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

                                   FORM 10-KSB

(Mark One)

      [X]   ANNUAL  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
            EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

      [ ]   TRANSITION  REPORT  PURSUANT  TO  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
                 (Name of small business issuer in its charter)

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

 c/o Halperin Battaglia Raicht, LLP
    555 Madison Avenue, 9th Floor
         New York, New York                                       10022
(Address of principal executive offices)                       (Zip Code)

                                 (212) 765-9100
                           (Issuer's telephone number)

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                 Title of Class

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

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

Indicate by check mark whether the  registrant is a Shell Company (as defined in
Rule 12b-2 of the Exchange Act) [X] Yes  [ ] No

Issuer's revenues for 2002: $0

The aggregate  market value of the issuer's voting stock held by  non-affiliates
as of January 28, 2008, computed by reference to the closing price of such stock
on such date as quoted on the OTC Bulletin Board  ("OTCBB"),  was  approximately
$112,365. For purposes of this computation,  it is assumed that the Company
has no affiliates.

Check  whether the issuer has filed all  documents  and  reports  required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court. [ ] Yes [X] No

The number of shares  outstanding  of the  issuer's  Common Stock on January 28,
2008 was 56,182,746.

          TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT [ ] Yes [X] No

                    DOCUMENTS INCORPORATED BY REFERENCE: None
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<PAGE>
NOTE:  Unless otherwise  indicated,  this Form 10-KSB of Ocean Power Corporation
(the "Company")  speaks as of the date of the filing thereof with the Securities
and  Exchange  Commission  ("SEC").  On March 1,  2002,  due to  non-payment  of
applicable taxes the Company's  original charter became inoperative and void. On
October 25, 2007,  the Company filed a certificate of renewal and revival of its
charter  in the state of  Delaware.  During  the  period  from  March 1, 2002 to
October 25, 2007, the name Ocean Power was obtained by an unrelated  entity upon
proper  filing with the State of  Delaware.  As such,  as part of the  Company's
renewal and  revival of its  charter,  the  Company  changed its name from Ocean
Power Corporation to OPC Liquidation Corporation.
<PAGE>

                                     PART I

Item 1. Description of Business.

This item contains forward-looking statements that involve uncertainties. Actual
results could differ materially from those in the forward-looking statements due
to a number of  uncertainties,  including,  but not  limited to those  discussed
below and in Part II, Item 6  "Management's  Discussion  and Analysis or Plan of
Operations - Uncertainties Relating to Forward Looking Statements."

The Company was formed  primarily  as the result of the merger of PTC  Holdings,
Inc., a Delaware  corporation,  into PTC Group, Inc., an Idaho  corporation.  In
July 1999, PTC Group,  Inc. changed its name to Ocean Power Corporation and then
changed its state of  incorporation  from Idaho to  Delaware.  The Company was a
development  stage company that intended to engage  primarily in the business of
developing  and marketing  water  desalination  and renewable  power  generation
systems that were modular and mass produced.

The Company had a history of being financed primarily by raising capital through
private  placements of its stock and/or loans from third  parties.  The proceeds
from the financing had been used to develop the Company's  technologies,  pursue
acquisitions and make strategic  alliances and pay operating costs. In September
2002, the Company was without  sufficient capital to continue to operate and had
been unable to identify sources of additional financing.  The Board of Directors
of the Company (the "Board") was concerned that a sudden cessation of operations
would not provide  the best means to maximize  asset  values.  Therefore,  at an
October  3,  2002  meeting,   the  Board   approved  a  resolution  to  commence
negotiations with the Company's secured creditors, Algonquin Capital Management,
L.L.C. ("Algonquin") and Hibernia Capital Management,  L.L.C.  ("Hibernia"),  to
commence a voluntary  bankruptcy filing under Chapter 11 of the U.S.  Bankruptcy
Code  ("Code"),  and  immediately  thereafter,  a sale of the  Company's  assets
pursuant to Section 363 of the Code.

During the preceding  twelve  months,  the Company had endeavored to stem severe
cash  flow  shortages  through,  among  other  things,  workforce  and  overhead
reductions,  and the consolidation of its business operations. Due to persistent
cash flow shortages,  the Company terminated substantially all of its employees.
As a result of a  confluence  of  events,  including  a general  contraction  of
available  financing  from  capital  markets and the then recent  bankruptcy  in
Norway of Sigma  Elektroteknisk,  AS, a wholly  owned  subsidiary,  at a Special
Meeting of the Board on November 27, 2002,  the Board  unanimously  consented to
authorizing  the Company to file a voluntary  petition  under  Chapter 11 of the
Code.

On December 1, 2002, the Company filed a voluntary  petition under Chapter 11 of
the Code with the United States  Bankruptcy  Court for the Southern  District of
New  York  ("Bankruptcy   Court")  (that  and  all  subsequent  related  action,
collectively,  the "Bankruptcy  Case").  On December 16, 2002, the United States
Trustee appointed a creditors' committee pursuant to Section 1102(a) of the Code
(the "Committee").

