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

                                  FORM 10-QSB
                                  -------------


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

                  For the quarterly period ended September 30,2001

                                       OR

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

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

                          Commission File Number 1-5742



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

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

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

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

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

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

     State the number of shares  outstanding of each of the issuer's  classes of
common equity, as of the latest  practicable date: The registrant had 38,439,094
shares of its $.01 par value common stock outstanding as of November 13, 2001.

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

                                       1
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)

                        CONSOLIDATED FINANCIAL STATEMENTS

                    September 30, 2001 and December 31, 2000




<PAGE>

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


                                     ASSETS
                                     ------

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

   Cash                                    $   247,417   $ 2,152,593
   Cash - restricted                            43,664        23,706
   Advances to employees                       356,720       320,567
   Prepaid expenses                            191,532       222,235
                                           -----------   -----------

     Total Current Assets                      839,333     2,719,101
                                           -----------   -----------

EQUIPMENT, NET                               1,106,356       922,980
                                           -----------   -----------

OTHER ASSETS

   Debt offering costs                           9,000          --
   Deposits                                     52,775        55,348
   Patents and licensing agreements, net     6,682,513     7,281,679
   Goodwill, net                             5,820,951     6,315,183
                                           -----------   -----------

     Total Other Assets                     12,565,239    13,652,210
                                           -----------   -----------

     TOTAL ASSETS                          $14,510,928   $17,294,291
                                           ===========   ===========

                                      F-1

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


<PAGE>

<TABLE>
<CAPTION>

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


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

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

<S>                                                             <C>             <C>
CURRENT LIABILITIES

   Accounts payable                                             $  3,946,117    $  1,127,414
   Accrued expenses                                                8,080,189       6,844,282
   Notes payable - related parties                                 1,165,277       1,317,618
   Notes and convertible debentures payable - current portion      2,742,047         488,457
   Research advances                                                    --           473,145
                                                                ------------    ------------

     Total Current Liabilities                                    15,933,630      10,250,916
                                                                ------------    ------------

LONG-TERM LIABILITIES

   Notes and convertible debentures payable                        2,207,784       1,294,588
                                                                ------------    ------------

     Total Long-Term Liabilities                                   2,207,784       1,294,588
                                                                ------------    ------------

     Total Liabilities                                            18,141,414      11,545,504
                                                                ------------    ------------

STOCKHOLDERS' EQUITY

   Preferred stock: 20,000,000 shares authorized of
    $0.001 par value; no shares outstanding                             --              --
   Common stock: 500,000,000 shares authorized of
    $0.01 par value; 38,439,094 and 38,149,942 shares
    issued and outstanding, respectively                             384,391         381,499
   Additional paid-in capital                                     30,349,020      25,611,288
   Deferred compensation and consulting expense                   (1,484,517)       (410,667)
   Other comprehensive income                                        320,442         195,258
   Deficit accumulated during the development stage              (33,199,822)    (20,028,591)
                                                                ------------    ------------

     Total Stockholders' Equity                                   (3,630,486)      5,748,787
                                                                ------------    ------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $ 14,510,928    $ 17,294,291
                                                                ============    ============
</TABLE>



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

                                      F-2
<PAGE>

<TABLE>
<CAPTION>

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






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

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

EXPENSES

   General and administrative           6,527,977       5,853,770       1,687,670       1,726,410      22,471,265
   Impairment of intangible assets           --           400,000            --           400,000         400,000
   Research and development             3,823,689         223,156       2,151,715          82,306       5,369,145
   Depreciation and amortization        1,253,141         246,069         423,925         168,859       1,736,500
                                      ------------    ------------    ------------    ------------    ------------

     Total Expenses                    11,604,807       6,722,995       4,263,310       2,377,575      29,976,910
                                     ------------    ------------    ------------    ------------    ------------

     LOSS FROM OPERATIONS             (11,604,807)     (6,722,995)     (4,263,310)     (2,377,575)    (29,976,910)
                                     ------------    ------------    ------------    ------------    ------------

OTHER INCOME (EXPENSE)

   Currency gain                              994            --               994            --             1,516
   Interest income                         32,117         115,861           2,841          36,283         247,661
   Loss on sale of assets                    --              --              --              --          (387,649)
   Interest expense                    (1,599,535)       (215,304)     (1,111,779)        (71,685)     (3,249,781)
                                     ------------    ------------    ------------    ------------    ------------

     Total Other Expense               (1,566,424)        (99,443)     (1,107,944)        (35,402)     (3,388,253)
                                     ------------    ------------    ------------    ------------    ------------

LOSS BEFORE EXTRAORDINARY
 ITEM                                 (13,171,231)     (6,822,438)     (5,371,254)     (2,412,977)    (33,365,163)

EXTRAORDINARY ITEM

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

     NET LOSS                         (13,171,231)     (6,657,089)     (5,371,254)     (2,412,977)    (33,199,822)
                                     ------------    ------------    ------------    ------------    ------------

OTHER COMPREHENSIVE INCOME
 (LOSS)

   Currency translation adjustment        125,184         198,927         (45,240)        198,927         320,442
                                     ------------    ------------    ------------    ------------    ------------

     TOTAL COMPREHENSIVE
       INCOME (LOSS)                 $(13,046,047)   $ (6,458,162)   $ (5,416,494)   $ (2,214,050)   $(32,879,380)
                                     ============    ============    ============    ============    ============
</TABLE>




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


                                      F-3

<PAGE>

<TABLE>
<CAPTION>

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



                                                     For the                    For the
                                               Nine Months Ended          Three Months Ended
                                                  September 30,               September 30,
                                         ---------------------------   --------------------------
                                             2001             2000       2001             2000
                                         -------------    ----------   ----------   -------------

      BASIC AND DILUTED LOSS PER
       SHARE

<S>                                      <C>              <C>          <C>          <C>
Operating loss                           $       (0.34)   $    (0.19)  $    (0.14)  $        (0.07)
Extraordinary item                                --            --           --              --
                                         -------------    ----------   ----------   -------------

   Total                                 $       (0.34)   $    (0.19)  $    (0.14)  $        (0.07)
                                         =============    ==========   ==========   =============

WEIGHTED AVERAGE NUMBER
 OF SHARES OUTSTANDING                      38,269,334    35,282,677   38,439,094       36,405,608
                                         =============    ==========   ==========   =============
</TABLE>




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


                                      F-4

<PAGE>

<TABLE>
<CAPTION>

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




                                                                                                                        Deficit
                                                                                                         Deferred      Accumulate
                                                Common Stock           Additional        Other          Compensation   During the
                                        ---------------------------      Paid-In     Comprehensive     and Consulting  Development
                                           Shares          Amount        Capital     Income (Loss)       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.

                                      F-5

<PAGE>

<TABLE>
<CAPTION>

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


                                                                                                                        Deficit
                                                                                                         Deferred      Accumulate
                                                Common Stock           Additional        Other          Compensation   During the
                                         ---------------------------     Paid-In     Comprehensive    and Consulting  Development
                                           Shares          Amount        Capital     Income (Loss)       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.

                                      F-6
<PAGE>

<TABLE>
<CAPTION>

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


                                                                                                                        Deficit
                                                                                                         Deferred      Accumulate
                                                Common Stock           Additional        Other          Compensation   During the
                                          ---------------------------     Paid-In     Comprehensive    and Consulting  Development
                                           Shares          Amount        Capital     Income (Loss)       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)



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

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

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

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

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

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

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

Amortization of deferred
 compensation and consulting
 expense (unaudited)                              --             --             --              --          166,070

Warrants issued in connection
 with debt obligations - 3rd quarter
 (unaudited)                                      --             --          999,243            --             --              --

Valuation adjustment to warrants
 granted for consulting services
 (unaudited)                                      --             --         (291,880)           --          291,880            --

Currency translation adjustment
(unaudited)                                       --             --             --           125,184           --              --

Net loss for the nine months ended
September 30, 2001 (unaudited)                    --             --             --              --             --      (13,171,231)
                                          ------------   ------------   ------------   -------------   -------------   ------------
Balance, September 30, 2001
 (unaudited)                                38,439,094   $    384,391   $ 30,349,020    $    320,442   $ (1,484,517)  $(33,199,822)
                                          ------------   ------------   ------------   -------------   -------------   ------------
</TABLE>



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

                                      F-7
<PAGE>

<TABLE>
<CAPTION>

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


                                                                                           Inception on
                                                            For the Nine Months Ended         March 26,
                                                                   September 30,           1992 Through
                                                           ----------------------------    September 30,
                                                               2001             2000          2001
                                                           ------------    ------------    ------------

