for the period
         ended March 31,  2002 and  accumulated  amortization  at March 31, 2002
         amounted to $38,621 and $208,816,  respectively  (Patents) and $163,500
         and $1,028,350, respectively (Licensing Agreement).

         The Company recorded a License fee of $500,000 for the exclusive rights
         to certain STM patented and unpatented  technology  related to Stirling
         cycle heat engines.  The amount represents the initial amount due under
         the terms of the Agreement.

         The  Company is  amortizing  the amount over  twelve  months  using the
         straight  line method.  The Company has not paid the second  payment of
         $500,000  which  was due to STM at  April  20,  2001.  This  amount  is
         included in accrued expenses. Because of the nonpayment, the Company no
         longer has exclusive  license  rights to STM's  patented and unpatented
         technology,  but has  retained  the  rights on a  non-exclusive  basis.
         Accordingly,  the Company recorded amortization expense of $213,699 and
         an impairment  expense of $286,301  during the year ended  December 31,
         2001.  The  impairment  expense  was  calculated  at the day  that  the
         Company's license with STM became non-exclusive due to non-payment.


                                       14
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001





NOTE 3 - BUSINESS COMBINATION

         In August 2000, the Company acquired SIGMA  Elektroteknisk,  AS (SIGMA)
         by  exchanging  1,718,748  shares  of its  common  stock for all of the
         common stock of SIGMA.  The acquisition was accounted for as a purchase
         in accordance with APB 16, "Business  Combinations."  The excess of the
         total  acquisition  cost over the fair value of the net assets acquired
         of $6,589,756 was being  amortized  over 10 years by the  straight-line
         method.  Amortization expense amounted to $- and $164,744 for the three
         months ended March 31, 2002 and 2001, respectively.

         Because  of the  adoption  of SFAS No.  142,  the  Company is no longer
         amoritizing the goodwill generated from the purchase of Sigma.  Instead
         the goodwill is subject to  impairment  testing.  As of March 31, 2002,
         the Company determined that there is no impairment of goodwill.

NOTE 4 - NOTES AND DEBENTURES PAYABLE

         During the quarter ended March 31, 2002, the Company  received from the
         issuance of notes  payable to five  individuals.  All of the notes bear
         interest at $13.00%,  are unsecured and due one year from issuance with
         interest payments due quarterly.

         As additional  consideration for the notes payable, the Company granted
         warrants  to acquire  200,000  shares of common  stock with an exercise
         price of $0.75 per share and have been valued at  $102,000  pursuant to
         the Black Scholes  pricing  model.  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 $67,152,  and the remaining balance of $132,848
         was recorded as debt, net of discount.  The discount is being amortized
         to  interest  expense  over the term of the debt  using  the  effective
         interest rate method.

         During the quarter ended March 31, 2002, the Company received  $550,000
         from the sale of convertible debentures. The debentures are convertible
         at prices  ranging  from  $0.70 to $0.90 per share for a period of five
         years, bear interest at 12.00%,  are unsecured and are due 5 years from
         the dates of issuance.

         As  additional  consideration  for  $550,000 of the  convertible  notes
         payable,  the Company granted  warrants to acquire  2,525,714 shares of
         common  stock  with  exercise  prices of $0.70 to $0.90 per share  with
         expiration  dates five years from the date of grant.  The warrants were
         valued at $2,101,314  pursuant to the Black Scholes pricing model.  The
         proceeds were allocated between debt and additional  paid-in capital in
         proportion to the relative fair value of the debt and equity  (warrants
         and beneficial  conversion  rights)  elements of the  transaction.  The
         portion  allocated to equity was $550,000 and the remaining  balance of
         $-0- has been 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.


                                       15
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 5 - ACCRUED EXPENSES

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

                                                        March 31,  December 31,
                                                          2002        2001
                                                      ----------- ------------
                                                       (Unaudited)

            Accrued payroll taxes payable             $    77,107 $     47,325
            Accrued interest payable - payroll             52,717       52,717
            Accrued payroll tax penalty                    98,845       98,845
            Accrued franchise taxes payable               100,274       97,828
            Accrued payroll payable                       575,566            -
            Accrued fringe benefits taxes payable           1,684       25,607
            Accrued vacation payable                      133,639      234,607
            Accrued other expenses                         36,346       42,758
            Aquamax/Keeran contingency accrual          1,131,000      934,800
            Aquamax/Keeran license fee payable          6,540,000    6,540,000
            Accrued STM license fee payable               500,000      500,000
            Accrued deferred compensation - Moard         129,670      115,824
            Accrued legal settlement - Mchargue            63,400       63,400
            Accrued interest payable                    1,102,580      806,811
                                                      ----------- ------------

                 Total                                $10,542,828 $  9,560,522
                                                      =========== ============


NOTE 6 - GOING CONCERN

         The  Company's  financial   statements  are  prepared  using  generally
         accepted  accounting  principles  applicable  to a going  concern which
         contemplates  the  realization of assets and liquidation of liabilities
         in  the  normal  course  of  business.  The  Company  has  had  limited
         activities  since  inception  and is  considered  a  development  stage
         company  because it has no operating  revenues,  and planned  principal
         operations have not yet commenced.

         The Company has incurred  losses from its  inception  through March 31,
         2002  of  approximately  $42,460,000.  The  Company  does  not  have an
         established  source of funds  sufficient to cover its operating  costs,
         has a working capital deficit of approximately $19,620,000,  has relied
         exclusively  on  debt  and  equity  financing.  Accordingly,  there  is
         substantial doubt about its ability to continue as a going concern.

         In order to  develop a  reliable  source  of  revenues,  and  achieve a
         profitable  level of  operations,  the Company  will need,  among other
         things,  additional  capital  resources.   Management's  plans  include
         raising  additional  capital through the private placement sales of our
         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 2002.  However,  management  cannot provide
         any assurances that the Company will be successful in accomplishing any
         of its plans.

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


                                       16
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 -COMMITMENTS AND CONTINGENCIES

         a.  Employment Agreements

         During  June 1998,  the  Company  entered  into a five year  employment
         agreement with its President.  The agreement calls for a base salary of
         $182,000  per  year  allowing  for  increases  each  year  based on the
         Consumer Price Index,  merit increases and increases in salary or bonus
         as deemed  appropriate to reflect the value of services  provided.  The
         agreement also calls for the extension of certain executive benefits.

         During  June 1998,  the  Company  entered  into a five year  employment
         agreement with its Secretary/Treasurer.  The agreement calls for a base
         salary of $130,000 per year allowing for  increases  each year based on
         the Consumer  Price Index,  merit  increases and increases in salary or
         bonus as deemed  appropriate to reflect the value of services provided.
         The  agreement  also  calls  for the  extension  of  certain  executive
         benefits.  During 2001,  the base salary was  increased to $208,000 per
         year.

         During  June 1998,  the  Company  entered  into a five year  employment
         agreement  with its Vice  President.  The  agreement  calls  for a base
         salary of $182,000 per year allowing for  increases  each year based on
         the Consumer  Price Index,  merit  increases and increases in salary or
         bonus as deemed  appropriate to reflect the value of services provided.
         The  agreement  also  calls  for the  extension  of  certain  executive
         benefits.

         During December 2000, the Company entered into an employment  agreement
         through its wholly-owned  subsidiary,  Ocean Power UK Limited, with its
         managing director. The initial agreement will continue until terminated
         by either party.  The base salary is $182,000 per year and allowing for
         annual increases. The agreement also calls for the extension of certain
         executive benefits.

         b.  Consulting Agreements

         During June 1999,  the Company  entered into a  consulting  agreement
         with D. Weckstein & Co., Inc.  (Weckstein)  as financial  consultants
         and investment bankers for a period of two years.

         The agreement calls for the Company to issue options to purchase 30,000
         shares of the Company's  common stock  exercisable  at a price of $5.00
         per share for a period of three  years from the date of the  agreement.
         The agreement  also calls for cash payments in connection  with certain
         financial  transactions  consummated  as a result  of  introduction  by
         Weckstein such as mergers, acquisitions,  joint ventures, debt or lease
         placements  and  similar  or other,  on-balance  or  off-balance  sheet
         corporate finance transactions as follows:

         a. 7% of the first $1,000,000 of the consideration paid in such
            transaction;
         b. 6% of the consideration in excess of $1,000,000 and up to
            $3,000,000;
         c. 5% of the consideration in excess of $3,000,000 and up to
            $5,000,000;
         d. 4% of the consideration in excess of $5,000,000 and up to
            $7,000,000;
         e. 3% of the consideration in excess of $7,000,000 and up to
            $9,000,000; and
         f. 2% of the consideration in excess of $9,000,000.



                                       17
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 -COMMITMENTS AND CONTINGENCIES (Continued)

         b. Consulting Agreements (Continued)

         During  December  1999,  the  agreement was amended  whereby  Weckstein
         received  options to purchase up to 125,000 shares of common stock at a
         price of $1.00 per share until December 31, 2003.

         The Company  recognized  consulting  expense of $130,402 to reflect the
         fair value of the common stock and options upon grant.  During 2000 and
         1999, the Company paid $21,500 and $10,000 in commissions to Weckstein,
         respectively.  No options  were  exercised as of December 31, 2000 (see
         Note 12).