Simultaneously  with  filing  the  Chapter 11  petition,  the  Company  filed an
emergency  motion  to  authorize  it  to  obtain  loans  and  advances  under  a
Debtor-In-Possession   Loan  Agreement  with  Algonquin  in  order  to  continue
operations  so that the  Company  could  attempt  to  maximize  the value of its
assets. The Bankruptcy Court entered an interim order approving the financing on
December  5,  2002 and a final  order was  entered  on  December  20,  2002.  In
addition,  the Company filed a motion in the Bankruptcy Case pursuant to Section
363 of the Code to approve the proposed sale of substantially  all of its assets
to Algonquin and Hibernia,  subject to higher and better offers.  By order dated
February 6, 2003, the Bankruptcy  Court authorized the asset sale agreement with
Algonquin  and Hibernia as modified by the  Creditor  Settlement  Agreement  and
assumption  and  assignment  of  certain  executory   contracts,   licenses  and
intellectual  property  rights  for a credit bid of  $2,000,000.  As part of the
Creditor  Settlement  Agreement,   Algonquin  and  Hibernia  reconveyed  to  the
bankruptcy  estate a 60%  ownership in the Water  Assets of the Company  ("Water
Assets"). The Bill of Sale consummating the sale was signed on February 19, 2003
(the "Primary Asset Sale").

Having sold its assets and ceased operations, the Company was not in a financial
position to support the on-going  operations needed to develop the Water Assets.
On May 20,  2003,  the  Bankruptcy  Court  approved  the  sale of the  Company's
interest in the Water Assets to Oases Desalination International, Ltd. ("Oases")
in exchange for their  covenant to  commercialize  those assets and make certain
royalty payments.  Although it made certain minimal payments,  Oases immediately
defaulted in certain  pre-closing  obligations  and never  consummated a closing
under the  agreement.  Subsequently,  Oases and ReEnergy  Group  entered into as
asset purchase agreement in which Oases would sell all of its assets,  including
the Water  Assets,  to ReEnergy  Group.  Because  Oases was in default  with the
Company and had not paid for the Water Assets and/or closed on

<PAGE>

the  transaction,  Oases and Renergy Group sought the Company's  consent wherein
ReEnergy Group would directly purchase the Water Assets from the Company.  After
significant negotiations,  the Committee,  Oases and ReEnergy Group entered into
the Consent  Agreement,  in order to, among other things,  provide the Company's
consent  to  transfer  the  Water  Assets  to  ReEnergy  Group  for  a  modified
consideration  of  $750,000  for the Water  Assets.  On  October  26,  2005,  an
application was filed with the Bankruptcy  Court to approve this arrangement and
the arrangement was approved by order dated November 16, 2005 (the "Water Assets
Sale", and together with the Primary Asset Sale, the "Asset Sales"). The Company
has  received all of the funds in this  transaction,  which are being held in an
account maintained by bankruptcy counsel for the Committee.

Currently,  the Company has no operations and no assets other than approximately
$227, 210 in cash.

In October of 2006,  the Company  signed a term sheet,  subsequently  amended on
September 18, 2007, with Trinad Capital Master Fund Ltd. (the "Plan Sponsor") to
sponsor a Chapter 11 plan of reorganization, which was filed with the Bankruptcy
Court on January  15,  2008  ("Plan").  The Plan  identifies  NorthStar  Systems
International,  Inc.  as a  potential  merger  candidate  to be merged  into the
Company  ("Merger  Candidate").  Under the terms of the proposed  Plan, the Plan
Sponsor would pay $500,000 to the Company's estate, and creditors of the Company
would  receive a pro rata cash  payment  and  stock  consideration  in the newly
merged  entity.  The  aforementioned   consideration  would  be  distributed  to
unsecured  creditors  of the Company  under the proposed  Plan.  If the existing
unsecured  creditors  of the Company  approve the Plan,  the  creditors  and the
existing  stockholders  of the  Company  would  own  approximately  6%  and  1%,
respectively,  of the merged company; provided,  however, that in the event that
the  unsecured  creditors  vote as a class  to  reject  the Plan and the Plan is
confirmed  under the cram-down  provisions of Section  1129(b) of the Code,  the
creditors and the existing  stockholders of the Company would own  approximately
4% and 0%,  respectively,  of the merged company. The merger contemplated by the
Plan  would  be  subject  to  various  closing  conditions  including,   without
limitation,  (i) confirmation of the Plan, (ii) the negotiation and execution of
definitive  documents  in form  acceptable  to the Plan  Sponsor  and the Merger
Candidate, (iii) the satisfactory completion of the Plan Sponsor's due diligence
on the Merger Candidate,  and (iv) the absence of any material adverse change in
the business of the Merger Candidate.  The merger would be consummated  pursuant
to a merger  agreement,  which would contain,  among other things,  detailed and
appropriate  representations and warranties,  affirmative and negative covenants
and closing conditions customary for transactions of that type. The Plan Sponsor
may  withdraw  at any time  prior to the  confirmation  of the Plan and gives no
assurance that agreement will be reached with the Merger  Candidate with respect
to the terms of such merger agreement.