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

   Net loss                                                $(13,171,231)   $ (6,657,089)   $(33,199,822)
   Adjustments to reconcile net loss to net
    cash used by operating activities:
     Depreciation and amortization                            1,253,141         246,069       1,736,500
     Deferred compensation and consulting expense               166,070         225,000         495,403
     Value of common stock, warrants, options
      and discounts on equity instruments issued
      for services                                                 --         3,188,931       3,802,930
     Loss on sale of assets                                        --              --           387,649
     Amortization of debenture discount                       1,163,169            --         1,813,169
     Amortization of debt issue costs                             3,000            --             3,000
     Gain on disposition of debt                                   --              --          (165,340)
     Impairment loss                                               --           400,000         400,000
   Change in operating asset and liability
      accounts,  net of amounts acquired in
      business combination:
     (Increase) in overpayment receivable                          --          (162,350)           --
     (Increase) decrease in advances to employees,
      prepaid expenses, deposits and debt offering costs        128,323        (348,768)     (5,758,254)
     Decrease in other assets                                      --           775,872            --
     Increase (decrease) in accounts payable                  3,085,836        (685,586)      4,119,297
     Increase (decrease) in accrued expenses                  1,164,907        (150,428)      7,782,056
                                                           ------------    ------------    ------------

       Net Cash Used by Operating Activities                 (6,206,785)     (3,168,349)    (18,583,412)
                                                           ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Payments on license agreement                                   --          (400,000)       (400,000)
   Cash acquired in Sigma acquisition                              --           142,254         142,254
   Proceeds from sale of assets                                    --              --                 1
   Purchase of fixed assets                                    (354,575)       (745,615)     (1,098,550)
   Equipment procurement costs                                     --              --          (564,110)
                                                           ------------    ------------    ------------

       Net Cash Used by Investing Activities                   (354,575)     (1,003,361)     (1,920,405)
                                                           ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Proceeds from notes payable                                4,775,000            --         4,775,000
   Repayment of notes payable - related parties                (164,341)           --        (1,685,541)
   Repayment of notes payable                                  (346,517)     (2,566,019)     (1,685,591)
   Proceeds from notes payable - related parties                 12,000          82,178       7,236,287
   Issuance of convertible debentures                           400,000            --         1,050,000
   Common stock issued for cash                                    --        10,240,750      11,131,032
   Stock offering costs                                            --              --           (26,289)
                                                           ------------    ------------    ------------

       Net Cash Provided by Financing Activities           $  4,676,142    $  7,756,909    $ 20,794,898
                                                           ------------    ------------    ------------
</TABLE>




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

                                      F-8

<PAGE>

<TABLE>
<CAPTION>

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


                                                                                           Inception on
                                                            For the Nine Months Ended        March 26,
                                                                   September 30,           1992 Through
                                                           ----------------------------    September 30,
                                                               2001             2000           2001
                                                           ------------    ------------    ------------

<S>                                                        <C>             <C>             <C>
NET INCREASE (DECREASE) IN CASH                             $(1,885,218)   $ 3,585,199      $   291,081

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

CASH AT END OF PERIOD                                       $   291,081    $ 3,953,475      $   291,081

CASH PAID FOR:

   Interest                                                 $    68,459    $    12,946      $    81,405
   Income taxes                                             $      --      $      --        $      --

NON-CASH FINANCING ACTIVITIES

   Value of common stock, warrants, options and
    discounts on equity instruments issued for
    services                                                $      --      $ 3,188,931      $ 3,802,930
   Equity instruments issued for deferred
     consulting expense                                     $ 1,533,000    $   900,000      $ 2,273,000
   Common stock issued for recapitalization                 $      --      $      --        $ 2,761,773
   Common stock issued for conversion of debt               $   456,287    $   831,812      $ 2,963,572
   Acquisition of licenses through
   license agreement payable                                $      --      $ 6,940,000      $ 6,940,000
   Options granted for deferred compensation                $   861,000    $      --        $   861,000

</TABLE>



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

                                      F-9

<PAGE>



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


NOTE 1 -      BASIS OF FINANCIAL STATEMENT PRESENTATION

              The  accompanying   unaudited  condensed   consolidated  financial
              statements have been prepared by the Company pursuant to the rules
              and regulations of the Securities and Exchange Commission. Certain
              information  and  footnote   disclosures   normally   included  in
              financial   statements   prepared  in  accordance  with  generally
              accepted  accounting  principles have been condensed or omitted in
              accordance  with  such  rules  and  regulations.  The  information
              furnished  in  the  interim   condensed   consolidated   financial
              statements 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, 2000 Annual Report on Form 10-KSB.  Operating  results for the
              nine  months  ended   September  30,  2001  are  not   necessarily
              indicative of the results that may be expected for the year ending
              December 31, 2001. On June 18, 2001,  the Company  incorporated  a
              wholly owned subsidiary named Powerco US, Inc.

NOTE 2 -      PATENTS AND LICENSING AGREEMENT

              The  Company's  patents and  license  agreement  consisted  of the
              following at September 30, 2001 and December 31, 2000:
<TABLE>
<CAPTION>

                                                               September 30,       December 31,
                                                                   2001               2000
                                                              -----------------  ------------------
                                                                 (Unaudited)
<S>                                                           <C>                <C>
   Patents                                                    $         971,592  $          973,658
   Licensing Agreement - Aquamax and Keeran                           6,540,000           6,540,000
   Accumulated amortization                                            (829,079)           (231,979)
                                                              -----------------  ------------------

                                                              $       6,682,513  $        7,281,679
                                                              =================  ==================
</TABLE>

              As part of the  purchase of Sigma  (Note 3), the Company  acquired
              patents  valued at their  fair  value of  $971,592,  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 September  30, 2001.  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  September 30, 2001 and  accumulated  amortization at
              September 30, 2001 amounted to $56,343 and $127,729,  respectively
              (Patents)  and  $510,500  and  $701,350,  respectively  (Licensing
              Agreement).

NOTE 3 -      BUSINESS COMBINATION

              In August 2000,  the Company  acquired  SIGMA  Elektroteknisk,  AS
              (SIGMA) by exchanging 1,718,748 shares of its common stock for all
              of the common stock of SIGMA. The acquisition was accounted for as
              a purchase in accordance with APB 16, "Business Combinations." The
              acquisition of the total  acquisition  cost over the fair value of
              the net assets  acquired of $6,589,756 is being  amortized over 10
              years by the straight-line  method.  Amortization expense amounted
              to $494,232 and $109,850 for the nine months ended  September  30,
              2001 and 2000, respectively.


                                      F-10
<PAGE>


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

NOTE 4 -      NOTES AND DEBENTURES PAYABLE

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

                                                                                        September 30,       December 31,
                                                                                             2001               2000
                                                                                       -----------------  ------------------
                                                                                          (Unaudited)
<S>                                                                                    <C>                <C>
              Notes payable to two parties bearing interest at
              10.5%, collateralized by guarantee of the president
               of the Company, due in full by March 5, 2002.                           $       3,000,000  $                -

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

              Notes payable to ten parties bearing interest at 10%,
               without collateral, due in full one year from issue.                            1,175,000                   -

              Three (3)  convertible  debentures  payable due August to November
               2004,  bearing interest at 12% per annum,  uncollateralized,  and
               convertible into shares of the
               Company's common stock at $1.50 per share.                                        550,000             550,000

              Three (3) convertible  debentures  payable due August to September
               2006,  bearing interest at 12% per annum,  uncollateralized,  and
               convertible into shares of the
               Company's common stock at $1.00 to $1.50 per share.                               400,000                   -

              Four (4) convertible  debentures  payable due August 2006, bearing
               interest at 12% per annum,  uncollateralized and convertible into
               shares of the
               Company's common stock at $1.50 per share.                                         71,000                   -

              Less discount resulting from allocation of proceeds
               to warrants and conversion rights issued with the debt                         (1,880,049)                  -
                                                                                       -----------------  ------------------
                      Subtotal                                                                 3,915,951

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began May 1, 2000, uncollateralized.                                96,004             121,049

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began May 10, 2000, uncollateralized.                              417,702             569,964

              Note payable to Silent Clean Power bearing interest at 12.00%, due
               in equal semi-annual payments, collateralized
               by patents and licenses                                                           494,396             498,696

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual
               payments which began April 3, 2000, uncollateralized.                              25,778              43,336
                                                                                       -----------------  ------------------

              Total Notes and Debentures Payable                                       $       4,949,831  $        1,783,045
                                                                                       =================  ==================
</TABLE>


                                      F-11

<PAGE>


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


NOTE 4 -      NOTES AND DEBENTURES PAYABLE (Continued)

              Annual maturities of notes and debentures payable are as follows:

                  Years Ending
                  December 31,
                  ------------

                      2002                             $       2,742,047
                      2003                                     1,186,784
                      2004                                       550,000
                      2005                                             -
                      2006                                       471,000
                                                       -----------------

                                                       $       4,949,831
                                                       =================

              On November  13,  2001,  the Company  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, of accrued
              interest,  will be paid in Swedish  kroner on December 1, 2001 and
              principle  in the  approximate  amount  of  $83,000  plus  accrued
              interest  from December 1, 2001 will be paid on December 31, 2001.
              Accordingly,  as of  September  30,  2001,  the  company is not in
              default on the agreement to purchase the patents from Silent Clean
              Power.  The Company  expects it will obtain the capital  needed in
              order to make the payment to Silent  Clean Power either by raising
              funds from third  parties  or, if such  funding is not  available,
              through  contributions  to capital by the three  directors  of the
              Company,  each  of whom  have  agreed  jointly  and  severally  to
              contribute funds necessary to make such payment to the Company. In
              the event  that the  Company  is unable  to make such  payment  to
              Silent Clean Power, it would have a material adverse effect on the
              Company  and could  result  in an  impairment  charge  on  Sigma's
              assets, including Stirling engine patents and its goodwill.