         During  February 2000, the Company signed an amendment to its agreement
         for  consulting  services with  Weckstein  dated  December 7, 1999. The
         amendment cancels the 125,000 options  previously issued and called for
         the Company to issue 100,000  options to purchase the Company's  common
         stock exercisable at $6.00 per share until February 18, 2003. The grant
         date and  measurement  date were on  February  18,  2000.  The  Company
         recognized  consulting expense of $494,596 to reflect the excess of the
         fair value of the options as determined  by the Black  Scholes  pricing
         model upon the grant of the options over expense previously  recognized
         on the canceled options.

         During April 2000,  the Company  amended its agreement  for  consulting
         services with Weckstein dated February 18, 2000. The amendment  cancels
         the  100,000  options  previously  issued and called for the Company to
         issue  110,000   options  to  purchase  the   Company's   common  stock
         exercisable at $3.00 per share until February 18, 2003. The Company did
         not recognize any additional  consulting  expense upon the grant of the
         options  because  the value of the new options did not exceed the value
         of the options  previously  granted as  determined by the Black Scholes
         pricing model.

         During August 2000, the Company  granted an additional  100,000 options
         to  D.   Weckstein   for  completed   services   relating  to  business
         introductions and institutional meetings held on behalf of the Company.
         The options are exercisable at $3.50 per share and expire on August 31,
         2003.  The  Company  recorded  expense of  $358,000 to reflect the fair
         value of the options as determined by the Black Scholes pricing model.

         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.




                                       18
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         b. Consulting Agreements (Continued)

         The  liability  was  converted to equity upon issuance of the units and
         the value of the stock and warrants  will be expensed  over the term of
         the agreement  upon  completion  of services each quarter.  Pursuant to
         EITF 96-18, "Accounting For Equity Instruments That Are Issued To Other
         Than Employees For Acquiring Or In Conjunction  With Selling,  Goods Or
         Services",  the Company  will  continue to revalue the  warrants  until
         earned upon completion of services.  At January 1, 2000, the consulting
         agreement was valued at  $1,500,000,  representing  the market value of
         100,000 shares of the Company's common stock and 100,000  warrants.  As
         of December 31, 2000, the  consulting  contract was valued at $740,000,
         representing the 100,000 shares of common stock issued on July 25, 2000
         at the then  trading  price of $4.00  per  share  and the  value of the
         warrants at December 31, 2000 of $340,000,  as  determined by the Black
         Scholes  pricing  model.  For the year ended  December  31,  2000,  the
         Company had  amortized  $279,334 of the  contract,  leaving a remaining
         balance  of  $410,667  at  December  31,  2000 which is  included  as a
         reduction of stockholders'  equity. At December 31, 2001, the remaining
         balance was $152,166  which is included as a reduction of  stockholders
         equity.  At March 31, 2002, the remaining balance was $104,800 which as
         a reductions of stockholders equity.

         During  June 2001,  the  Company  entered  into a  two-year  consulting
         agreement   with  Gene  Martineau  to  receive   services   related  to
         interfacing  with  institutional  investors  and brokerage  firms.  The
         Company  issued  120,000  shares of common  stock and  granted  120,000
         warrants  exercisable  for two years at $1.50.  Pursuant to EITF 96-18,
         "Accounting  For  Equity  Instruments  that Are  Issued  To Other  Than
         Employees  For  Acquiring  Or In  Conjunction  With  Selling,  Goods or
         Services",  the Company  will  continue to revalue the  warrants  until
         earned upon  completion  of  services.  The  unamortized  fair value at
         December  31, 2001 was  $271,833  which is  included as a reduction  of
         stockholders  equity.  The  unamortized  value  at March  31,  2002 was
         $231,750 which is included as a reduction of stock holders equity.

         On June 20, 2001, the Company (through its subsidiary Powerco US, Inc.)
         entered into an employment  agreement with David Moard (Moard)  wherein
         Moard  would  serve  as the  president  of the  Powerco.  Terms  of the
         agreement are as follows:  (1) Moard's base salary will be $240,000 per
         year with the first and second years  salary  being  deferred to future
         years,  (later amended to deferring  $60,000 per year starting November
         1, 2001) and (2) Moard was granted 820,000 stock options exercisable at
         $1.50 per share of which 260,000 vest in year one, 360,000 vest in year
         two and 200,000  vest in year three.  The  employment  agreement  is in
         effect for three  years.  The Company has  accrued  wages of  $115,824,
         which represents the deferred salary through December 31, 2001, and has
         expensed $270,593, which represents amortization of the intrinsic value
         of the stock  options as well as the payroll  expense.  At December 31,
         2001, the unamortized  intrinsic value of the stock options amounted to
         $717,000,  which  is  included  as an  offset  to  equity  as  deferred
         compensation  expense and will be amortized  over the vesting period of
         the options. At March 31, 2002, the unamortized  intrinsic value of the
         stock  options  allowed to  $648,750  which is included as an offset to
         equity.


                                       19
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         c. Options for Consulting Services

         On February 7, 2002, the Company  entered into a three year  consulting
         agreement  for  assistance  in  preparing  material  to be used in fund
         raising activities,  and business development  activities as well as to
         introduce the Company to potential strategic partners and investors. In
         consideration  for the consulting  services,  the Company has agreed to
         grant  100,000  options  with an exercise  price  $1.10 per share.  The
         options have a three year life.

         The unamortized portion of the deferred  compensation at March 31, 2002
         was $74,611 and is included as a reduction of stockholders equity.

         d. Extension of Consulting Agreement

         On January 8, 2002,  pursuant to an Extension and  Expansion  Agreement
         with  Weckstein,  the Company  extended the  consulting  agreement with
         Weckstein  for a minimum  period of six months and up to three years at
         the option of the Company.  As  compensation  for this  extension,  the
         Company has issued to Weckstein  200,000  shares of common stock valued
         at  $1.06  per  share.   The   unamortized   portion  of  the  deferred
         compensation  at March  31,  2002 was  $106,000  and is  included  as a
         reduction of stockholders equity.

         e. Investor Relations Agreement

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



                                       20
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         f. License Agreements

         (a) STM

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

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

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

                                                       $6,500,000
                                                       ==========

         The Company paid an initial  amount of $500,000 that was amortized over
         twelve months.  The second annual payment in the amount of $500,000 was
         due and payable on April 20, 2001. The Company  defaulted on the second
         annual payment and under the terms of the contract,  lost the exclusive
         rights  to  the   Technology,   but  has   retained  the  rights  on  a
         non-exclusive  basis.  Due to this  default  and the  inability  of the
         Company to raise sufficient capital to develop the Company's  products,
         the  technology  was deemed to be impaired as of September 23, 2001, or
         60 days after  notification  of default.  As of December 31, 2001,  the
         Company  has   recognized   a  payable  in  the  amount  of   $500,000,
         amortization  expense in the amount of $213,670 and loss on  impairment
         in the amount of $286,330  for the  unamortized  amount as of September
         23, 2001.

         (b) AQUAMAX/KEERAN

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

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



                                       21
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES

         f. License Agreements (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 was $6,540,000
         at September 30, 2000,  which  consisted of $3,600,000  payable in cash
         and  $2,940,000  payable  in common  stock  (representing  the value of
         600,000 shares of common stock to be issued, valued at the market value
         of shares of the Company's common stock as of the effective date of the
         transaction,  September 21, 2000),  and has been accrued as a liability
         and  included in the amount  recorded as a  licensing  agreement  asset
         along  with  the  $400,000  paid in  cash.  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
         parties and dated on the original September signing date) were extended
         on October 2, 2000. The transaction was originally  recorded in October
         2000 in the belief that, until properly  executed  signature pages were
         received,  it was  not  effective.  Based  on our  reassessment  of the
         circumstances,  we have determined that the agreement became binding on
         September 21, 2000.

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





                                       22
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES

         f. License Agreements (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 an  exclusive
         basis, but actually  licensed on a non-exclusive  basis.  Consequently,
         the value of the licensed technology is diminished due to the fact that
         Hadwaco is free, contrary to the Licensors'  original  representations,
         to license the same  technology to third  parties for its  (potentially
         competitive) use.

         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.

         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,  since the Company intends to keep the patent rights,  the
         Company has recorded the liability,  and related  asset,  because under
         the terms of the  agreement  the  Company  has no  discretion  to avoid
         future  payment of the  remaining  cash and common stock  payable.  The
         amount of payment under the agreement  withheld  pending  resolution of
         the dispute was not  indicative of the  diminished  value of the patent
         rights  received  as  the  Company's   management  has  estimated  that
         approximately  $400,000 of the purchase  price  represents the value of
         the  exclusivity  feature of the one patent that was not received.  The
         failure of  Aquamax/Keeran  to deliver  exclusive rights to all patents
         resulted in a condition  of default by  Aquamax/Keeran.  Aquamax/Keeran
         has  asserted  that the  Company's  subsequent  withholding  of payment
         resulted in a condition of default by the Company.