Employees

In 2002, the Company had approximately 40 employees,  all of which were employed
on a full-time  basis.  Substantially  all employees had been  terminated or had
resigned as of July 31, 2002.

Item 2. Description of Properties.

The Company does not own or lease any property. All administrative functions are
performed through consultants and advisors.

Item 3. Legal Proceedings.

See Item 1. above.

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

None.

                                       2
<PAGE>
                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's  Common Stock is listed on the OTCBB under the symbol  PWREQ.  The
following  table sets forth the high and low  closing  prices as reported on the
OTCBB for all periods  presented.  The quotations reflect  inter-dealer  prices,
without retail  markup,  markdown or  commissions  and may not represent  actual
transactions.

2002                                                 High                 Low

First Quarter                                      $  1.27             $  0.75

Second Quarter                                        1.06                0.08

Third Quarter                                         0.08               0.013

Fourth Quarter                                        0.06               0.005

2001                                                 High                 Low

First Quarter                                      $ 4.250             $ 2.450

Second Quarter                                       4.050               2.400

Third Quarter                                        3.850               1.900

Fourth Quarter                                       2.850               0.770

There were  approximately 274 holders of record of the Company's Common Stock as
of March 13,  2007,  the latest date for which a report was  available  from the
Company's transfer agent.

The  Company  has never  paid  cash  dividends  and does not  expect to pay cash
dividends in the foreseeable future.

Recent  Sales of  Unregistered  Securities;  Uses of  Proceeds  from  Registered
Securities:

Further to the sales  described in the Company's  Form 10-KSB for the year ended
December 31, 2001:

      76)   Issuance of Stock to Cornell Capital Partners, LP

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

      77)   Issuance of Convertible Debentures

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

                                       3

<PAGE>

<TABLE>
<CAPTION>
                                   Conversion
Date of Issuance    Note Amount    Securities    Number of Shares    Price per share    Expiration Date
----------------    -----------    ----------    ----------------    ---------------    ---------------
<S>                 <C>            <C>           <C>                 <C>                <C>
   3/26/02              $50,000     Common             71,429              $.70             3/26/07

                                    Warrants          357,143              $.70             3/25/07

   3/26/02              $25,000     Common             35,714              $.70             3/26/07

                                    Warrants          178,571              $.70             3/25/07

   3/26/02              $25,000     Common             35,714              $.70             3/26/07

                                    Warrants          178,714              $.70             3/25/07
</TABLE>

      78)   Issuance of Warrants to Ricardo Inc.

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

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

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

<TABLE>
<CAPTION>
                                   Conversion
Date of Issuance    Note Amount    Securities    Number of Shares    Price per share    Expiration Date
----------------    -----------    ----------    ----------------    ---------------    ---------------
<S>                 <C>            <C>           <C>                 <C>                <C>
   4/10/02             $100,000     Common            153,846              $.65             4/10/07

                                    Warrants          769,231              $.65             4/09/07
</TABLE>

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

      On June  14,  2002,  the  Board  of  Directors  agreed  to issue to XCEL &
Associates,  Inc. ("XCEL"),  a total of 150,000 shares. This issuance is per the
terms of that certain  Agreement  between XCEL and Ocean Power Corporation dated
October 23, 2001 wherein Ocean Power  acknowledged  XCEL's continued and ongoing
work to develop Terra Systems Inc.,  technology and establish a new fuel source.
At the request of XCEL the shares were broken down into three certificates.  The
market price for the Company's common stock on June 14, 2002 was $0.40.

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

      81)   Issuance of Options for Consulting Services

      On June 14, 2002, the Company  extended the  consulting  agreement with D.
Weckstein  &  Co.,  Inc  for a  period  of one  year  from  June  30,  2002.  As
compensation for this extension,  the Company issued to D. Weckstein & Co., Inc.
400,000  options to  purchase  common  stock at an  exercise  price of $0.40 per
share. The options are exercisable for a period of three years. The market price
for the Company's common stock on June 14, 2002 was $0.40.

      82)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On June 21, 2002,  the Company issued 85,526  registered  shares of common
stock to Cornell  Capital  Partners,  LP. pursuant to a Notice of Conversion for
$13,000 in principal  with respect to the 5 year,  Convertible  Debenture in the
amount of $500,000 and as referenced in the Company's  Registration Statement on
Form SB-2, which was declared  effective as of noon on June 19, 2002. The market
price for the Company's common stock on June 21, 2002 was $0.15.