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

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


                                    F-12

<PAGE>


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


NOTE 4 -      NOTES AND DEBENTURES PAYABLE (Continued)

              As additional  consideration for $1,175,000 of the non-convertible
              notes  payable,  the  Company  granted  425,006  warrants  with an
              exercise  price of $1.50 per share and  300,000  warrants  with an
              exercise price of $1.00 per share,  all with an expiration date of
              five years from the dates of grant  (third  quarter of 2001).  The
              warrants were valued at an average of $1.63 per share  ($1,187,871
              in  total)  pursuant  to the  Black  Scholes  pricing  model.  The
              proceeds  were  allocated  between  debt  and  additional  paid-in
              capital in  proportion  to the relative fair value of the debt and
              equity (warrants and beneficial conversion rights) elements of the
              transaction. The portion allocated to equity was $528,244, and the
              remaining  balance of $646,756 has been  recorded as debt,  net of
              discount.  The discount of $528,244  will be amortized to interest
              expense  over the term of the debt  using the  effective  interest
              rate method.

              During the quarter ended  September 30, 2001,  the Company  issued
              convertible  debentures  with  detached  warrants in exchange  for
              $400,000  in cash from  three  entities  and for  interest  due of
              $71,000 to four entities. The convertible debentures bear interest
              at 12% and are due in five years from the dates of issuance unless
              converted into the Company's common stock. The debentures  payable
              are  convertible  into the  Company's  common  stock at a price of
              $1.00  to  $1.25  per  share.   Concurrent  with  the  convertible
              debentures,  the Company granted 794,667  warrants to purchase one
              share of the  Company's  common  stock with an  exercise  price of
              $1.00 to $1.25 per share.  The warrants were granted as additional
              consideration   to  the  lenders   for  funding  the   convertible
              debentures and will be valued at $2,273,433  pursuant to the Black
              Scholes pricing model.  The proceeds of the convertible  debenture
              will be allocated  between debt and additional  paid-in capital in
              proportion  to the relative  fair value of the debt and the equity
              (warrants  and  beneficial  conversion  features)  elements of the
              transactions.  The  portion  to be  allocated  to  equity  will be
              $379,392.  The discount of $379,392  will be amortized to interest
              expense  over the term of the debt  using the  effective  interest
              rate method.

NOTE 5-       ACCRUED EXPENSES

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

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


<S>                                                                           <C>                <C>
                  Accrued payroll taxes payable                               $          40,744  $          26,657
                  Accrued interest payable - payroll                                     52,717             52,717
                  Accrued payroll tax penalty                                            98,845             98,845
                  Accrued interest payable - notes                                      440,801            118,155
                  Other accrued items                                                   907,082              7,908
                  Accrued license agreement costs (Note 2)                            6,540,000          6,540,000
                                                                              -----------------  -----------------

                                Total                                         $       8,080,189  $       6,844,282
                                                                              =================  =================
</TABLE>

                                      F-13

<PAGE>


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

NOTE 6-        GOING CONCERN

               The Company's  financial  statements are prepared using generally
               accepted  accounting  principles  applicable to a going  concern,
               which  contemplates  the realization of assets and liquidation of
               liabilities in the normal course of business. The Company has had
               limited   activities   since   inception   and  is  considered  a
               development stage company because it has no significant operating
               revenues and planned principal operations have not yet commenced.
               The  Company  has  incurred  losses  from its  inception  through
               September 30, 2001 of approximately $33,000,000. The Company does
               not have an established  source of funds  sufficient to cover its
               operating  costs and,  accordingly,  there is  substantial  doubt
               about its ability to continue as a going concern.

               In order to develop a reliable  source of revenues  and achieve a
               profitable  level of  operations,  the Company  will need,  among
               other things,  additional capital  resources.  Management's plans
               include  raising  additional  capital  through the sale of common
               stock,  the  proceeds  of  which  will  be used  to  develop  the
               Company's   products,   pay   operating   expenses,   and  pursue
               acquisitions and strategic alliances. The Company expects that it
               will need  $20,000,000  to  $30,000,000  of additional  funds for
               operations  and expansion in 2001 and 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  establish
               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.

NOTE 7-        COMMITMENTS AND CONTINGENCIES

               Wohlreich
               ---------

               During  January  2000,  the  Company  entered  into a  three-year
               consulting   agreement  with  Clement  J.  Wohlreich  to  receive
               financial,  marketing  and  management  services.  The  agreement
               called for the Company to issue 100,000 units, each consisting of
               one share of the Company's  common stock and one attached warrant
               granting  the  right  for three  years to  purchase  one share of
               common  stock for an exercise  price of $1.50.  As the  agreement
               provided for issuance of the units upon commencement of services,
               the Company accrued a liability and a deferred consulting expense
               as a reduction of shareholders'  equity in an amount equal to the
               value of the common  stock and  warrant at the  inception  of the
               agreement. The liability was converted to equity upon issuance of
               the  units  and the  value  of the  stock  and  warrants  will be
               expensed  over  the  term of the  agreement  upon  completion  of
               services each quarter.  Pursuant to EITF 96-18,  "Accounting  For
               Equity  Instruments  That Are Issued To Other Than  Employees For
               Acquiring Or In Conjunction With Selling, Goods Or Services," the
               Company will  continue to revalue the warrants  until earned upon
               completion of services.  As of September 30, 2000, the consulting
               contract was valued at $562,000,  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 September 30,
               2001 of $162,000,  as  determined  by the Black  Scholes  pricing
               model.  For the quarter  ended  September  30, 2001,  the Company
               recorded   compensation   expense   of   $(12,967)   representing
               amortization of the contract offset by the change in value of the
               warrants during the quarter ended  September 30, 2001,  leaving a
               remaining  balance of $234,167 at September  30,  2001,  which is
               included as a reduction of stockholders' equity.
                                      F-14
<PAGE>

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


NOTE 7-        COMMITMENTS AND CONTINGENCIES (Continued)

               Martineau
               ---------

               During June 2001, the Company entered into a two-year  consulting
               agreement  with Gene  Martineau  to receive  services  related to
               interfacing with institutional investors and brokerage firms. The
               Company  to 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.  As of
               September  30,  2001,  the  consulting  contract  was  valued  at
               $558,120,  representing the 120,000 shares of common stock issued
               on June 30, 2001 at the then trading price of $2.80 per share and
               the value of the warrants at September  30, 2001 of $222,120,  as
               determined by the Black  Scholes  pricing  model.  For the period
               ended  September  30,  2001,  the Company  recorded  compensation
               expense  of $65,020  representing  amortization  of the  contract
               offset by the change in value of the warrants  during the quarter
               ended September 30, 2001, leaving deferred  compensation  expense
               with a remaining balance of $465,100 at September 30, 2001, which
               is included as a reduction of stockholders' equity.

               On June 20, 2001, the Company (through its subsidiary Powerco US,
               Inc.)  entered  into an  employment  agreement  with David  Moard
               (Moard).  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,  and (2) Moard was issued
               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 $66,593,  which
               represents the deferred  salary  through  September 30, 2001, and
               has  expensed  $75,750,  which  represents  amortization  of  the
               intrinsic value of the stock options.  At September 30, 2001, the
               unamortized  intrinsic  value of the stock  options  amounted  to
               $785,250,  which is  included  as an offset to equity as deferred
               compensation  expense  and will be  amortized  over  the  vesting
               period of the options.