                                       23
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         f.  License Agreements (Continued)

         AQUAMAX/KEERAN (Continued)

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

         In July 2001, the aforementioned negotiations resulted in the execution
         by  Aquamax/Keeran  and the  Company,  as well as Hadwaco  Ltd.  Oy and
         Hackman Oy Abp, of agreements which would have, if closing had occurred
         as   stipulated,   resolved   the  dispute   between  the  Company  and
         Aquamax/Keeran.  The  Agreements  provided  that the Company would make
         payments to  Aquamax/Keeran of $1,800,000 in cash and 600,000 shares of
         common  stock on or before  September  28,  2001,  in  addition  to the
         $400,000 already paid to Aquamax/Keeran,  in exchange for ownership (as
         opposed  to  licenses  as  provided  in  the  September   2000  License
         Agreement) of all the Aquamax/Keeran technology in any way connected to
         water  treatment.  The agreements  also provided that the Company would
         grant back to Aquamax/Keeran an exclusive, worldwide license to exploit
         Newco's water desalination technology for applications where the volume
         of water processed is less than 1,000 cubic meters per day. The license
         back of rights to Aquamax/Keeran was to be exclusive for a term of five
         years  and  non-exclusive  thereafter.  The  agreements  also  included
         release of liability provisions, whereby all parties would release each
         other of and from all claims and liabilities,  including the amount due
         in connection  with the Company's  obligation  under the September 2000
         License  Agreement as well as the Company's claim for a price reduction
         due to the  non-exclusivity of the Hadwaco license.  Contemporaneously,
         the Company  entered into agreements with Hadwaco Ltd Oy and Hackman Oy
         Abp (Hadwaco). The agreement of the parties was as follows: The Company
         was to  form a new  company  (Newco)  in  Finland.  The  Company  would
         immediately  provide  Newco with  $1,500,000 to purchase from Hadwaco a
         100%  interest in  Hadwaco's  existing  and ongoing  water  remediation
         business, including all related intellectual property. Newco's purchase
         price for  Hadwaco's  water  remediation  business was to be $1,500,000
         plus a 19% interest in Newco's common stock. The Company was to provide
         senior debt funding up to a principle  aggregate  amount of  $7,500,000
         over a period of three  years from the date of  closing of the  Hadwaco
         purchase.




                                       24
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         f.  License Agreements (Continued)

         AQUAMAX/KEERAN (Continued)

         On August 29, 2001, the Company  entered into an agreement with Aquamax
         (International)    Holdings   B.V.   and   Keeran    Corporation   N.V.
         ("Aquamax/Keeran")  to extend  the  deadline  for  consummation  of the
         transactions  set forth in the  agreement  executed on July 20, 2001 by
         and among Aquamax/Keeran,  Balantum Oy and the Company. As amended, the
         closing of the transaction  shall occur on the earlier of September 28,
         2001 or the first  practically  possible day after the Company  becomes
         listed on the Nasdaq OTC Bulletin Board. Additionally, after August 31,
         2001,  the  Company  shall  take  responsibility  for  paying  for  the
         processing and  maintenance of patents and patent  applications,  which
         shall be  transferred  to Balantum Oy pursuant to the terms of the July
         20, 2001 agreement.

         In connection with the extension agreement, the Company has assumed the
         obligation of  Aquamax/Keeran to compensate a finder in connection with
         the transactions  between  Aquamax/Keeran  and the Company an amount of
         $43,050 and 20,000 shares of the Company's common stock.

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

         Because its  agreements  with  Hadwaco  Ltd. Oy and Hackman Oy Abp were
         non-binding,  the  Company  does not  believe  that it has a  liability
         arising  out of its  failure to  complete  the  transactions  described
         above,  other than the loss of  amounts  the  Company  agreed to pay in
         connection with obtaining  extensions of the agreements.  In connection
         with its dispute with Aquamax/Keeran, the Company still believes it has
         the right to a  purchase  price  reduction  because  of the  failure of
         Aquamax/Keeran  to deliver  exclusive rights to all of the patents and,
         while no claim has been  asserted,  might be subject to a damage  claim
         related to the Company's  withholding of payment on the  Aquamax/Keeran
         license  agreement.  The  Company  has  recorded  expenses  of $984,800
         related to the costs of the terminated  agreements with Hadwaco/Hackman
         and the  possible  costs  associated  with the  Aquamax/Keeran  license
         agreement dispute.



                                       25
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         f. License Agreements (Continued)

                                      SIGMA

         On March 6, 2001, the Company's wholly owned subsidiary, SIGMA, entered
         into a collaboration  agreement with Baxi Group Ltd. (a manufacturer of
         heating  systems in Europe)  for the  development  and  marketing  of a
         combined heat and power product  (micro-CHP) for the residential market
         in the United  Kingdom.  The  objective  of the  agreement is to form a
         joint working  arrangement for the development of a micro-CHP  package,
         consisting of the Sigma Energy  Converter  (Sigma Stirling  engine) and
         the metal  cabinet,  into  which each unit will be  mounted,  including
         controls and  connections  to both systems and the  electricity  supply
         network.  The  purpose of the  collaboration  agreement  is to design a
         prototype   micro-CHP  package  to  be  installed  in  compliance  with
         applicable  regulations in older and larger houses as replacements  for
         boilers that have reached the end of their  service  life.  The parties
         will work  together in assigning  sufficient  priority  and  allocating
         necessary  resources (which have already been budgeted by Sigma) to the
         project to develop  the  package in a mutually  agreeable  time  frame,
         which is  currently  anticipated  to be by  mid-2003 if the Company can
         raise sufficient  capital to fund completion of its Stirling engine and
         pay its  portion  of the  costs in  connection  with the  collaboration
         agreement.  Pursuant to the terms of the Collaboration Agreement,  each
         party pays its own expenses.  The  agreement  has no fixed  termination
         date, but can be terminated at any time by either party on three months
         notice.  The costs incurred by the Company,  which are associated  with
         the Baxi collaboration, have been expensed when incurred.

              SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (SAIC)

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




                                       26
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001


                                       II

NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)

         f. License Agreements (Continued)

         SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (SAIC) (CONTINUED)

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

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

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

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

         g.  License Option Agreement

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

NOTE 8 - EQUITY TRANSACTIONS

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

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




                                       27
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

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

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

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

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

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

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


NOTE 9 - EQUITY LINE OF CREDIT

         On November 29, 2001, the Company entered into an Equity Line of Credit
         with Cornell Capital  Partners,  L.P.  (Cornell)  pursuant to which the
         Company may, at its discretion,  periodically sell to Cornell shares of
         common stock for a total  purchase  price of up to $10.0  million.  For
         each share of common stock  purchased  under the Equity Line of Credit,
         Cornell  will pay 95% of the  lowest  closing  bid  price on which  our
         common stock is traded for the 5 days immediately  following the notice
         date. The maximum amount  available to the Company is $1,000,000 in any
         30 calendar day period.  The Company may request an advance every three
         trading  days. A  consulting  fee of 5% of each advance will be paid to
         Cornell  upon  closing  each of the  sales  under  this  agreement.  In
         addition, the Company issued 260,270 shares of common stock on February
         28, 2002 as a commitment  fee valued at  $500,000,  or $1.92 per share.
         The price the stock closed at on November 29, 2001 was $1.75 per share.
         The non-refundable  commitment fee was included in accounts payable and
         was fully  expensed as debt offering  costs.  The Company has not drawn
         any advances  under this agreement as of December 31, 2001 or March 31,
         2002.  The  Company  filed an  SB-2,  which  has not yet been  declared
         effective.



                                       28
<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                      March 31, 2002 and December 31, 2001

 NOTE 10 - SUBSEQUENT EVENTS

         During April 2002, the Company entered into a settlement  agreement for
         amounts due Ricardo,  Inc. in the amount of  $1,458,248.  The agreement
         calls for  payments of $600,000 due April 30, 2002 and May 31, 2002 and
         the remaining  balance plus interest  accrued at a rate of 6% per annum
         from  July  1,  2001  through  the  dates  of  payment.  As  additional
         consideration,  the Company issued Ricardo,  Inc.  warrants to purchase
         750,000  shares of the Company's  common stock at an exercise  price of
         $0.50 per share for five years. In the event of default on any of these
         payments,  the  outstanding  balance is to accrue interest at a rate of
         12% per annum  from  July 1,  2001  through  the date of  payment.  The
         Company did not make the scheduled payment in April.

         During  April 2002,  the Company  entered  into a six month  consulting
         agreement  with  Hyperion  Partners  Corporation  (Hyperion) to provide
         financial  services.  The  agreement  calls for the  payment  of a cash
         placement  fee of equal to 8% and the issuance of warrants  equal to 3%
         of the total amount of financing raised by Hyperion.



                                       29
<PAGE>


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

FORWARD-LOOKING STATEMENTS

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

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

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

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








                                       30
<PAGE>

CERTAIN BUSINESS DEVELOPMENTS

      The Company is a development stage company,  which is still dependent upon
its ability to raise capital  through loans and private or public sale of stock.
The Company  believed and continues to believe that one of the main  impediments
to its  ability  to raise  significant  operating  capital  has been  delays  in
obtaining  relisting on the NASDAQ  Over-the-Counter  Bulletin  Board. On Friday
September  7, 2001 the Company was  successful  in becoming  relisted on the OTC
Bulletin Board. Three working days later, on Tuesday, September 11, 2001, an act
of war  was  committed  on  the  United  States  with  the  World  Trade  Center
devastation.  That event  disrupted  the  financial  markets  and  significantly
affected and  consequently  delayed the Company's  efforts to obtain  investment
funds necessary to carry out its business plans within the time lines previously
projected by the  Company.  While the delays in raising  operating  capital have
caused the Company to re-assess the timelines for implementation of its business
plan, the Company  continues to believe that it will be able to raise sufficient
capital to meet its core business plan  objectives as more fully detailed below.
However,  management  cannot  provide any  assurances  that the Company  will be
successful  in  accomplishing  any of its  plans.  Failure  to raise  sufficient
capital to meet its  business  plan  objectives  could  have a material  adverse
effect  on  the  Company's  results  of  operations,   financial  condition  and
liquidity.