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

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

                                       4

<PAGE>

      84)   Issuance of Common Stock to Cornell Capital Partners, LP

      On June 25, 2002, the Company issued 265,625  registered  shares of common
stock to Cornell  Capital  Partners,  LP. pursuant to a Notice of Conversion for
$17,000 in principal  with respect to the 5 year,  Convertible  Debenture in the
amount of $500,000 and as referenced in the Company's  Registration Statement on
Form SB-2, which was declared  effective as of noon on June 19, 2002. The market
price for the Company's common stock on June 25, 2002 was $0.11.

      85)   Issuance of Common Stock to ELEKTYRON

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

      86)   Vesting of Granted Options:

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

                        Option Holder                  Amount of Options
                      -----------------                -----------------
                      Eric Adema                            150,000

                      Blair Aiken                           500,000

                      John Grimes                           100,000

                      Gustavo Guzman                         35,000

                      David Moard                           820,000

                      Michael Quah                          500,000

                      Wendy Kwok                             15,000

                      Kevin Tyson                           250,000

                      Thomas G. Redmon                      500,000

                      Philip M. Johnson                     100,000

      87)   Extension of Options

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

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

      On June 27, 2002,  the Company  issued  600,000  shares of common stock to
Keeran  Corporation,  N.V.  pursuant to the  Aquamax-Keeran-Ocean  Power License
Agreement  dated  September 19, 2000. The market price for the Company's  common
stock on June 27, 2002 was $0.08.

      89)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On June 28, 2002, the Company issued 687,500  registered  shares of common
stock to Cornell Capital Partners, LP. pursuant to an Advance  Notice/Compliance
Certificate  as  defined  in the  Equity  Line of  Credit as  referenced  in the
Company's  Registration  Statement on Form SB-2, which was declared effective as
of noon on June 19,  2002.  The market price for the  Company's  common stock on
June 28, 2002 was $0.09.

      90)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On June 28, 2002, the Company issued 156,250  registered  shares of common
stock to Cornell  Capital  Partners,  LP. pursuant to a Notice of Conversion for
$10,000 in principal  with respect to the 5 year,  Convertible  Debenture in the
amount of $500,000 and as referenced in the Company's  Registration Statement on
Form SB-2, which was declared  effective as of noon on June 19, 2002. The market
price for the Company's common stock on June 28, 2002 was $0.09.

                                       5

<PAGE>

      91)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 8, 2002, the Company issued  287,159  registered  shares of common
stock to Cornell Capital Partners, LP. pursuant to an Advance  Notice/Compliance
Certificate  as  defined  in the  Equity  Line of  Credit as  referenced  in the
Company's  Registration  Statement on Form SB-2, which was declared effective as
of noon on June 19, 2002 The market price for the Company's common stock on July
8, 2002 was $0.08.

      92)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 9, 2002, the Company issued  925,926  registered  shares of common
stock to Cornell  Capital  Partners,  LP. pursuant to a Notice of Conversion for
$20,000 in principal  with respect to the 5 year,  Convertible  Debenture in the
amount of $500,000 and as referenced in the Company's  Registration Statement on
Form SB-2, which was declared  effective as of noon on June 19, 2002. The market
price for the Company's common stock on July 9, 2002 was $0.05.

      93)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 11, 2002, the Company issued 1,666,667 registered shares of common
stock to Cornell Capital Partners, LP. pursuant to an Advance  Notice/Compliance
Certificate  as  defined  in the  Equity  Line of  Credit as  referenced  in the
Company's  Registration  Statement on Form SB-2, which was declared effective as
of noon on June 19,  2002.  The market price for the  Company's  common stock on
July 11, 2002 was $0.03.

      94)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 15, 2002, the Company issued 666,667  registered  shares of common
stock to Cornell Capital Partners, LP. pursuant to an Advance  Notice/Compliance
Certificate  as  defined  in the  Equity  Line of  Credit as  referenced  in the
Company's  Registration  Statement on Form SB-2, which was declared effective as
of noon on June 19,  2002.  The market price for the  Company's  common stock on
July 15, 2002 was $0.03.

      95)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 22, 2002, the Company issued 2,521,930 registered shares of common
stock to Cornell Capital Partners, LP. pursuant to an Advance  Notice/Compliance
Certificate  as  defined  in the  Equity  Line of  Credit as  referenced  in the
Company's  Registration  Statement on Form SB-2, which was declared effective as
of noon on June 19,  2002.  The market price for the  Company's  common stock on
July 22, 2002 was $0.02.

      96)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 29, 2002, the Company issued 1,635,965 registered shares of common
stock to Cornell Capital Partners, LP. pursuant to an Advance  Notice/Compliance
Certificate  as  defined  in the  Equity  Line of  Credit as  referenced  in the
Company's  Registration  Statement on Form SB-2, which was declared effective as
of noon on June 19,  2002.  The market price for the  Company's  common stock on
July 29, 2002 was $0.02.

      97)   Issuance of Common Stock to Cornell Capital Partners, LP.

      On July 31, 2002, the Company issued 3,854,167 registered shares of common
stock to Cornell  Capital  Partners,  LP. pursuant to a Notice of Conversion for
$37,000 in principal  with respect to the 5 year,  Convertible  Debenture in the
amount of $500,000 and as referenced in the Company's  Registration Statement on
Form SB-2, which was declared  effective as of noon on June 19, 2002. The market
price for the Company's common stock on July 31, 2002 was $0.03.