               IF, LLC
               -------

               On September 1, 2001, the Company (through its subsidiary Powerco
               US, Inc.) entered into a 24 month  consulting  agreement with IF,
               LLC  to  provide   consulting   services   relating  to  business
               development  through proactive  communication to new customers of
               Powerco's distribution  generation equipment and to assist in the
               development and forecasts of Powerco's business plan. The Company
               has agreed to pay IF, LLC $15,000 per month of which $10,000 will
               be paid monthly and $5,000 will be accrued  until the Company has
               received a minimum investment of $2,000,000.

                                      F-15
<PAGE>


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


NOTE 7-        COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN
               ------------------

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

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

               Under the terms of the License  Agreement,  the Company agreed to
               pay a total of $4,000,000  and 600,000 shares of its common stock
               for the  rights  under  the  License  Agreement  under a  payment
               schedule  contingent on various factors as to timing but to be no
               later than  December 31, 2000.  The Company has paid  $400,000 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.

                                      F-16

<PAGE>


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


NOTE 7-        COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN (Continued)
               ------------------

               The   license   agreement   was   signed  by  the   Company   and
               Aquamax/Keeran  representatives  as of September  21,  2000,  but
               because of questions  raised as to the identity and  authority of
               one  Aquamax/Keeran  signatory,  an  exhibit  was  added  to  the
               agreement solely to clarify the matter.  Revised  signature pages
               (signed by the original  Aquamax/Keeran  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.

                                      F-17

<PAGE>


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

NOTE 7-        COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND 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.

                                      F-18
<PAGE>


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


NOTE 7-        COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN  (Continued)
               -------------------

               The  Company  has  demanded  arbitration  of  this  dispute  with
               Aquamax/Keeran  as  contemplated  in the license  agreement.  The
               arbitration  procedures  have not commenced while the Company and
               Licensors  have been  involved in  settlement  negotiations.  The
               negotiations  resulted in the execution by both parties,  as well
               as Hadwaco Ltd. Oy and Hackman Oy Abp, of a non-binding Letter of
               Intent (LOI). The LOI was executed by the various parties between
               June 15, 2001 and June 20, 2001.  Contemporaneously,  the Company
               entered into a related  non-binding Letter of Intent with Hadwaco
               Ltd Oy and  Hackman Oy Abp.  The  agreement  of the  parties,  as
               memorialized in both LOIs, 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.

                                      F-19

<PAGE>


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


NOTE 7-        COMMITMENTS AND CONTINGENCIES (Continued)

               AQUAMAX AND KEERAN

               The Company was to provide  senior debt funding up to a principle
               aggregate  amount of $7,500,000 over a period of three years from
               the date of closing of the Hadwaco purchase.

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

                                      F-20

<PAGE>


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

NOTE 7-        COMMITMENTS AND CONTINGENCIES (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. During the
               three-month period ended September 30, 2001, such costs consisted
               of travel  costs and  research  and  development  costs.  For the
               three-months  ended  September  30,  2001,  the Company  expensed
               $9,750 of travel costs for monthly  planning and update  meetings
               in connection with the collaboration which is included in general
               and administrative  expenses and $5,758 of engineer  compensation
               costs  which  are  included  in  the  research  and   development
               expenses.

               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.

                                      F-21

<PAGE>


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


NOTE 7 -       COMMITMENTS AND CONTINGENCIES (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  September  30, 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.

NOTE 8 -       SUBSEQUENT EVENTS

               Legal Proceedings
               -----------------

               On October 5, 2001,  Ricardo  Inc.  filed a lawsuit  against  the
               Company's subsidiary, Sigma Elektroteknisk AS in the Forliksklage
               Court (Minor Civil Court) of Norway. The lawsuit seeks 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. The
               total amount claimed to be due and owing is $1,458,248 plus legal
               costs incurred in processing  the claim.  The Company has accrued
               $1,458,248 which is included in accounts payable.


                                      F-22
<PAGE>


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

               Elektryon, Inc.
               ---------------

               On October 10, 2001, the Company and Elektryon, Inc. entered into
               a  licensing  agreement  whereby  the  Company  was  granted  the
               non-exclusive  right and license within the United States and the
               exclusive,  worldwide right and license outside the United States
               to buy, make, have made, use, distribute,  install, offer to sell
               and sell  generators  designed  to power large  commercial  sites
               which utilize Elektryon's patented improvements.  The term of the
               agreement is 5 years.  The Company must pay to Elektryon  the sum
               of $150,000 and price per  licensed  product to be agreed upon by
               the parties from time to time, which shall in no event exceed the
               lowest  price  charged  to any other  third  party  purchaser  of
               Elektryon's  licensed  products.  As further  consideration,  the
               Company must pay five (5) percent of the raw cost of any licensed
               product, on a per unit basis, which the Company makes or has made
               by any party other than Elektryon.

               Melaroba Note Payable
               ---------------------

               On October 12,  2001,  the  Company  borrowed  $225,000  from the
               Melaroba  Corp.  The note bears  interest at 10% per annum and is
               due within 90 days of the  issuance  of the note.  If the note is
               not repaid  within 90 days,  the Company  agrees to issue 150,000
               shares of common  stock.  The Company has accounted for this note
               as a convertible  note and has  allocated  $120,000 to additional
               paid-in   capital,   which  represents  the  fair  value  of  the
               beneficial  conversion feature.  The discount of $120,000 will be
               amortized to interest expense over the term of the debt using the
               effective interest rate method.


                                      F-23

<PAGE>


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


NOTE 8 -       SUBSEQUENT EVENTS

               Venture Investment  Group, Inc. Convertible Debenture Payable
               -------------------------------------------------------------

               On October 29, 2001, the Company  borrowed  $100,000 from Venture
               Investment  Group, Inc. The note bears interest at 12% and is due
               in five years from the date of issuance unless converted into the
               Company's common stock. The debenture payable is convertible into
               the  Company's  common  stock  at a price  of  $1.00  per  share.
               Concurrent  with the convertible  debenture,  the Company granted
               300,000  warrants to purchase one share of the  Company's  common
               stock with an  exercise  price of $1.00 per share.  The  warrants
               were  granted  as  additional  consideration  to the  lender  for
               funding the convertible  debenture and will be valued at $921,200
               pursuant to the Black Scholes pricing model.  The proceeds of the
               convertible   debenture  will  be  allocated   between  debt  and
               additional  paid-in  capital in  proportion  to the relative fair
               value  of the  debt  and  the  equity  (warrants  and  beneficial
               conversion features) elements of the transactions. The portion to
               be allocated to equity will be $100,000. The discount of $100,000
               will be amortized  to interest  expense over the term of the debt
               using the effective interest rate method.

               EPRIsolutions
               -------------

               On November 5, 2001, the Company's  subsidiary,  Powerco US, Inc.
               and EPRIsolutions entered into an equipment lease and fixed price
               services agreement for a term of 14 months,  commencing  November
               1, 2001.  Powerco will lease to EPRIsolutions for the term of the
               agreement  and deliver to its  EPRI-Peac  facility  in  Knoxville
               Tennessee a Sigma beta Stirling engine  generator.  EPRIsolutions
               will conduct a  technology  assessment  and baseline  testing and
               validation of the engine as part of collaboration between Powerco
               and  EPRIsolutions  to test and evaluate  market  entry  Stirling
               engines  and pilot the  market  introduction  of beta  systems to
               North America energy companies.  In exchange for the lease of the
               equipment,  support  services  to  be  provided  by  Powerco  and
               shipping costs for the engine,  EPRIsolutions will pay to Powerco
               a firm fixed  price of  $79,000.  At the end of the test  period,
               EPRIsolutions  will prepare and deliver to Powerco a final report
               on the  results  of  its  baseline  tests  of  the  engine  unit.
               Additionally,  EPRIsolutions  will  receive an option to purchase
               stock in Powerco for a value equal to $75,000 at the market value
               of the  stock  at the time of  exercise,  exercisable  after  the
               conclusion of the testing period provided in the agreement.

NOTE 9-        NEWLY ISSUED 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 occurring after June 30,
               2001 and certain transition provisions that affect accounting for
               business  combinations prior to June 30, 2001 are effective as of
               the date that SFAS No. 142 is applied in its entirety, which will
               be January 1, 2002 for the  Company.  SFAS No. 142 is  effective,
               generally,  in fiscal years  beginning  after  December 15, 2001,
               which will be the fiscal  year ending  December  31, 2002 for the
               Company.

                                      F-24
<PAGE>


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


NOTE 9-        NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

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

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

               While the Company has not  completed  the process of  determining
               the  effect  of  these  new  accounting   pronouncements  on  its
               consolidated financial statements,  the Company currently expects
               that there will be no  reclassification  in  connection  with the
               transition  provisions of SFAS No. 141 based on clarifications of
               the  transition  provisions  issued by the FASB in October  2001.
               Accordingly,  the Company expects that, after  implementation  of
               SFAS No. 142, all intangible  assets will be amortizable  and the
               goodwill will not be amortizable.