PLAN OF OPERATION

      Ocean Power's current  operations  began in January 1997 as  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 Ocean Power, then
named PTC Group,  in June 1999. PTC Group  continued as the surviving  corporate
entity conducting the business of PTC Holdings.

      Ocean Power is developing modular seawater desalination systems integrated
with environmentally  friendly power sources. We are 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 Ocean Power 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,
Ocean Power 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.   We  do  not  currently  plan  to  license  our
intellectual  property to these regional joint ventures.  All such  intellectual
property will remain the property of Ocean Power. Furthermore,  any enhancements
to our intellectual  property arising out of the regional joint ventures will be
licensed back to us for our use.

      Ocean  Power  has had no  profit to date.  It has  experienced  a total of
$42,460,815  in losses from  inception  on March 26,  1992  through to March 31,
2002.  Ocean  Power's  losses have  resulted from the fact that our products are
still in development and planned principle operations have not commenced.

      At March 31, 2002, Ocean Power's  unrestricted  cash position  declined to
$777 as compared to $68,914 at December 31, 2001, and we have incurred  accounts
payable, notes payable, and other obligations  aggregating  $23,116,297.  During
the three  months  ended March 31,  2002,  aggregate  liabilities  increased  by
$1,365,953.

      On November 13, 2001, Ocean Power obtained an extension of the payment due
date which was due to Silent  Clean  Power from May 2001 to December  31,  2001.
Payment of approximately $7,600 in accrued interest, was made in December,  2001
in Swedish  kroner and  principal  in the amount of  approximately  $83,000 plus
accrued interest from December 1 was due on December 31, 2001 in Swedish kroner.
Silent Clean Power has agreed to extend the payment due date to May 23, 2002.



                                       31
<PAGE>

      Due to the  increased  level of activity  projected  during the next three
years,  additional  funding will be needed and is being sought.  From January 1,
2001 to May 1, 2002, Ocean Power has raised  $7,177,000 of additional  financing
through proceeds from notes payable and convertible debentures.  Of that amount,
Ocean  Power has  received  loans of $12,000  and  $215,000,  respectively  from
related parties.

      In order to  continue  as a going  concern,  develop a reliable  source of
revenues,  and achieve a profitable level of operations,  Ocean Power will need,
among other things, additional capital resources. Management's plans to continue
as a going concern include raising  additional capital through private placement
sales of Ocean  Power's  common  stock  and/or  loans  from third  parties,  the
proceeds of which will be used to develop Ocean Power's products,  pay operating
expenses and pursue acquisitions and strategic alliances.  All funds raised will
be used to pay current debts and fund  operations and expansion  consistent with
Ocean Power's business plan.  However,  management cannot provide any assurances
that we will be successful in accomplishing  any of our plans.  Failure to raise
sufficient capital could have a material adverse effect on Ocean Power's results
of operations, financial condition, and liquidity.

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

      Ocean  Power has a limited  operating  history  on which to  evaluate  our
prospects.   The  risks,  expenses  and  difficulties  encountered  by  start-up
companies  must be  considered  when  evaluating  Ocean Power'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 Ocean Power. 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.
      Ocean Power does not have an established  source of revenue  sufficient to
cover our operating costs and to allow us to continue as a going concern.  Also,
management  cannot  provide  any  assurances  that  we  will  be  successful  in
accomplishing  any of our plans.  The  ability of Ocean  Power to  continue as a
going concern is dependent upon our ability to successfully  accomplish the plan
described  in  the  following   paragraphs  and  eventually   attain  profitable
operations.

      Ocean Power's plan of operation for the next twelve months is as follows:

      (i) Since  completion  of our water quality  certification  on December 9,
1999,  Ocean  Power has raised  approximately  $17  million  pursuant to private
placement  financing  and loans which has allowed  Ocean Power to implement  our
Product  Development  Program,  as  well  as to  further  business  development,
strategic  partnering and  acquisition  activities.  Based on an analysis of our
sales and development  costs,  Ocean Power has begun efforts to raise additional
financing  pursuant to private  placement sales of our common stock and/or loans
from third parties.  The exact method of this additional  round of financing has
not been determined.

      One of the major  reasons  that  Ocean  Power  prefers to enter into joint
ventures to finance our  endeavors is to  distribute  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)  Ocean Power intends to conduct technology and product  development
in a number of areas.  They are:

            (a)   low-temperature hydrogen generation;


                                       32
<PAGE>


            (b)   ejectors;

            (c)   chemical-free water pretreatment;

            (d)   enhanced heat transfer in plastic heat exchangers;

            (e)   high-performance alkaline fuel cells;

            (f)   Stirling engines;

            (g)   Plasma chemical reactors.

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

      (iii) Ocean Power intends to build and install additional  facilities in
the next year.  They are:

            (a)   further laboratory and test facilities;

            (b)   system integration facilities; and

            (c)   a manufacturing facility for proprietary components.

      (iv)  Although  Ocean  Power  plans  to  subcontract  out as much  work as
possible,  during  the next year we still  anticipate  increasing  the number of
employees from the current 36 full-time  employees to approximately 75 full-time
employees.


OUR LICENSE FROM AQUAMAX/KEERAN

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

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

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


OUR DISPUTE WITH AQUAMAX/KEERAN

      Our license to all technology  covered by the license  agreement was to be
exclusive within the specified field of use.  Subsequent to the execution of the
license  agreement and to our making of the initial  payments to  Aquamax/Keeran
under the license,  we  discovered  that  Aquamax/Keeran's  license to Hadwaco's
international  patent  application  that was  sub-licensed to us pursuant to the
license  agreement,  was not  exclusive,  as was  represented  and  warranted by
Aquamax/Keeran. As a result, on December 22, 2000, we served on Aquamax/Keeran a
notice  of  default  under  the  terms of the  license  agreement.  We  demanded
arbitration  pursuant  to the license  agreement  and  asserted  that there is a
difference in the value of the Hadwaco  sublicense  because it is non-exclusive.
The  possible  diminished  value  arises due to the fact that Hadwaco is free to


                                       33
<PAGE>

license the same technology  covered by the Hadwaco patent  application to third
parties for their  (potentially  competing)  use in the field of use provided in
our agreement with  Aquamax/Keeran.  Our request for  arbitration was limited to
issue of the  consideration we owe  Aquamax/Keeran  and does not assert that the
license  does not exist or is not  effective.  Aquamax/Keeran  did not  formally
respond to our demand for arbitration.  We suspended all further payments due to
Aquamax/Keeran  under the license  agreement  pending  resolution of the dispute
which is discussed below.

      Nevertheless,  we commenced development activities predicated on using the
technology licensed from  Aquamax/Keeran  regardless of whether the amounts owed
to Aquamax/Keeran  and the value of the licenses are adjusted.  The technologies
licensed from Aquamax/Keeran are part of the long-range  development program for
distillation-based  systems and are not part of the SWRO  systems to be utilized
in 2002.


ATTEMPTED RESOLUTION OF THE DISPUTE

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

      In July 2001, the aforementioned negotiations resulted in the execution by
Aquamax/Keeran  and the Company,  as well as Hadwaco Ltd. Oy and Hackman Oy Abp,
of agreements which would have, if closing had occurred as stipulated,  resolved
the dispute between the Company and Aquamax/Keeran. The Agreements provided that
the Company  would make to  Aquamax/Keeran  payments of  $1,800,000  in cash 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.  The agreements also provided that the Company would grant back
to  Aquamax/Keeran  a royalty  free,  exclusive,  worldwide  license  to exploit
Newco's water desalination technology for applications where the volume of water
processed is less than 1,000 cubic meters per day. The license back of rights to
Aquamax/Keeran  was to be exclusive  for a term of five years and  non-exclusive
thereafter.  The  agreements  also  included  release of  liability  provisions,
whereby  all  parties  would  release  each  other of and from  all  claims  and
liabilities,   including  the  amount  due  in  connection  with  the  Company's
obligation  under the September 2000 License  Agreement as well as the Company's
claim for a price reduction due to the  non-exclusivity  of the Hadwaco license.
Contemporaneously,  the Company  entered into agreements with Hadwaco Ltd Oy and
Hackman Oy Abp  (Hadwaco).  The  agreement  of the parties  was as follows:  The
Company  was to  form a new  company  (Newco)  in  Finland.  The  Company  would
immediately  provide  Newco with  $1,500,000  to  purchase  from  Hadwaco a 100%
interest in its existing and ongoing water remediation  business,  including all
related  intellectual  property.  Newco's  purchase  price for  Hadwaco's  water
remediation  business was to be $1,500,000 plus a 19% interest in Newco's common
stock.  The  Company  was to  provide  senior  debt  funding  up to a  principle
aggregate  amount of  $7,500,000  over a period of three  years from the date of
closing of the Hadwaco purchase.