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

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

                                       6

<PAGE>

                        Option Holder                  Amount of Options
                      -----------------                -----------------
                      Eric Adema                             24,590

                      Blair Aiken                            34,000

                      John Grimes                            11,538

                      Gustavo Guzman                          9,128

                      Jon Hanlon                              9,615

                      Joan Hosey                              7,038

                      Stephanie Hosey                         4,615

                      YuYan Luo                               7,692

                      David Moard                            75,043

                      Lori O'Brien                            9,609

                      Randall Peeters                        25,693

                      Michael Quah                           52,923

                      Thomas Redmon                          35,973

                      Wendy Kwok                              7,692

                      Joel Rich                               6,455

                      Kevin Tyson                            53,782

                      Robert Zhao                            12,308

      99)   Issuance of Options for Consulting Services

      On September 1, 2002, the Company entered into a consulting agreement with
Carl Fricke.  The agreement  was for a minimum of three  months.  As part of the
compensation,  the  Company has granted  options to purchase  500,000  shares of
common  stock at a purchase  price of $0.02 per share.  The market price for the
Company's common stock on September 1, 2002 was $0.02.

Purchases of Equity Securities by the Issuer:

None.

Item 6. Management's Discussion and Analysis or Plan of Operations.

The  following  discussion  and analysis  contains a number of "forward  looking
statements" within the meaning of the Section 21E of the Securities Exchange Act
of 1934, as amended,  with respect to expectations  for future periods which are
subject  to  various   uncertainties   explained  herein  and  in  "Management's
Discussion and Analysis or Plan of Operation - Uncertainties Relating to Forward
Looking Statements."

Statements   containing  the  words  "believes,"   "anticipates,"   "estimates,"
"expects,"  "intends,"  "plans,"  "seeks,"  "will,"  "may,"  "should,"  "would,"
"projects," "predicts,"  "continues," and similar expressions or the negative of
these  terms  constitute  forward-looking  statements  that  involve  risks  and
uncertainties.

We intend  such  forward-looking  statements  to be covered  by the safe  harbor
provisions for  forward-looking  statements  contained in the Private Securities
Litigation  Reform Act of 1995, and are including this statement for purposes of
invoking  these safe harbor  provisions.  Such  statements  are based on current
expectations and are subject to risks,  uncertainties  and changes in condition,
significance,  value  and  effect,  including  those  discussed  in the  section
entitled "Risk Factors" contained herein. Such risks,  uncertainties and changes
in condition,  significance,  value and effect could cause the Company's  actual
results to differ  materially from those  anticipated  events.  Except as may be
required  under federal law, we undertake no  obligation to update  publicly any
forward-looking  statements  for any  reason,  even if new  information  becomes
available or other events occur.

Overview

The reader is referred  to the  description  of the  Company's  Bankruptcy  Case
contained in Item 1 above.

                                       7

<PAGE>

Results of Operations:

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

The  business of the  Company in 2002  consisted  of  developing  technology  to
produce modular distributed water and power systems.  Effective December 1, 2002
the Company filed a voluntary  petition under Chapter 11 of the Bankruptcy  Code
with the Bankruptcy Court.  During the year ended December 31, 2002, the Company
incurred minimal administrative expenses in connection with the Bankruptcy Case,
e.g., related to legal, accounting,  and administrative  activities.  During the
year ended December 31, 2002, there were no revenue-generating activities (other
than gains  recognized on the settlement of debt and write-off of investments in
subsidiaries).  Salaries  and wages  during the year  ended  December  31,  2002
totaled $2,516,928,  a decrease of $8,608 or <1%, compared to $2,525,536 for the
year ended  December  31, 2001.  The  administrative  activities  of the Company
during  the year  ended  December  31,  2002  were  performed  by the  Company's
employees  until  they  were  terminated,   at  which  time  all  administrative
activities were performed by Mr. Michael Hopper. Direct administrative  expenses
of the Company for the year ended  December  31, 2002  totaled  $15,342,482,  an
increase of $7,191,961 or 88%,  compared to $8,150,521  incurred during the year
ended  December 31, 2001. The increase is due to consulting  fees,  amortization
and  impairment  of the  Company's  licenses,  interest  expense  and legal fees
incurred in preparation for the Company's entrance into bankruptcy  proceedings.
The Company  accrued  interest on its long-term  debts until December 1, 2002 at
which  time  those  debts  were  deemed  to be  frozen  due  to  the  bankruptcy
proceedings.  As of December 1, 2002,  the Company began the accrual of interest
on the DIP  financing.  The  Company  accrued  interest on its  long-term  debts
totaling  $2,007,142 and accrued interest on the DIP financing  totaling $1,485.
Interest  expense for the year ended  December 31, 2002 totaled  $3,877,129,  an
increase of $605,538 or 19%,  compared to $3,271,591 for the year ended December
31, 2001. The increase was due to the increase in long term debt during the year
ended December 1, 2002.