               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  be  recorded   as  a  liability   when  those
               obligations  are  incurred,  with  the  amount  of the  liability
               initially  measured at fair value.  Upon initially  recognizing a
               liability for an accrued  retirement  obligation,  an entity must
               capitalize  the cost by  recognizing  an increase in the carrying
               amount of the related  long-lived asset. Over time, the liability
               is accreted to its present value each period, and the capitalized
               cost is  depreciated  over the useful life of the related  asset.
               Upon  settlement of the  liability,  an entity either settles the
               obligation for its recorded  amount or incurs a gain or loss upon
               settlement.  While the Company has not  completed  the process of
               determining  the effect of this new accounting  pronouncement  on
               its  consolidated  financial  statements,  the Company  currently
               expects  that  the  effect  of  SFAS  No.  143 on  the  Company's
               consolidated  financial  statements,  when it becomes  effective,
               will not be significant.

                                      F-25
<PAGE>


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


NOTE 9-        NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

               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 supercedes 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 the requirement of
               APB 30 that discontinued operations be measured at net realizable
               value or that entities include under "discontinued operations" in
               the financial  statements  amounts for operating losses that have
               not yet  occurred.  Additionally,  FAS 144  expands  the scope of
               discontinued  operations  to include all  components of an entity
               with  operations that (1) can be  distinguished  from the rest of
               the entity and (2) will be eliminated from the ongoing operations
               of the entity in a disposal transaction.

               While the Company has not  completed  the process of  determining
               the  effect  of  this  new   accounting   pronouncement   on  its
               consolidated financial statements,  the Company currently expects
               that the  effect of SFAS No.  144 on the  Company's  consolidated
               financial  statements,  when it  becomes  effective,  will not be
               significant.

NOTE 10-       RECENT DEVELOPMENTS

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

                                      F-26


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

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

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

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

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

Certain Business Developments

Ocean Power Corporation 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  capitol  had been
delays in  obtaining  relisting  on the NASDAQ  OTC  Bulletin  Board.  On Friday
September  7, 2001 the Company was  successful  in becoming  relisted on the OTC
(over-the-counter)  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

The  Company'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

                                       2
<PAGE>

MTC's outstanding debt. PTC Holdings  subsequently merged with the Company, then
named PTC Group,  in June 1999. PTC Group  continued as the surviving  corporate
entity conducting the business of PTC Holdings.

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

The Company has had no profit to date. It has experienced a total of $33,199,822
in losses from  inception  of current  operations  on March 26, 1992  through to
September 30, 2001.  The  Company's  losses have resulted from the fact that its
products are still in  development  and planned  principle  operations  have not
commenced.

At September  30, 2001,  the  Company's  cash  position  declined to $291,081 as
compared  to  $335,140  at June 30,  2001,  $2,683,723  at March 31,  2001,  and
$2,176,299 at December 31, 2000, and we have incurred  accounts  payable,  notes
payable,  and other  obligations  aggregating  $18,141,414.  During the 3 months
ended September 30, 2001, aggregate liabilities increased by $3,982,164.

At June 30,  2001,  the Company  was in  discussion  with Silent  Clean Power to
convert the current  semi-annual  principle  payment of  approximately  $83,000,
which was due on a note payable which is  collateralized  by patents used in the
Company's  Stirling engine business by its subsidiary,  Sigma, into stock in the
Company.  The  discussions  did not result in an  agreement  to convert  debt to
stock.  Management  intends  to  cure  the  delinquency  through  future  equity
infusions or borrowings,  and does not believe that the delinquencies affect the
company's  ownership of the patents.  On November 13, 2001, the Company 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,  will be made on December 1, 2001 in Swedish  kronor and  principle in
the amount of  approximately  $83,000 plus accrued interest from December 1 will
be paid on December 31, 2001 in Swedish kronor.

Accordingly,  as of  September  30,  2001 the  Company  is not in default of the
agreement to purchase the patents from Silent Clean Power.  The Company  expects
it will make the  payment to Silent  Clean  Power  either by raising  funds from
third parties or, if such funding is not  available,  through  contributions  to
capital by the three directors of the Company,  each of whom have agreed jointly
and severally to contribute to the Company funds necessary to make such payment.
In the event that the  Company is unable to make such  payment,  it would have a
material adverse effect on the Company and could result in an impairment  charge
on Sigma's assets, including Stirling engine patents and its goodwill.

Due to the increased  level of activity  projected  during the next three years,
additional  funding  will be  needed  and is being  sought.  From  January  1 to
November 13, 2001,  the Company has raised  $5,512,000 of  additional  financing
through  proceeds from notes payable and  convertible  debentures (see note 4 in
the financial statements for additional details on notes payable and convertible

                                       3
<PAGE>

debentures).  Also,  the Company has  received a loan of $12,000  from a related
party as of September 30, 2001.

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

In order to continue as a going concern,  develop a reliable source of revenues,
and achieve a profitable level of operations, the Company will need, among other
things, additional capital resources.  Management's plans to continue as a going
concern include raising  additional  capital through private  placement sales of
the  Company's  common stock and/or  loans from third  parties,  the proceeds of
which will be used to develop the Company's products, pay operating expenses and
pursue acquisitions and strategic  alliances.  In our Form 10-QSB for the second
quarter of 2001, the Company  indicated  that it expects to need  $20,000,000 to
$30,000,000 of additional funds for operations and expansion in 2001. Due to the
delays in fund  raising  caused in part by the  September  11 acts of war on the
United States,  the Company  expects that  $20,000,000  to  $30,000,000  will be
raised by the end of the first quarter of 2002, rather than the end of 2001. All
funds raised will be used to pay current debts and fund operations and expansion
consistent with the Company's business plan. However,  management cannot provide
any assurances that the Company will be successful in  accomplishing  any of its
plans.  Failure to raise sufficient capital could have a material adverse effect
on the company's results of operations, financial condition, and liquidity.

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

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

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

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

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

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

         (i)      Since  completion  of its  water  quality  certification  on 9
                  December  1999,  the  Company  has  raised  approximately  $16
                  million  pursuant  to private  placement  financing  and loans

                                       4
<PAGE>

                  which  has  allowed  the  Company  to  implement  its  Product
                  Development   Program,   as  well  as  to   further   business
                  development,  strategic partnering and acquisition activities.
                  Based on an analysis of its sales and development  costs,  the
                  Company intends to raise an additional $20-30 million pursuant
                  to private  placement  sales of its common  stock and/or loans
                  from third  parties  during  the last  quarter of 2001 and the
                  first quarter of 2002.  In addition,  depending on the pace of
                  actual sales and the  acquisition  activities  of the Company,
                  the Company may seek to raise an additional round of financing
                  on an amount to be  determined  by the Company,  in the second
                  half of 2002. The exact method by which this additional  round
                  of financing will be raised will be based on the  maximization
                  of shareholder  value. The additional equity, if raised by the
                  Company, will allow the Company to execute its business plan.

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

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

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

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

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

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

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

Aquamax International Holdings BV and Keeran Corporation

                  Our License from Aquamax/Keeran

In September 2000, we signed an agreement with Aquamax  International  Holdings,
BV of  the  Netherlands  and  Keeran  Corporation  NV,  a  Netherlands  Antilles
Corporation,  providing  for a worldwide  license  for their  issued and pending
patents and other  intellectual  property  rights relating to the use of plastic
heat evaporator  condensers for the distillation of seawater.  The scope of this

                                       5
<PAGE>

license  which  we  refer  to as the  authorized  "field  of  use"  is  for  the
distillation of potable water from naturally  occurring saline water in units of
1000  cubic  meters  per day or larger.  Additionally,  Aquamax/Keeran  has also
independently  licensed certain of the same technology covered by its license to
us to Hadwaco Oy, a Finnish company ("Hadwaco"), but for a separate and distinct
field of use, that of wastewater treatment.

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

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

                  Our Dispute with Aquamax/Keeran

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

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

                  Attempted Resolution of the Dispute

The  arbitration  procedures  have not commenced while the Company and Licensors
have been involved in settlement negotiations.  The negotiations resulted in the

                                       6
<PAGE>

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 occured 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.