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


                                       34
<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.  Because the  agreements  with Hadwaco
Ltd. Oy and Hackman Oy Abp were  non-binding,  the Company does not believe that
it has liability  arising out of its failure to complete the transactions  under
the agreements  described above as the Company's attempt to resolve the dispute,
other than the loss of amounts  the  Company  agreed to pay in  connection  with
obtaining  extensions of the  agreements.  In  connection  with its dispute with
Aquamax/Keeran,  the Company still believes it has the right to a purchase price
reduction  because of the failure of  Aquamax/Keeran to deliver exclusive rights
to all of the patents and, while no claim has been asserted, might be subject to
a  damage  claim  related  to  the  Company's  withholding  of  payment  on  the
Aquamax/Keeran license agreement.  The Company has recorded expenses of $800,000
related to the costs of the terminated  agreements with  Hadwaco/Hackman and the
possible costs associated with the Aquamax/Keeran license agreement dispute.

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

      Our methodology for  determining  whether an impairment  exists at balance
sheet  dates is to  monitor  our  progress  against  the our  vapor  compression
desalination  development  program  described  in the next  paragraph.  Prior to
commencement of the plan of product  improvement  (PPI) described below, we will
continue  to  monitor  the  desalination  marketplace  and  assess  whether  any
significant changes, such as emergence of new competing technologies, changes in
market size and  configuration,  or changes in the  competitor's  business  have
taken place.  This enables us to assess whether any market  conditions  threaten
the viability of our planned business.  If any such threatening  conditions were
to occur,  we would  assess  whether the market  value of our vapor  compression


                                       35
<PAGE>

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  (provisional  patents filed August
2000 and patent  pending  patents filed August 2001).  The remaining  step is to
complete a PPI which  consists of 14 projects,  the combined  effect of which is
projected to yield a more economically viable seawater desalination system, with
lower energy and operating costs for both the projected vacuum vapor compression
system and the existing seawater reverse osmosis technology.  The formal PPI was
initially  designed in 1997, after the first physical  assessment of the Aquamax
equipment in Finland.  The program was  thereafter  continuously  developed  and
refined to reflect new information  gathered from the Aquamax  equipment we have
acquired  and have  under  testing  in  Malta,  as well as data  gathered  about
competitive  technologies  from our  consultants,  and our own monitoring of the
market.  The planning,  scheduling and cost estimating of the formal program was
finalized  in October of 2000.  The PPI is expected to require  approximately  4
full-time  employees and 18 to 20 months to complete once additional  funding of
approximately $5 million is arranged. Neither the time, manpower requirements or
cost necessary for the PPI have changed.  Two of the projects represent critical
path projects on which the 18 to 20 month time line will be  dependent.  The two
critical path projects are: "High Efficiency Steam Ejector Development" Project,
the goal of which is to replace a mechanical  compressor  with a high efficiency
hypercritical    ejector   (OPC   has   a   U.S.   patent   pending)   and   the
"Evaporator-Condenser  Efficiency  Increase"  Project,  the  goal of which is to
increase the overall  efficiency of the vapor  compression cycle by at least 30%
(OPC has a U.S.  patent  pending).  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  resulted in a
delay to our  arranging  funding  for the PPI for two  reasons:  first,  because
potential  investors elected not to invest until we were again eligible to trade
on the  OTC  Bulletin  Board;  and  second,  as a  result  of the  diversion  of
management  resources to the task of amending the SEC filings and other  efforts
necessary  to  re-attain  eligibility  to trade on the OTC  Bulletin  Board.  On
September 7, 2001 the Company became  relisted on the NASDAQ OTC Bulletin Board.
The  following  Tuesday,  September  11, 2001 an act of war was committed on the
United States with the World Trade Center devastation, which further delayed the
funding  necessary  to pursue the PPI.  During the period  that the PPI has been
delayed by the unavailability of funding, the Company has assessed impairment of
the  carrying  value of its assets  employed  in the  desalination  business  by
monitoring  developments in the market for desalination products to determine if
technological,  competitive or market conditions  indicate that the value of the
assets  (including the amortized  cost of the licensed  patents and the value of
the research and development activities that were expensed as incurred including
research  leading to Ocean Power's three  additional  patents and the "know how"
resulting from our testing of the unit in Malta) is less than the carrying value
of the related asset  consisting  principally of the cost of the  Aquamax/Keeran
patent net of accumulated  amortization and the previous impairment  adjustment.
Management's assessment of market conditions described above leads management to
conclude that there has been no impairment of the Aquamax/Keeran related license
agreement asset other than the $400,000 that was recorded in connection with the
dispute with Aquamax/Keeran over exclusivity of one of the patents, as described
below.

      The  license  agreement  was  signed  by the  Company  and  Aquamax/Keeran
representatives  as of September 21, 2000, but because of questions raised as to
the identity and authority of one Aquamax/Keeran signatory, an exhibit was added
to the agreement solely to clarify the matter.  Revised  signature pages (signed
by the  original  Aquamax/Keeran  person  and  dated on the  original  September
signing  date) were  received  by us on October 2,  2000.  The  transaction  was
originally  recorded in October 2000 in the belief that, until properly executed
signature pages were received,  it was not effective.  Based on our reassessment
of the  circumstances,  we have determined that the agreement  became binding on
September 21, 2001. Therefore,  the September 30, 2000 financial statements were
amended to reflect the  transaction  as occurring in  September.  The key points
leading to the change in the Company's  position as to the effective  date were:
(1)  although  the name and  title of the  representative  signing  on behalf of
Keeran  Corporation  was not  disclosed on the  signature  page or  accompanying
documents,  the  signature  was an original and the signer had actual  authority
from Keeran  Corporation to execute the agreement;  (2) original signature pages
for all parties were  exchanged in September  with the intent to be bound by the


                                       36
<PAGE>

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 is required to pay us
royalties on the sale of the licensed  products,  plus 50% of any royalties they
receive  pursuant  to sales by their  sub-licensees.  Since this is an  advanced
technology  development  program,  the amount of future royalties due from sales
will be determined  once the product is fully  developed and the actual value of
the technology can be determined.

SIGMA ELEKTROTEKNISK AS ACQUISITION

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

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

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

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


                                       37
<PAGE>

companies that build engines for the automobile industry, thereby reducing Ocean
Power'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 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 H2OkW Systems (TM)
sea water desalination systems. We believe that Sigma's basic one-cylinder model
can be expanded from the current 3kW to up to a 25kW engine with no basic design
change.  Our  long-term  plan,  ultimately,  is to seek to combine  several 25kW
engine  systems in  parallel  arrays  that will allow us to install  distributed
power systems from  kilowatts to megawatts  with one basic design that can share
many common parts; thereby reducing the cost to produce the power systems.  This
manufacturing  efficiency,  coupled  with the inherent  flexibility  of the fuel
sources for a Stirling  engine (any heat source will do, such as oil, gas, solar
power or any biomass) we believe will cause Stirling engines to have significant
commercial  advantages as a source of distributed  power over other  distributed
technologies such as fuel cells, with their more stringent fuel requirements.

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

      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 Ocean
Power) 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  Ocean  Power'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,  Ocean  Power'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.

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<PAGE>

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

      With frequent  contact among the CEO of Sigma,  Ocean Power's  Director of
Manufacturing,  Chief  Scientist and other staff,  as well as regular visits and
internal  reports,  management  concluded that all activities  were  progressing
acceptably.  Continuous  monitoring of competing  technologies and review of our
development  progress led management to believe that the new technologies  Sigma
was applying to Stirling engines could result in competitive  advantages and the
total value of their basic patents had 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  quarterly  balance sheet dates between
September 2000 and June 2001.

      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,  became effective  January 1, 2002 for Ocean Power
and, from such date,  Ocean Power will apply its provisions,  and those of other
accounting pronouncements referenced therein, for assessing impairment.

      The  development  benchmarks  used as  triggering  events  for  impairment
assessments  (which have remained  unchanged since the acquisition of Sigma) for
Sigma's Stirling engine business are as follows:

TARGETED COMPLETION DATE                Benchmark.

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 OF 2001 OR FIRST         First proceeds from sale of prototypes.
QUARTER OF 2002

LATE FIRST QUARTER OR EARLY SECOND      Release of second generation prototype
QUARTER OF 2002                         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 OF 2003                  Commence production of product (small
                                        energy converter with electrical output
                                        of 3kW and thermal output of 9kW).

      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). Ocean Power 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.

      Our initial  anticipated  time-line to develop our 3kW 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.  That  timeline has now been extended by 12 to 14 months due to difficulty
in raising funds resulting,  in part, from delays in obtaining  relisting on the
NASDAQ  OTC  Bulletin  Board  (relisting  occurred  September  7,  2001) and the
September  11,  2001 act of war  committed  on the United  States with the World
Trade Center  devastation that disrupted the financial markets and significantly
affected and,  consequently,  delayed Ocean Power's efforts to obtain investment
funds necessary to carry out its business plans within the time lines previously
projected by Ocean Power. As a consequence of funding availability,  Ocean Power
has been forced to reduce the pace of development.  We currently expect that the


                                       39
<PAGE>

second benchmark  originally  projected to be completed in the fourth quarter of
2001  will  be  delayed  for  up  to  12  to 14  months,  depending  on  funding
availability.  However,  the  first  transaction  for the  sale  of a  prototype
Stirling Engine was consummated during the last quarter of 2001, with the actual
delivery date to be determined.  The other benchmarks will be delayed by periods
comparable  to the delay in the  benchmark  originally  scheduled for the fourth
quarter 2001, that is 12 to 14 months.