The net income (loss) for the year ended December 31, 2002 was ($21,480,828),  a
decrease of  $3,998,985  or 23%,  compared to  ($17,481,843)  for the year ended
December  31,  2001.  The  decrease  was due to the  increase in  administrative
expenses discussed above which was offset by the gains on settlement of debt and
write-off of investments in  subsidiaries  also discussed  above. As a result of
the bankruptcy  filing  discussed  above,  all of the Company's  operations were
discontinued  as of December 1, 2002,  at which point the Company  incurred only
administrative expenses and interest expenses on the DIP financing.

Liquidity and Capital Resources

Primary sources of liquidity since the Company ceased  operations have been cash
balances that have been used to pay administrative expenses.  Operating expenses
of the Company  have been funded with  available  cash  retained  from the Asset
Sales.  As of the date of this  filing  with the SEC of this Form  10-KSB,  cash
totals approximately  $227,210.  Based on such balance and management's forecast
of  activity  levels  during the period that it may remain  without  operations,
management  is unclear as to whether the present cash balance will be sufficient
to pay its current liabilities and its administrative  expenses as such expenses
become due;  provided that, if the Plan is confirmed,  management  believes that
the present cash balance will be sufficient to pay its current  liabilities  and
its administrative expenses as such expenses become due.

Uncertainties Relating to Forward Looking Statements

"Item 6.  Management's  Discussion  and Analysis or Plan of Operation" and other
parts of this Form 10-KSB contain certain  "forward-looking  statements"  within
the  meaning  of the  Securities  Act of 1934,  as  amended.  While the  Company
believes  any  forward-looking  statements  it has made are  reasonable,  actual
results  could  differ  materially  since the  statements  are based on  current
management expectations and are subject to risks and uncertainties.  These risks
and uncertainties include, but are not limited, to the following:

      o     There  can be no  assurance  that the  Plan,  or any  other  plan of
            reorganization,  will  be  approved  by  the  Bankruptcy  Court  and
            effected.

      o     There can be no assurance that the Plan Sponsor will reach agreement
            on definitive  documentation for a merger with the Merger Candidate,
            or any other potential merger candidate.

      o     Even if a plan of reorganization is approved by the Bankruptcy Court
            and effected,  there can be no assurance as to the terms of any such
            plan, including without limitation as to the distributions,  if any,
            to be made to existing creditors and stockholders of the Company.

      o     The Plan Sponsor may withdraw at any time prior to confirmation of a
            plan  of  reorganization,   including  without  limitation,  due  to
            unsatisfactory results of its due diligence on the Merger Candidate.
            In such event,  the Company

                                       8

<PAGE>

            may  substitute  the Plan  Sponsor  with  another  person  or entity
            offering to purchase stock in the newly merged entity under the Plan
            on terms and conditions that may not be the same, or as economically
            favorable to the Company's estate, as those are being offered by the
            Plan Sponsor.  In such event,  the recovery for unsecured  creditors
            would likely be dramatically reduced.

      o     No public  market exists for stock in the merged  entity,  and it is
            not anticipated that any will necessarily develop in the foreseeable
            future.  Therefore,  notwithstanding the legal ability to trade such
            stock,  any  recipient  thereof  should expect that it might have to
            hold the stock for an indefinite period of time.

Item 7. Financial Statements.

The  financial  statements  filed  herewith  are  set  forth  in  the  Index  to
Consolidated  Financial  Statements  (on  page  F-1) of the  separate  financial
section, which follows this report, and are incorporated herein by reference.

Item 8. Changes  In and  Disagreements  With  Accountants  on  Accounting  and
        Financial Disclosures.

The Company's  prior  auditors,  H.J. & Associates,  LLC,  resigned on April 30,
2003. The Company's  current  independent  auditors,  Pritchett,  Siler & Hardy,
P.C.,  have been engaged since  November 28, 2006.  Since that date,  there have
been no  disagreements  with the firm on any matter of accounting  principles or
practices, financial statement disclosure or auditing scope or procedure.

Item 8A. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Our management,  with the  participation of our principal  executive officer and
principal  financial officer,  has evaluated the effectiveness of the design and
operation  of our  disclosure  controls  and  procedures  (as  defined  in Rules
13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of 1934, as amended)
as of the  end of the  period  covered  by this  annual  report.  Based  on this
evaluation,  our principal  executive  officer and principal  financial  officer
concluded  that these  disclosure  controls and  procedures  are  effective  and
designed to ensure that the information  required to be disclosed in our reports
filed or  submitted  under  the  Securities  Exchange  Act of 1934 is  recorded,
processed, summarized and reported within the requisite time periods.

(b) Changes in internal controls.