                                       7
<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

                                       8
<PAGE>

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  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

                                       9
<PAGE>

"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  have elected not to invest until we are again  eligible to
trade on the OTC Bulletin  Board;  and second,  as a result of the  diversion of
management  resources to the task of amending the SEC filings and other  efforts
necessary  to  re-attain  eligibility  to trade on the OTC  Bulletin  Board.  On
September 7, 2001 the Company became  relisted on the NASDAQ OTC Bulletin Board.
The  following  Tuesday,  September  11, 2001 an act of war was committed on the
United States with the World Trade Center devastation, which further delayed the
funding  necessary  to pursue the PPI.  During the period  that the PPI has been
delayed by the unavailability of funding, the Company has assessed impairment of
the  carrying  value of its assets  employed  in the  desalination  business  by
monitoring  developments in the market for desalination products to determine if
technological,  competitive or market conditions  indicate that the value of the
assets  (including the amortized  cost of the licensed  patents and the value of
the research and development activities that were expensed as incurred including
research  leading to Ocean Power's three  additional  patents and the "know how"
resulting from our testing of the unit in Malta) is less than the carrying value
of the related asset  consisting  principally of the cost of the  Aquamax/Keeran
patent net of accumulated  amortization and the previous impairment  adjustment.
Management's assessment of market conditions described above leads management to
conclude that there has been no impairment of the Aquamax/Keeran related license
agreement asset other than the $400,000 that was recorded in connection with the
dispute with Aquamax/Keeran over exclusivity of one of the patents, as described
below.

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

                                       10
<PAGE>

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.

                                       11
<PAGE>

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

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

Another  factor  drawing us to Sigma was its focus on what we believe could be a
profitable  business in the growing  distributed  power  market in Europe - home
heat and power  generation.  We believed  that Sigma's  focus could enable us to
develop a source of revenue from Sigma's Stirling engine design within as few as
15 months from acquisition  (November 2001). We are seeking to configure Sigma's
basic engine design for a range of other uses in the  commercial  and industrial
power markets, as well as adapting these engines as a power source for our H20kW
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.

                                       12
<PAGE>

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

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

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

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

                                       13
<PAGE>

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

The development  benchmarks 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:

<TABLE>
<CAPTION>
------------------------------------------------------- -----------------------------------------------------
               Targeted Completion Date                                      Benchmark
------------------------------------------------------- -----------------------------------------------------
<S>                                                     <C>
First Quarter of 2001                                   Prime customer agrees to collaborate in development
                                                        efforts.
------------------------------------------------------- -----------------------------------------------------
Fourth Quarter of 2001                                  Second generation prototype available to Sigma for
                                                        testing
------------------------------------------------------- -----------------------------------------------------
Fourth Quarter of 2001 or                               First proceeds from sale of prototypes.
First Quarter of 2002
------------------------------------------------------- -----------------------------------------------------
Late First Quarter or early                             Release of second generation  prototype for external
Second Quarter of 2002                                  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)
------------------------------------------------------- -----------------------------------------------------
</TABLE>

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

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 six to  twelve  months  due to
difficulty  in  raising  funds  resulting,  in part,  from  delays in  obtaining
relisting on the NASDQ OTC Bulletin Board (relisting occurred September 7, 2001)

                                       14
<PAGE>

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 the  Company's  efforts to
obtain  investment  funds  necessary to carry out its business  plans within the
time lines  previously  projected by the Company.  As a  consequence  of funding
availability,  the Company has been forced to reduce the pace of development. We
currently expect that the benchmark  originally projected to be completed in the
fourth  quarter of 2001 will be delayed a minimum of six months and  possibly up
to a year,  depending  on funding  availability.  The other  benchmarks  will be
delayed by periods comparable to the delay in the benchmark originally scheduled
for the fourth quarter 2001.

Our current  estimate of our funding  requirements to achieve the benchmarks set
forth above is $25.9 million due to delays in development caused by difficulties
in raising sufficient  funding..  The $25.9 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,  $5.5 million in 2001,  $10.4 million in 2002,
$7.6 million in 2003 and $1.7 million in 2004.  As of  September  30, 2001,  the
Company has provided  approximately  $3.4 million of the $25.9  million  revised
amount  projected to be needed for project  development.  Sigma has been able to
meet the Stirling engine benchmarks to date by (1) focusing on the core activity
of designing,  developing  and  engineering a production  prototype of the first
generation Sigma 3kW electric/9 kW thermal Stirling engine;  (2) using available
funds of  approximately  $3.4  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  Ricardo,  our
engineering consultant,  begin planning the design and manufacture of the second
generation prototype engine, which is intended to be lighter,  simpler in design
and less expensive 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 Ricardo 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,
the Company  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, the Company
concluded  that no  impairment  in the assets of the  Stirling  engine  business
exists at September 30, 2001. 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.  The  Company  will update its  impairment  and useful life
assessment each quarter.

                                       15
<PAGE>

With  respect  to  the  conversions  of  debt  to  equity,   Statoil   converted
approximately  $381,000 of its loans to Sigma into approximately  119,000 shares
of common  stock of the  Company.  The  temporary  solution to our  shortfall in
available  funding was to focus on core  activity.  Additional  funding  will be
needed during the remainder of 2001 and 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.

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

While management  believes  sufficient funds can be raised from external sources
of capital, no assurance can be given that the funding will be obtained.  In the
event that  funding is not  available,  or is only  available  on terms that the
Company  believes are  unfavorable,  adequate  funding may not be obtained which
could  have a  material  adverse  effect on the  Company's  financial  position,
results of operations  and liquidity and would result in 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 20
employees.  To develop the Stirling  engine as we currently  plan, we anticipate
increasing Sigma's manpower to approximately 38 in 2002 and to 45 in 2003 and 53
people by 2004.  At the time of  acquisition  in September  2000,  Sigma had six
full-time  employees  and by the end of 2000 that had  increased  to ten.  Sigma
increased  its full time  employees to 16 by March 31 and to 20 by September 30.
To date,  Sigma's manpower  requirements have been less than expected because of
lack of funding to proceed with the Stirling  engine  development  as originally
planned.

                  Recently Issued 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 will be January 1, 2002 by the  Company.  SFAS No. 142 is
effective,  generally,  in fiscal years  beginning after December 15, 2001 which
will be the year ending December 31, 2002 by the Company.

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

                                       16
<PAGE>

SFAS No. 142 provides,  among other things,  that goodwill and intangible assets
with indeterminate lives shall not be amortized. Goodwill shall be assigned to a
reporting  unit and annually  assessed for  impairment.  Intangible  assets with
determinate lives shall be amortized over their estimated useful lives, with the
useful lives reassessed continuously, and shall be assessed for impairment under
the  provisions  of SFAS No. 121,  Accounting  for the  Impairment of Long-Lived
Assets and for  Long-Lived  Assets to be Disposed Of.  Goodwill is also assessed
for impairment on an interim basis when events and circumstances  warrant.  Upon
adoption of SFAS No. 142, the Company  will 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.

While the Company has not  completed  the process of  determining  the effect of
these new accounting  pronouncements  on its financial  statements,  the Company
currently expects that there will be no  reclassification in connection with the
transition  provisions of SFAS No. 141 based on clarifications of the transition
provisions  issued by FASB in October  2001.  Accordingly,  the Company  expects
that,  after  implementation  of SFAS No.  142,  all  intangible  assets will be
amortizable and the goodwill will not be amortizable.

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

SFAS No. 144 -- On October 3, 2001,  the Financial  Accounting  Standards  Board
issued SFAS No. 144,  Accounting  for the  Impairment  or Disposal of Long-Lived
Assets  which is  effective  for  financial  statements  issued for fiscal years
beginning  after  December 15, 2001 and,  generally,  its  provisions  are to be
applied  prospectively..  SFAS 144 supercedes  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 amounts for

                                       17
<PAGE>

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.

While the Company has not  completed  the process of  determining  the effect of
this new  accounting  pronouncements  on its financial  statements,  the Company
currently  expects  that the effect of SFAS No. 144 on the  Company's  financial
statements, when it becomes effective, will not be significant.


                  PART II. OTHER INFORMATION

ITEM 1.  Legal Proceedings

On  October  5,  2001  Ricardo  Inc.  filed  a  lawsuit  against  the  Company's
subsidiary,  Sigma  Elektroteknisk  AS in the  Forliksklage  Court  (Minor Civil
Court) of Norway.  The lawsuit seeks 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.
The total  amount  claimed to be due and owing is  $1,458,248  plus legal  costs
incurred in processing the claim.  The Company has accrued  $1,458,248  which is
included in accounts payable.

ITEM 2.  Changes in Securities

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

1.       Issuance of Promissory  Note to Bylin  Heating  Systems,  Inc.,  Profit
         Sharing Pension Plan.

         On July 11,  2001,  the Company  issued a one year  promissory  note to
         Bylin Heating Systems,  Inc., Profit Sharing Pension Plan for $200,000.
         The note  accrues  interest at a rate of 10% per annum.  If the Company
         elects to  pre-pay  the note,  then the lender has the right to convert
         both the principal or interest into the Company's common stock at $3.00
         per share.  As additional  consideration,  the Company  granted  66,667
         warrants with an exercise price of $1.50 per share,  with an expiration
         date of July 10, 2004. The market price for the Company's  common stock
         on July 11, 2001 was $2.40.