      Our current estimate of our funding requirements to achieve the benchmarks
set  forth  above is $27.55  million  due to  delays  in  development  caused by
difficulties in raising sufficient funding.  The $27.55 million aggregate amount
needed over the revised  five-year  period to fund the activities in the Plan of
Development  is as follows:  $700,000  in 2000,  $4.59  million in 2001,  $11.06
million in 2002,  $8.66  million in 2003 and $2.54  million in 2004. As of March
31,  2002,  Ocean Power has  provided  approximately  $4.0 million of the $27.55
million revised amount projected to be needed for project development. Sigma was
able to meet the first  Stirling  engine  benchmark  and  continue  to work on a
reduced scale toward the second and third benchmarks 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  approximately  $4.0 million;  (3) obtaining vendor credit of
$1.5 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 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  than  the  first  generation  engine.  Thirty  units  of  the  second
generation  prototype  units have been  ordered  and were in  production  before
production  was  suspended  in  September  2001 due to  difficulties  in raising
sufficient  funding.  The first three units that were  scheduled for delivery in
the fourth quarter 2001 can be completed approximately 6 months after funding is
obtained  in  amounts  sufficient  to pay the  engineering  consultant  the $1.5
million due for services  provided to date. Upon completion of production of the
prototype  units,  we expect 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.

      Because of the delays in  development  caused by  difficulties  in raising
funds, Ocean Power performed an impairment  assessment of the assets employed in
its Stirling  engine  business,  which consist  largely of the Sigma patents and
goodwill.  Using the estimated present value of future cash flows from the Sigma
engine  business,  taking  into  account  the delay in  development  and related
increases in total development  cost, as an estimate of fair value,  Ocean Power
concluded  that no  impairment  in the assets of the  Stirling  engine  business
existed at March 31, 2002.  The  impairment  assessment  considered  whether any
significant  changes  have  occurred  in the  targeted  market  place that would
diminish the value of the  Stirling  engine  business,  such as emergence of new
competing technologies,  changes in market size and configuration, or changes in
competitors'  businesses.  We also  considered  whether the delay in development
should  result in a decrease in the useful lives  assigned to the Sigma  patents
and  goodwill  and  have  concluded  that,  because  we  intend  to  re-commence
development as soon as funds are obtained, there is no reduction in useful lives
needed at this time.  Ocean  Power will  update its  impairment  and useful life
assessment each quarter.

      With respect to the conversions of debt to equity,  Statoil  converted its
loan of  approximately  $381,000 to Sigma into 119,152 shares of common stock of
Ocean Power. The temporary solution to our shortfall in available funding was to
focus on core activity.  Additional  funding will be needed during the remainder
of 2002 to  complete  the  development  tasks  under  the  revised  schedule  of
completion.  An impairment in the value of the Sigma assets  (including  patents
and goodwill) could occur if sufficient  funding to complete  development is not
obtained.

      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
Ocean Power believes are unfavorable, adequate funding may not be obtained which
could  have a  material  adverse  effect on Ocean  Power's  financial  position,
results of operations  and liquidity and would result in extended  delays in the
revised  schedule and would likely result in an impairment of the carrying value
of  Sigma  assets  (including  patents  and  goodwill)  and/or  could  lead to a
reduction in the estimated useful life used to amortize these assets.

      Our initial estimate of our manpower  requirements for the Stirling engine
development  plan  was a total of 53  people  by 2004.  Sigma  currently  has 13
employees.  To develop the Stirling  engine as we currently  plan, we anticipate
increasing  Sigma's manpower to approximately 38 in 2002 and 2003, and 45 people
by 2004. To date,  Sigma's  manpower  requirements  have been less than expected


                                       40
<PAGE>
because of lack of funding to proceed with the Stirling  engine  development  as
originally planned.

ACCOUNTING PRONOUNCEMENTS

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

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

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

      The Company has reviewed the carrying value of the goodwill generated from
the  Sigma  purchase  and  the  patents  and has  determined  that  there  is no
impairment of the assets. The Company has not amortized the goodwill  associated
with the purchase during the quarter ended March 31, 2002

      SFAS NO.  143 -- On  August  16,  2001,  the  FASB  issued  SFAS No.  143,
Accounting for Asset Retirement Obligations, which is effective for fiscal years
beginning after June 15, 2002. It requires that obligations  associated with the
retirement  of a tangible  long-lived  asset to be recorded as a liability  when
those  obligations  are  incurred,  with the amount of the  liability  initially
measured at fair value.  Upon  initially  recognizing a liability for an accrued
retirement  obligation,  an entity must  capitalize  the cost by  recognizing an
increase in the carrying amount of the related  long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability,  an entity either settles the  obligation for its recorded  amount or
incurs a gain or loss upon  settlement.

      SFAS NO. 144 -- On October 3, 2001,  the  Financial  Accounting  Standards
Board  issued  SFAS No.  144,  Accounting  for the  Impairment  or  Disposal  of
Long-Lived Assets which is effective for financial  statements issued for fiscal
years beginning after December 15, 2001 and, generally, its provisions are to be
applied  prospectively.  SFAS 144 supersedes SFAS Statement No. 121 ("FAS 121"),
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
Be  Disposed  Of.  SFAS  144  applies  to  all  long-lived   assets   (including
discontinued  operations) and consequently  amends  Accounting  Principles Board
Opinion No. 30 ("APB 30"), Reporting Results of Operations Reporting the Effects
of Disposal of a Segment of a Business.

      SFAS 144  develops one  accounting  model (based on the model in SFAS 121)
for  long-lived  assets that are to be disposed of by sale, as well as addresses
the principal  implementation  issues.  SFAS 144 requires that long-lived assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less cost to sell. That  requirement  eliminates APB 30's requirement
that  discontinued  operations  be  measured  at net  realizable  value  or that
entities  include under  discontinued  operations  in the  financial  statements

                                       41
<PAGE>

amounts for operating losses that have not yet occurred.  Additionally,  FAS 144
expands the scope of  discontinued  operations  to include all  components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be  eliminated  from the  ongoing  operations  of the  entity  in a
disposal transaction.























                                       42
<PAGE>

PART II


ITEM 1.  LEGAL PROCEEDINGS

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

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


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

      1)    Issuance  of Stock  Options  to  Board  Directors,  Employees  and
Consultants

      On January 8, 2002,  the Board of  Directors  authorized  the  issuance of
3,094,588  stock  options  to  purchase  common  shares  of the  Company  to the
non-employed board directors,  employees,  including board member employees, and
certain  consultants  to the Company.  The stock  options are valid for ten (10)
years and are exercisable at $1.00 per share. The market price for the Company's
common stock on January 8 was $1.06.

       -------------------------------------------------------------------------
                  Option Holder                          Amount of Options
       -------------------------------------------------------------------------
       Gloria Rose Ott, Chairman                           250,000
       -------------------------------------------------------------------------
       Ed Juchniewicz, Director                            500,000
       -------------------------------------------------------------------------
       Employees of Ocean Power Corporation               2,090,248
       -------------------------------------------------------------------------
       Employees of Sigma Elektroteknisk                   136,063
       -------------------------------------------------------------------------
       Employees of Ocean Power (UK)                       31,145
       -------------------------------------------------------------------------
       Consultants                                         87,132
       -------------------------------------------------------------------------

      2)    Issuance of Warrants to Terra Systems

      On January 8, 2002,  the Board of  Directors  authorized  the  issuance of
150,000  warrants  exercisable at $1.00 per share for 1 year to Terra Systems in
order to secure the  exclusive  right to  integrate  Terra  Systems'  coal fired
technology  with  the  Company's  Stirling  engine.  The  market  price  for the
Company's common stock on January 8 was $1.06.

      3)    Issuance of Common  Stock and  Warrants  to Synergy  International
Partners S.A.

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




                                       43
<PAGE>

the term of the  agreement.  The market price for the Company's  common stock on
January 8 was $1.06.

      4)    Issuance of  Convertible  Debenture to Venture  Investment  Group,
Inc.

      On January 14, 2002, the Company issued a five-year  convertible debenture
for $100,000.  The note accrues interest at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's  common stock at $.90
per share. As additional  consideration,  the Company  granted 333,333  warrants
with an exercise price of $.90 per share, with an expiration date of January 13,
2007. The market price for the Company's common stock on January 14 was $1.00.

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
1/14/02       $100,000    Common      111,111      $.90        1/14/07
---------------------------------------------------------------------------
                          Warrants    333,333      $.90        1/13/07
---------------------------------------------------------------------------

      5)    Issuance of  Convertible  Debenture to Venture  Investment  Group,
Inc.

      On January 22, 2002, the Company issued a five-year  convertible debenture
for $100,000.  The note accrues interest at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's  common stock at $.90
per share. As additional  consideration,  the Company  granted 333,333  warrants
with an exercise price of $.90 per share, with an expiration date of January 21,
2007. The market price for the Company's common stock on January 22 was $0.98.