There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f)  under the Securities  Exchange Act of 1934, as
amended)  identified in connection  with the evaluation of our internal  control
performed  during  our  fourth  quarter  that  has  materially  affected,  or is
reasonably  likely to materially  affect,  our internal  control over  financial
reporting.

Item 8B. Other Information.

On December 1, 2002, the Company filed a voluntary  petition under Chapter 11 of
the Code with the  Bankruptcy  Court and an emergency  motion  authorizing it to
obtain loans and  advances  under a  Debtor-In-Possession  Loan  Agreement  with
Algonquin,  in order to continue operations so that the Company could attempt to
maximize the value of its assets.  Joseph P. Maceda resigned as President of the
Company  concurrently  with such filing. On December 16, 2002, the United States
Trustee appointed the creditors' Committee. The Bankruptcy Court entered a final
order approving the financing on December 20, 2002.

                                       9
<PAGE>

                        Consolidated Financial Statements
                                  and Report of
                     Independent Registered Accounting Firm

                             Ocean Power Corporation

                           December 31, 2002 and 2001

<PAGE>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)

                        CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2002
<PAGE>

                                 C O N T E N T S

Independent Auditors' Report...............................................  F-1

Report of Independent Registered Public Accounting Firm..................... F-2

Consolidated Balance Sheet.................................................  F-3

Consolidated Statements of Operations and Other Comprehensive Income........ F-5

Consolidated Statements of Stockholders' Equity (Deficit)..................  F-6

Consolidated Statements of Cash Flows...................................... F-15

Notes to the Consolidated Financial Statements............................. F-17

<PAGE>

                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

Board of Directors
Ocean Power Corporation and Subsidiaries
El Dorado Hills, California

We have audited the accompanying consolidated statements of operations and other
comprehensive  income,  stockholders' equity (deficit),  and cash flows of Ocean
Power  Corporation and  Subsidiaries (a development  stage company) for the year
ended December 31, 2001,  and from inception on March 26, 1992 through  December
31, 2001. These consolidated  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall  consolidated  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  results of Ocean  Power
Corporation and Subsidiaries' (a development stage company) operations and other
comprehensive  income and their cash flows for the year ended  December 31, 2001
and from  inception  on March 26, 1992 through  December 31, 2001 in  conformity
with accounting principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 to the
consolidated  financial  statements,  the Company is a development stage company
which has  generated  significant  losses from  inception  and has a substantial
working  capital  deficit  which  together  raises  substantial  doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also described in Note 9. The consolidated  financial  statements do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.

HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 22, 2002

                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
OCEAN POWER CORPORATION & SUBSIDIARIES
New York, NY 10022

We have  audited  the  accompanying  consolidated  balance  sheet of Ocean Power
Corporation  and   Subsidiaries  as  of  December  31,  2002,  and  the  related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for the year ended  December 31, 2002 and from inception on March 26, 1992
through  December 31, 2002.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  based on our  audit.  The
consolidated  financial  statements of Ocean Power  Corporation and Subsidiaries
for the period from  inception on March 26, 1992 through  December 31, 2001 were
audited by other  auditors  whose  report  dated  March 22,  2002  expressed  an
unqualified  opinion on those  statements and included an explanatory  paragraph
expressing  concern  about the  ability of the  company to  continue  as a going
concern. Our opinion on the consolidated statements of operations, stockholders'
equity  (deficit) and cash flows for the period from inception on March 26, 1992
through  December 31, 2002,  insofar as it relates to amounts for prior  periods
through December 31, 2001, is based solely on the report of other auditors.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audit provides a
reasonable basis for our opinion.

In our  opinion,  based on our  audit  and the  report  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the  financial  position  of Ocean  Power  Corporation  and
Subsidiaries  as of December 31, 2002,  and the results of their  operations and
their cash flows for the year ended  December  31,  2002 and from  inception  on
March 26,  1992  through  December  31,  2002,  in  conformity  with  accounting
principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that Ocean Power  Corporation and Subsidiaries will continue as a going concern.
As discussed in Note 9 to the financial statements,  Ocean Power Corporation and
Subsidiaries  has incurred  substantial  losses since  inception and has current
liabilities  in excess of assets.  Further,  The  Company  has filed a voluntary
petition  under  Chapter  11 of the  Bankruptcy  Code  with  the  United  States
Bankruptcy Court Southern  District of New York. These factors raise substantial
doubt  about  the  ability  of the  Company  to  continue  as a  going  concern.
Management's plans in regards to these matters are also described in Note 9. The
financial  statements do not include any adjustments  that might result from the
outcome of these uncertainties.