2.       Issuance of Promissory Note to William Barron.

         On July 24,  2001,  the Company  issued a one year  promissory  note to
         William Barron for $50,000.  The note accrues interest at a rate of 10%
         per annum.  If the Company elects to pre-pay the note,  then the lender
         has the  right to  convert  both the  principal  or  interest  into the
         Company's common stock at $3.00 per share. As additional consideration,
         the Company granted 16,667 warrants with an exercise price of $1.50 per
         share,  with an expiration  date of July 23, 2002. The market price for
         the Company's common stock on July 24, 2001 was $2.25.

                                       18
<PAGE>

3.       Issuance of Promissory Notes to Carl Fricke.

         On July 24,  2001 and  August 1,  2001,  the  Company  issued  one year
         promissory notes to Carl Fricke for $50,000.  The notes accrue interest
         at a rate of 10% per annum. If the Company elects to pre-pay the notes,
         then the lender has the right to convert both the principal or interest
         into the  Company's  common  stock at $3.00 per  share.  As  additional
         consideration  for each note, the Company  granted 16,667 warrants with
         an exercise price of $1.50 per share,  with an expiration  date of July
         23,  2002 and July 31,  2002  respectively.  The  market  price for the
         Company's  common  stock on July 24,  2001 and August 1, 2002 was $2.25
         and $2.30, respectively.

4.       Issuance of Promissory Note to Summit Petroleum Corporation.

         On August 7, 2001,  the Company  issued a one year  promissory  note to
         Summit Petroleum Corporation for $150,000. The note accrues interest at
         a rate of 10% per annum.  If the  Company  elects to pre-pay  the note,
         then the lender has the right to convert both the principal or interest
         into the  Company's  common  stock at $3.00 per  share.  As  additional
         consideration,  the Company  granted  50,000  warrants with an exercise
         price of $1.50 per share,  with an  expiration  date of August 6, 2002.
         The market price for the  Company's  common stock on August 7, 2001 was
         $2.35.

5.       Issuance of Promissory Note to Edward  Freidberg  trustee for Freidberg
         Law Corporation Pension Plan.

         On August 8, 2001,  the Company  issued a one year  promissory  note to
         Edward Freidberg trustee for Freidberg Law Corporation Pension Plan for
         $100,000.  The note accrues interest at a rate of 10% per annum. If the
         Company  elects to pre-pay  the note,  then the lender has the right to
         convert both the principal or interest into the Company's  common stock
         at $3.00 per share.  As additional  consideration,  the Company granted
         33,334  warrants  with an  exercise  price of $1.50 per share,  with an
         expiration date of August 6, 2002. Joseph Maceda,  the president of the
         Company,  also pledged  75,000 shares as collateral for the loan to the
         Company.  The market price for the Company's  common stock on August 8,
         2001 was $2.40.

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

         On  August  20,  2001,  the  Company  issued  a five  year  convertible
         debenture for $200,000.  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 $1.50 per share. As additional consideration,
         the Company  granted  266,667  warrants with an exercise price of $1.25
         per share, with an expiration date of August 19, 2006. The market price
         for the Company's common stock on August 20, 2001 was $2.30.

<TABLE>
<CAPTION>
         ----------------- --------------- ---------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount     Conversion       Number of      Price per     Expiration Date
                                           Securities       Shares         share
         ----------------- --------------- ---------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         8/20/01           $200,000        Common           133,333        $1.50         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
                                           Warrants         266,667        $1.25         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
</TABLE>

7.       Issuance of Convertible Debenture to Freedom Funding Inc.

         On  August  20,  2001,  the  Company  issued  a five  year  convertible
         debenture for $42,000 to Freedom  Funding  Inc..  This is the amount of
         interest that was due on the $350,000 convertible debenture of November
         16, 1999 for the year 2000. The note accrues  interest at a rate of 12%
         per annum and both the principal and interest are convertible  into the

                                       19
<PAGE>

         Company's common stock at $1.50 per share. As additional consideration,
         the Company granted 56,000 warrants with an exercise price of $1.25 per
         share, with an expiration date of August 19, 2006. The market price for
         the Company's common stock on August 20, 2001 was $2.30.

<TABLE>
<CAPTION>
         ----------------- --------------- ---------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount     Conversion       Number of      Price per     Expiration Date
                                           Securities       Shares         share
         ----------------- --------------- ---------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         8/20/01           $42,000         Common           28,000         $1.50         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
                                           Warrants         56,000         $1.25         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
</TABLE>

8.       Issuance of Convertible Debenture to Freedom Funding Inc.

         On  August  20,  2001,  the  Company  issued  a five  year  convertible
         debenture for $12,000 to Freedom  Funding  Inc..  This is the amount of
         interest that was due on the $100,000 convertible debenture of November
         16, 1999 for the year 2000. 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 $1.50 per share. As additional consideration,
         the Company granted 16,000 warrants with an exercise price of $1.25 per
         share, with an expiration date of August 19, 2006. The Market price for
         the Company's common stock on August 20, 2001 was $2.30.

<TABLE>
<CAPTION>
         ----------------- --------------- ---------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount     Conversion       Number of      Price per     Expiration Date
                                           Securities       Shares         share
         ----------------- --------------- ---------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         8/20/01           $12,000         Common           8,000          $1.50         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
                                           Warrants         16,000         $1.25         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
</TABLE>

9.       Issuance of Convertible Debenture to Venture Investment Group, Inc.

         On  August  20,  2001,  the  Company  issued  a five  year  convertible
         debenture for $12,000 to Venture  Investment  Group,  Inc.. This is the
         amount of interest that was due on the $100,000  convertible  debenture
         of November 16, 1999 for the year 2000. 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 $1.50 per share.  As
         additional  consideration,  the Company granted 16,000 warrants with an
         exercise  price of $1.25 per share,  with an expiration  date of August
         19, 2006. The Market price for the Company's common stock on August 20,
         2001 was $2.30.

<TABLE>
<CAPTION>
         ----------------- --------------- ---------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount     Conversion       Number of      Price per     Expiration Date
                                           Securities       Shares         share
         ----------------- --------------- ---------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         8/20/01           $12,000         Common           8,000          $1.50         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
                                           Warrants         16,000         $1.25         8/19/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
</TABLE>

10.      Issuance of Convertible Debenture to Regis Investment Co. Ltd.

         On  August  20,  2001,  the  Company  issued  a five  year  convertible
         debenture for $5,000 to Regis  Investment Co. Ltd..  This is the amount
         of  interest  that was due on the  $100,000  convertible  debenture  of

                                       20
<PAGE>

         November  16, 1999 for the five months prior to the  conversion  of the
         debenture in the year 2000. 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 $1.50 per share. As additional consideration,
         the Company  granted 6,667 warrants with an exercise price of $1.25 per
         share, with an expiration date of August 19, 2006. The Market price for
         the Company's common stock on August 20, 2001 was $2.30.

<TABLE>
<CAPTION>
         ----------------- -------------- ----------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount    Conversion        Number of      Price per     Expiration Date
                                          Securities        Shares         share
         ----------------- -------------- ----------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         8/20/01           $5,000         Common            3,333          $1.50         8/19/06
         ----------------- -------------- ----------------- -------------- ------------- ----------------
                                          Warrants          6,667          $1.25         8/19/06
         ----------------- -------------- ----------------- -------------- ------------- ----------------
</TABLE>

11.      Issuance of Warrants to Freedom Funding Inc.

         On August 20,  2001,  the  Company  amended  the  $350,000  convertible
         debenture to Freedom Funding Inc. of November 16, 1999 and detached and
         granted 466,667 warrants with an exercise price of $.75 per share, with
         an  expiration  date of  August  19,  2006.  The  Market  price for the
         Company's common stock on August 20, 2001 was $2.30.

12.      Issuance of Warrants to Freedom Funding Inc.

         On August 20,  2001,  the  Company  amended  the  $100,000  convertible
         debenture to Freedom Funding Inc. of November 16, 1999 and detached and
         granted 133,333 warrants with an exercise price of $.75 per share, with
         an  expiration  date of  August  19,  2006.  The  Market  price for the
         Company's common stock on August 20, 2001 was $2.30.

13.      Issuance of Warrants to Venture Investment Group, Inc.

         On August 20,  2001,  the  Company  amended  the  $100,000  convertible
         debenture to Venture  Investment  Group,  Inc. of November 16, 1999 and
         detached and granted  133,333  warrants with an exercise  price of $.75
         per share, with an expiration date of August 19, 2006. The Market price
         for the Company's common stock on August 20, 2001 was $2.30.