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
1/22/02       $100,000    Common      111,111      $.90        1/22/07
---------------------------------------------------------------------------
                          Warrants    333,333      $.90        1/21/07
---------------------------------------------------------------------------

      6)    Issuance of  Convertible  Debenture to Venture  Investment  Group,
Inc.

      On January 30, 2002, the Company issued a five-year  convertible debenture
for $100,000.  The note accrues interest at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's  common stock at $.90
per share. As additional  consideration,  the Company  granted 333,333  warrants
with an exercise price of $.90 per share, with an expiration date of January 29,
2007. The market price for the Company's common stock on January 30 was $1.00.

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
1/30/02       $100,000    Common      111,111      $.90        1/30/07
---------------------------------------------------------------------------
                          Warrants    333,333      $.90        1/29/07
---------------------------------------------------------------------------

      7)    Issuance of Promissory Note to Cocomodo Investments, LLP

      On January 29,  2002,  the Company  issued a one-year  promissory  note to
Cocomodo  Investments,  LLP for $75,000.  The note accrues interest at a rate of
13% per annum.  If the  principal  and interest are not paid when due, then they
shall bear  interest  thereafter  at a rate of 13.5%.  If the Company  elects to
pre-pay any principal or interest,  then the lender has the right to convert any
amount of the prepayment of the principal or interest into the Company's  common
stock at $.75 per share. As additional consideration, the Company granted 75,000
warrants to Cocomodo Investments,  LLP, with an exercise price of $.75 per share
and an expiration  date of January 28, 2003.  The market price for the Company's
common stock on January 29 was $1.00

      8)    Issuance of Promissory Note to Wendell H. Adair, Jr.

      On February  1, 2002,  the Company  issued a one-year  promissory  note to
Wendell H. Adair,  Jr. for $25,000.  The note accrues  interest at a rate of 13%
per annum.  If the principal and interest are not paid when due, then they shall
bear interest  thereafter at a rate of 13.5%.  If the Company  elects to pre-pay
any  principal or interest,  then the lender has the right to convert any amount
of the  prepayment of the principal or interest into the Company's  common stock
at $.75 per share.  As  additional  consideration,  the Company  granted  25,000
warrants to Wendell H. Adair,  Jr. with an exercise  price of $.75 per share and
an expiration  date January 31, 2003. The market price for the Company's  common
stock on February 1 was $1.01.




                                       44
<PAGE>

      9)    Issuance of Transferable Options for Consulting Services

      On February 7, 2002 Ocean Power entered into a consulting  agreement  with
Jeffrey P. Nash for consulting services. This agreement is for a period of three
years and will expire on February 6, 2005,  unless extended by mutual  agreement
in writing.  The Consultant is required to assist in preparing  material for the
Company to be used in its fund raising and business development activities.  The
Consultant is required to introduce the Company to potential  strategic partners
and investors. In consideration for consulting services,  Ocean Power has agreed
to grant to the Consultant one hundred thousand (100,000)  transferable  options
for the  purchase  of one hundred  thousand  (100,000)  shares of the  Company's
common stock,  at a purchase price of $1.10 per share.  The market price for the
Company's  common stock on February 7 was $1.05. The options are exercisable for
a period of three years,  commencing  February 7, 2002, with piggy back right of
registration.

      10)   Issuance of Promissory Note to Daniel Chestler

      On February 13, 2002,  the Company  issued a one-year  promissory  note to
Daniel  Chestler  for $25,000.  The note  accrues  interest at a rate of 13% per
annum. If the principal and interest are not paid when due, then they shall bear
interest  thereafter  at a rate of 13.5%.  If the Company  elects to pre-pay any
principal  or  interest,  then the lender has the right to convert any amount of
the  prepayment of the principal or interest into the Company's  common stock at
$.75 per share. As additional consideration, the Company granted 25,000 warrants
to Daniel  Chestler  with an exercise  price of $.75 per share and an expiration
date  February 12,  2003.  The market  price for the  Company's  common stock on
February 13 was $.95.

      11)   Issuance of Warrants to Algonquin Capital  Management and Lockwood
Children's Trust

      On February 19, 2002, the Company cancelled a total of 3,288,000  warrants
to Algonquin Capital  Management and Lockwood  Children's Trust with an exercise
price of $1.50 per share and re-issued 3,288,000 warrants with an exercise price
of $.50 per share,  with an expiration  date of February 18, 2007. This was done
as  additional  consideration  for a loan made by  Michael  D.  Lockwood  to the
Company on March 5, 2001. The additional consideration consisted of amending the
terms of the original  Promissory Note as follows.  1) The payment due dates for
all accrued but unpaid  interest of  September 5, 2001 and December 5, 2001 were
extended  to March 5, 2002,  when all unpaid  principal  and  accrued but unpaid
interest was due; 2) Interest shall be deemed to have accrued at the rate of 10%
until March 5, 2002,  rather than the default  rate  provided in the  Promissory
Note; 3) principal  and interest and accrued  interest was not paid on or before
March 5, 2002;  therefore,  all unpaid interest and principal now bears interest
at a rate of 13.5%. The Company did not repay the Promissory Note and the entire
amount of principal and interest is currently  outstanding.  The market value of
the Company's stock on February 19 was $.86.

------------------------------------- ------------ ------------------ ----------
  WARRANT HOLDER    ORIGINAL DATE      NUMBER OF     REPLACEMENT      PRICE PER
                                        SHARES          DATE            SHARE
------------------------------------- ------------ ------------------ ----------
Algonquin Capital  January 27, 2000   1,000,000    February 19, 2002    $.50
    Management
------------------------------------- ------------ ------------------ ----------
Algonquin Capital  August 29, 2000      688,000    February 19, 2002    $.50
    Management
------------------------------------- ------------ ------------------ ----------
     Lockwood      August 29, 2000      100,000    February 19, 2002    $.50
 Children's Trust
------------------------------------- ------------ ------------------ ----------
Algonquin Capital  March 5, 2001      1,000,000    February 19, 2002    $.50
    Management
------------------------------------- ------------ ------------------ ----------
Algonquin Capital  September 19, 2001   500,000    February 19, 2002    $.50
    Management
------------------------------------- ------------ ------------------ ----------

      12)   Issuance of Warrants to John V. Doyle

      On February 19, 2002, the Company cancelled a total of 266,015 warrants to
John V. Doyle with an exercise  price of $1.50 per share and  re-issued  266,015
warrants with an exercise  price of $.50 per share,  with an expiration  date of
February 18, 2007. This was done as additional  consideration for a loan made by
John V.  Doyle to the  Company on March 5, 2001.  The  additional  consideration
consisted of amending the terms of the original  Promissory Note as follows:  1)
The payment due dates for all accrued but unpaid  interest of  September 5, 2001
and December 5, 2001 were extended to March 5, 2002,  when all unpaid  principal
and accrued  but unpaid  interest  was due; 2) Interest  shall be deemed to have



                                       45
<PAGE>


accrued at the rate of 10% until March 5, 2002,  rather  than the  default  rate
provided in the Promissory  Note; 3) principal and interest and accrued interest
was not paid on or before  March 5,  2002;  therefore  all unpaid  interest  and
principal now bears  interest at a rate of 13.5%.  The Company did not repay the
Promissory  Note and the entire  amount of  principal  and interest is currently
outstanding. The market value of the Company's stock on February 19 was $.86.

------------------ -----------------  ------------ ------------------ ----------
  WARRANT HOLDER     ORIGINAL DATE     NUMBER OF    REPLACEMENT        PRICE PER
                                        SHARES         DATE              SHARE
------------------ -----------------  ------------ ------------------ ----------
  John V. Doyle,    January 28, 2000    15,338      February 19, 2002      $.50
    as Trustee
------------------ -----------------  ------------ ------------------ ----------
  John V. Doyle     January 28, 2000    30,677      February 19, 2002      $.50
------------------ -----------------  ------------ ------------------ ----------
  John V. Doyle     August 29, 2000     20,000      February 19, 2002      $.50
------------------ -----------------  ------------ ------------------ ----------
  John V. Doyle     March 5, 2001      200,000      February 19, 2002      $.50
------------------ -----------------  ------------ ------------------ ----------

      13)   Issuance of Convertible Debenture to Barry G. Bampton

      On February 21, 2002, the Company issued a five-year convertible debenture
for $50,000.  The note accrues  interest at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's  common stock at $.70
per share. As additional  consideration,  the Company  granted 357,143  warrants
with an exercise  price of $.70 per share,  with an expiration  date of February
20,  2007.  The market price for the  Company's  common stock on February 21 was
$.75

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2/21/02       $50,000     Common      71,428       $.70        2/21/07
---------------------------------------------------------------------------
---------------------------------------------------------------------------
                          Warrants    357,143      $.70        2/20/07
---------------------------------------------------------------------------

      14)   Issuance of Promissory Note to John Cavalier

      On February 26, 2002,  the Company  issued a one-year  promissory  note to
John Cavalier for $25,000. The note accrues interest at a rate of 13% per annum.
If the  principal  and  interest  are not paid when due,  then they  shall  bear
interest  thereafter  at a rate of 13.5%.  If the Company  elects to pre-pay any
principal  or  interest,  then the lender has the right to convert any amount of
the  prepayment of the principal or interest into the Company's  common stock at
$.75 per share. As additional consideration, the Company granted 25,000 warrants
to John Cavalier with an exercise price of $.75 per share and an expiration date
February 25, 2003.  The market price for the Company's  common stock on February
26 was $.80.