14.      Issuance of Convertible Debenture to Venture Investment Group, Inc.

         On  August  23,  2001,  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 $1.50 per share. As additional consideration,
         the Company  granted  133,333  warrants with an exercise price of $1.25
         per share, with an expiration date of August 22, 2006. The Market price
         for the Company's common stock on August 23, 2001 was $2.70.

<TABLE>
<CAPTION>
         ----------------- --------------- ---------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount     Conversion       Number of      Price per     Expiration Date
                                           Securities       Shares         share
         ----------------- --------------- ---------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         8/23/01           $100,000        Common           66,667         $1.50         8/22/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
                                           Warrants         133,333        $1.25         8/22/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
</TABLE>

                                       21
<PAGE>

15.      Issuance of Promissory Note to David Weissberg.

         On August 29, 2001,  the Company issued a one year  promissory  note to
         David Weissberg for $50,000. The note accrues interest at a rate of 10%
         per annum.  If the Company elects to pre-pay the loan,  then the lender
         has the  right to  convert  both the  principal  or  interest  into the
         Company's common stock at $3.00 per share. As additional consideration,
         the Company granted 16,667 warrants with an exercise price of $1.50 per
         share, with an expiration date of August 28, 2002. The Market price for
         the Company's common stock on August 29, 2001 was $3.55.

16.      Issuance of Promissory Note to Edward P.Engle Jr..

         On September 4, 2001, the Company issued a one year  promissory note to
         Edward P. Engle Jr. for $10,000. The note accrues interest at a rate of
         10% per annum.  If the  Company  elects to pre-pay  the loan,  then the
         lender has the right to convert both the principal or interest into the
         Company's common stock at $3.00 per share. As additional consideration,
         the Company  granted 3,337 warrants with an exercise price of $1.50 per
         share,  with an expiration  date of September 3, 2002. The Market price
         for the Company's common stock on September 4, 2001 was $3.50.

17.      Issuance of Promissory Note to Kare C. Anderson.

         On September 4, 2001, the Company issued a one year  promissory note to
         Kare C.  Anderson for $15,000.  The note accrues  interest at a rate of
         10% per annum.  If the  Company  elects to pre-pay  the loan,  then the
         lender has the right to convert both the principal or interest into the
         Company's common stock at $3.00 per share. As additional consideration,
         the Company  granted 5,000 warrants with an exercise price of $1.50 per
         share,  with an expiration  date of September 3, 2002. The Market price
         for the Company's common stock on September 4, 2001 was $3.50.

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

         On  September  14,  2001,  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 $1.00 per share. As additional consideration,
         the Company  granted  300,000  warrants with an exercise price of $1.00
         per share,  with an expiration  date of September 14, 2006.  The Market
         price for the Company's common stock on September, 17, 2001 was $3.40.

<TABLE>
<CAPTION>
         ----------------- --------------- ---------------- -------------- ------------- ----------------
         Date of Issuance  Note Amount     Conversion       Number of      Price per     Expiration Date
                                           Securities       Shares         share
         ----------------- --------------- ---------------- -------------- ------------- ----------------
<S>                        <C>             <C>              <C>            <C>           <C>
         9/14/01           $100,000        Common           100,000        $1.00         9/14/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
                                           Warrants         300,000        $1.200        9/13/06
         ----------------- --------------- ---------------- -------------- ------------- ----------------
</TABLE>

19.      Issuance of Promissory Note to Michael D. Lockwood.

         On September 19, 2001, the Company issued a one year promissory note to
         Michael D. Lockwood for $500,000.  The note accrues  interest at a rate
         of 10.5% per annum.  If the  principal  and  interest are not paid when
         due, then they shall bear interest  thereafter at 13.5%. If the Company
         elects to  pre-pay  the loan,  then the lender has the right to convert
         both the principal or interest into the Company's common stock at $2.00
         per share in the name of Algonquin  Capital  Management.  As additional
         consideration,  the  Company  granted  500,000  warrants  to  Algonquin

                                       22
<PAGE>

         Capital  Management with an exercise price of $1.50 per share,  with an
         expiration  date of  September  18,  2002.  The  Market  price  for the
         Company's common stock on September 19, 2001 was $3.00.


ITEM 3.  Defaults Upon Senior Securities

         Not applicable.

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

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

ITEM 5.  Other Information

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

Recent Developments

On September 1,2001,  the Company and SAIC entered into a professional  services
agreement,  pursuant to which SAIC will  consult  with the Company and develop a
program to create a viable  near-term solar dish  concentrator  power system for
electrical power production.  The estimated costs to the Company for the work to
be done by SAIC is  $7,700,000  through  August 31,  2003.  For a more  detailed
description  of the terms of the  agreement,  see the  discussion  contained  in
footnote 7 to the Company's  consolidated financial statements for September 30,
2001.

On  September  7, 2001 the Company  became  relisted on the NASDAQ OTC  Bulletin
Board.

On October  10,2001  the  Company and  Elektryon,  Inc entered  into a licensing
agreement  whereby the Company was granted the  non-exclusive  right and license
within the United States and the exclusive,  worldwide right and license outside
the United States to buy, make, have made, use,  distribute,  install,  offer to
sell and sell generators  designed to power large commercial sites which utilize
Elektryon's  patented  improvements.  The term of the agreement is 5 years.  The
Company  must pay to  Elektryon  the sum of  $150,000  and a price per  licensed
product to be agreed  upon by the parties  from time to time,  which shall in no
event  exceed the lowest  price  charged to any other third party  purchaser  of
Elektryon's licensed products.  As further  consideration,  the Company must pay
five  (5)percent of the raw cost of any licensed  product,  on a per unit basis,
which the Company makes or has made by any party other than Elektryon.

On October  22,2001 the Board of  Directors  unanimously  confirmed  Mr.  Edward
Juchniewicz  as an  outside  director.  Mr.  Juchniewicz  spent  32 years at the
Central  Intelligence  Agency,  retiring  as the  Associate  Deputy  Director of
Operations.  He also served as the President of ESL  International in Sunnyvale,
California.  Additionally, he has formed a consulting firm specializing in joint
venture development primarily in the Middle East and Asia.

On November 5,2001 the Company's  subsidiary,  Powerco US,Inc and  EPRIsolutions
entered into an equipment lease and fixed price services agreement for a term of
14 months,  commencing November 1, 2001. Powerco will lease to EPRIsolutions for
the term of the  agreement  and deliver to its  EPRI-Peac  facility in Knoxville
Tennessee a Sigma beta Stirling engine generator.  EPRIsolutions  will conduct a
technology  assessment and baseline testing and validation of the engine as part
of a collaboration between Powerco and EPRIsolutions to test and evaluate market
entry  Stirling  engines and pilot the market  introduction  of beta  systems to
North  America  energy  companies.  In exchange for the lease of the  equipment,

                                       23
<PAGE>

support  services to be provided by Powerco and  shipping  costs for the engine,
EPRIsolutions  will pay to Powerco a firm fixed price of $79,000.  At the end of
the test  period,  EPRIsolutions  will  prepare  and  deliver to Powerco a final
report on the results of its baseline  tests of the engine  unit.  Additionally,
EPRIsolutions  will  receive an option to purchase  stock in Powerco for a value
equal to  $75,000  at the  market  value of the  stock at the time of  exercise,
exercisable  after  the  conclusion  of  the  testing  period  provided  in  the
agreement.

SEC Matter

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

ITEM 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

<TABLE>
<CAPTION>
----------------------- -------------------------------------------------------------------------------------
Exhibit
Number                                                      Description
----------------------- -------------------------------------------------------------------------------------
<S>                     <C>
2.01                    Aquamax/Keeran License Agreement - previously filed on September 4, 2001 with June
                        30, 2001 Form 10QSB/A
----------------------- -------------------------------------------------------------------------------------
2.02                    Elektryon License Agreement as of October 10, 2001
----------------------- -------------------------------------------------------------------------------------
2.03                    EPRIsolutions Equipment Lease and Fixed Price Services Agreement as of November 5,
                        2001
----------------------- -------------------------------------------------------------------------------------
2.04                    SAIC Technology License, Consulting Services And
                        Asset Purchase Agreement as of April 20, 2001
----------------------- -------------------------------------------------------------------------------------
2.05                    SAIC Professional Services Agreement as of September 1, 2001
----------------------- -------------------------------------------------------------------------------------
</TABLE>


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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.





                                  OCEAN POWER CORPORATION


Date: November 14, 2001             By: /s/ Joseph P. Maceda
-----------------------             ------------------------
                                            Joseph P. Maceda
                                             President


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