      15)   Issuance  of Stock for  Default on  Interest  Payments to Melaroba
Corporation

      On February 28, 2002  pursuant to the default  provisions  of a Promissory
Note dated  October  12,  2001 the  Company  issued  150,000  shares to Melaroba
Corporation.  The market  price for the  Company's  common stock on February 28,
2002 was $.75.

      16)   Issuance of Stock to D. Weckstein & Company, Inc.

      On February 28, 2002  pursuant to that certain  Extension and Expansion to
Weckstein's  existing  Consulting  Agreement  dated March,  26, 2001 the Company
issued to Weckstein  200,000 shares with piggy back right of  registration.  The
market price of the Company's common stock on February 28, 2002 was $.75.

      17)   Issuance of Promissory Note to Jay Watson

      On March 6, 2002,  the Company  issued a one-year  promissory  note to Jay
Watson for $50,000. The note accrues interest at a rate of 13% per annum. If the
principal  and  interest  are not paid when due,  then they shall bear  interest
thereafter at a rate of 13.5%. If the Company elects to pre-pay any principal or
interest,  then the lender has the right to convert any amount of the prepayment
of the principal or interest into the Company's  common stock at $.75 per share.
As additional  consideration,  the Company granted 50,000 warrants to Jay Watson
with an exercise  price of $.75 per share and an expiration  date March 5, 2003.
The market price for the Company's common stock on March 5 was $.82.



                                       46
<PAGE>

      18)   Issuance of  Convertible  Debenture to Venture  Investment  Group,
Inc.

      On March 7, 2002, the Company issued a five-year convertible debenture for
$100,000.  The note  accrues  interest  at a rate of 12% per  annum and both the
principal and interest are convertible  into the Company's  common stock at $.70
per share. As additional  consideration,  the Company  granted 714,286  warrants
with an exercise  price of $.70 per share,  with an expiration  date of February
20, 2007.  Venture  Investment Group, Inc., and Frankie Foo received 574,286 and
140,000 warrants,  respectively. The market price for the Company's common stock
on February 21 was $.75.

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
3/07/02       $100,000    Common      142,857      $.70        3/07/07
---------------------------------------------------------------------------
                          Warrants    714,286      $.70        3/06/07
---------------------------------------------------------------------------

      19)   Issuance of Convertible Debentures

      On March  26,  2002,  the  Company  issued  three,  five-year  convertible
debentures, one for $50,000 to Barry G. Bampton, one for $25,000 to Nicole Louis
Bampton and one for $25,000 to Nicole Ann Bampton.  The notes accrue interest at
a rate of 12% per annum and both the principal and interest are convertible into
the Company's common stock at $.70 per share. As additional  consideration,  the
Company granted 714,285 warrants with an exercise price of $.70 per share,  with
an expiration  date of March 25, 2007.  Barry G. Bampton,  Nicole Louise Bampton
and  Nicole  Ann  Bampton  received  357,143,   178,571  and  178,571  warrants,
respectively.  The market price for the Company's common stock on March 26, 2002
was $.93.

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
3/26/02       $50,000     Common      71,429       $.70        3/26/07
---------------------------------------------------------------------------
                          Warrants    357,143      $.70        3/25/07
---------------------------------------------------------------------------
3/26/02       $25,000     Common      35,714       $.70        3/26/07
---------------------------------------------------------------------------
                          Warrants    178,571      $.70        3/25/07
---------------------------------------------------------------------------
3/26/02       $25,000     Common      35,714       $.70        3/26/07
---------------------------------------------------------------------------
                          Warrants    178,714      $.70        3/25/07
---------------------------------------------------------------------------


20)   Issuance of Warrants to Ricardo Inc.

      On April 8, 2002,  the Company  entered into a forbearance  agreement with
Ricardo Inc.,  which  establishes  a payment  schedule for repayment of the full
sums owed with  interest.  As additional  consideration,  the Company  issued to
Ricardo  Inc.  750,000  warrants for the purchase of common stock of the Company
for a period of four years that are  exercisable  at $.50 per share.  The market
price for the Company's common stock on April 8 was $.93.

      21)   Issuance of Convertible Debenture to Freedom Funding, Inc.

      On April 10, 2002,  the Company issued a five-year  convertible  debenture
for $100,000.  The note accrues interest at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's  common stock at $.65
per share. As additional  consideration,  the Company  granted 714,286  warrants
with an exercise  price of $.65 per share,  with an expiration  date of April 9,
2007. The market price for the Company's common stock on April 10 was $.90.

---------------------------------------------------------------------------
DATE OF       NOTE AMOUNT CONVERSION  NUMBER OF    PRICE PER   EXPIRATION
ISSUANCE                  SECURITIES  SHARES       SHARE       DATE
---------------------------------------------------------------------------
4/10/02       $100,000    Common      153,846      $.65        4/10/07
---------------------------------------------------------------------------
                          Warrants    769,231      $.65        4/09/07
---------------------------------------------------------------------------


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      Not applicable.




                                       47
<PAGE>

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

      None.


ITEM 5.  OTHER INFORMATION

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

      On January 29, 2002 Ocean Power signed an Asset  Purchase  Term Sheet with
Elektryon,  Inc. to acquire certain of Elektryon's  assets,  including rights to
the 100KW Powr/Mastr product line. The term sheet extends Ocean Power's existing
exclusive  license to the  Powr/Mastr  product  outside  the  United  States and
nonexclusive  license within the United States  through the period  necessary to
complete a definitive Asset Purchase  Agreement,  obtain a fairness opinion from
Ocean Power's investment banker and obtain  satisfaction of all other conditions
of sale.

      The  price  for the  purchase  will be paid in stock  only  against  three
milestones;  (1)  $7,000,000  in Ocean Power common stock (at the 20 day average
price at the time of closing or $2.00 per share, whichever is higher) upon final
transfer of all assets to Ocean Power, (2) $8,000,000 in common stock (at the 20
day average price or $4.00 per share,  whichever is higher) when the  Powr/Mastr
product  achieves  10,000 hours of  continuous,  failure-free  operation or when
Ocean  Power  achieves  $6,250,000  of sales over a three  month  period  with a
minimum  gross margin of 30%,  whichever  comes first,  and (3)  $10,000,000  of
common  stock (at the 20 day  average  price or $6.00 per  share,  whichever  is
higher)  when  the  Powr/Mastr  product  meets  certain  applicable   regulatory
requirements.  The  purchase  is subject to the  satisfaction  of certain  other
conditions  set  forth in the term  sheet,  including  approval  by the Board of
Directors of the  respective  companies,  a fairness  opinion from Ocean Power's
investment  banker and court  approval  of the  purchase as part of a Chapter 11
plan of  reorganization  by  Elektryon.

     The Mr. Edward  Juchniewicz became a director of Ocean Power on October 22,
2001 and resigned, for personal and family reasons, effective March 15, 2002.

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

      Ocean Power was informed in August,  2001,  that the staff of the Division
of  Enforcement  of the  Securities  and Exchange  Commission  is  conducting an
informal  investigation  concerning the Company and past sales of securities and
accounting   policies   relating   to  the   Company's   acquisition   of  Sigma
Elektroteknisk and its transactions with Aquamax International  Holdings, BV and
Keeran Corporation N.V. The Company is cooperating with the inquiry. The Company
cannot   predict  the  length  nor  the  potential   outcome  of  this  informal
investigation, nor any potential impact on the Company or its operations.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)   EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO.   DESCRIPTION                               LOCATION
------------  -------------------------------------     ------------------------

<S>           <C>                                       <C>
2.01          Sigma Share Purchase Agreement dated      Incorporated by reference to July
                                                        25, 2000 the Registrant's Report
                                                        filed on Form 8-K/A on October 19,
                                                        2000

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

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

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

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

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

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

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



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<PAGE>

EXHIBIT NO.   DESCRIPTION                               LOCATION
------------  -------------------------------------     ------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       49
<PAGE>

EXHIBIT NO.   DESCRIPTION                               LOCATION
------------  -------------------------------------     ------------------------------


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

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

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

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

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

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

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

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

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

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

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

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

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

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




                                       50
<PAGE>

EXHIBIT NO.   DESCRIPTION                               LOCATION
------------  -------------------------------------     ------------------------------


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

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

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

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

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

10.31         Proprietary and Confidential Agreement    Provided herewith.
              for Consultant Services, dated
              February 7, 2002 between Ocean Power and
              Jeffrey P. Nash.

10.32         Settlement Agreement, dated April 8, 2002 Provided herewith.
              between Ocean Pwoer and Ricardo, Inc.

10.33         Agreement, dated April 15, 2002 between   Provided herewith.
              Ocean Power and Hyperion Partners Corp.

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


      (b)   REPORTS ON FORM 8-K.

            On February 6, 2001, the Company filed a Current Report with respect
to Item 5 - Other Events on Form 8-K.







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<PAGE>

                                   SIGNATURES

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

Dated:      May 15, 2002                   OCEAN POWER CORPORATION

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
























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