PRITCHETT, SILER & HARDY, P.C.
September 28, 2007
Salt Lake City, Utah

                                       F-2
<PAGE>

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

                                     ASSETS
                                     ------

                                                                    December 31,
                                                                        2002
                                                                    ------------

CURRENT ASSETS

   Cash                                                             $     13,750
   Cash - restricted                                                      48,521
                                                                    ------------

      Total Current Assets                                                62,271
                                                                    ------------

EQUIPMENT, NET (Note 2)                                                  366,603
                                                                    ------------

OTHER ASSETS

   Deposits                                                               18,402
   Patents, and licensing agreements, net (Note 4)                             -
   Goodwill, net (Note 2)                                                      -
                                                                    ------------

      Total Other Assets                                                  18,402
                                                                    ------------

      TOTAL ASSETS                                                  $    447,276
                                                                    ============

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

                                       F-3

<PAGE>

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

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

                                                                   December 31,
                                                                      2002
                                                                  -------------

CURRENT LIABILITIES

   Accounts payable                                               $   2,428,381
   Accrued expenses (Note 8)                                         10,355,759
   Notes payable - related parties (Note 6)                           1,033,469
   Notes and convertible debentures
      payable - current portion (Note 7)                              9,889,965
                                                                  -------------

      Total Current Liabilities                                      23,707,574
                                                                  -------------

      Total Liabilities                                              23,707,574
                                                                  -------------

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY (DEFICIT)

   Preferred stock: 20,000,000 shares authorized of
      $0.001 par value; no shares outstanding                                 -
   Common stock: 500,000,000 shares authorized of
      $0.01 par value; 56,182,746 shares issued and outstanding         561,827
   Additional paid-in capital                                        35,169,137
   Deficit accumulated during the development stage                 (58,991,262)
                                                                  -------------

      Total Stockholders' Equity (Deficit)                          (23,260,298)
                                                                  -------------

      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)        $     447,276
                                                                  =============

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

                                       F-4

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   From
                                                                               Inception on
                                               For the Years Ended               March 26,
                                                   December 31,                1992 Through
                                        ----------------------------------     December 31,
                                             2002               2001               2002
                                        ---------------    ---------------    --------------
<S>                                     <C>                <C>                <C>
REVENUES                                $             -    $             -    $            -
                                        ---------------    ---------------    --------------

EXPENSES

   General and administrative                         -                  -                 -
   Impairment of intangible assets                    -                  -                 -
   Research and development                           -                  -                 -
   Depreciation and amortization                      -                  -                 -
                                        ---------------    ---------------    --------------

     Total Expenses                                   -                  -                 -
                                        ---------------    ---------------    --------------

     LOSS FROM OPERATIONS                             -                  -                 -
                                        ---------------    ---------------    --------------

OTHER INCOME (EXPENSE)

   Currency gain                                      -                  -                 -
   Interest income                                    -                  -                 -
   Loss on sale of assets                             -                  -                 -
   Interest expense                          (3,877,129)        (3,271,591)       (8,798,966)
                                        ---------------    ---------------    --------------

     Total Other Income (Expense)            (3,877,129)        (3,271,591)       (8,798,966)
                                        ---------------    ---------------    --------------

LOSS BEFORE DISCONTINUED OPERATIONS          (3,877,129)        (3,271,591)       (8,798,966)

DISCONTINUED OPERATIONS

   Loss on discontinued operations          (17,603,699)       (14,210,252)      (50,192,296)
                                        ---------------    ---------------    --------------

NET LOSS                                    (21,480,828)       (17,481,843)      (58,991,262)
                                        ---------------    ---------------    --------------

OTHER COMPREHENSIVE INCOME

   Currency translation adjustment             (334,549)           139,291                 -
                                        ---------------    ---------------    --------------

     TOTAL COMPREHENSIVE LOSS           $   (21,815,377)   $   (17,342,552)   $  (58,991,262)
                                        ===============    ===============    ==============

BASIC AND DILUTED LOSS PER SHARE

   Loss before discontinued operations  $         (0.08)   $         (0.09)
   Discontinued operations                        (0.39)             (0.37)
                                        ---------------    ---------------

     Net loss per share                 $         (0.47)   $         (0.46)
                                        ===============    ===============

WEIGHTED AVERAGE NUMBER OF SHARES
   OUTSTANDING                               45,482,636         38,312,532
                                        ===============    ===============
</TABLE>

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

                                       F-5

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                               Common Stock            Additional        Other            and        During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   -------------
<S>                                        <C>         <C>            <C>            <C>             <C>            <C>
Inception, March 26, 1992                          -   $          -   $          -   $           -   $          -   $           -

Net loss from inception on
   March 20, 1992 through
   December 31, 1997                               -              -              -               -              -      (2,306,366)
                                          ----------   ------------   ------------   -------------   ------------   -------------

Balance, December 31, 1997                         -              -              -               -              -      (2,306,366)

February 24, 1998, common
   stock issued for cash to
   employees at $0.003 per share             395,467          3,955         (2,817)              -              -               -

March 6,1998, common stock
   issued for cash to employees
   at $0.003 per share                       121,904          1,219           (869)              -              -               -

March 12, 1998, common stock
   issued for cash to an employee
   at $0.003 per share                        33,199            332           (237)              -              -               -

March 18, 1998, common stock
   issued for cash to an employee
   at $0.003 per share                         2,575             26            (19)              -              -               -

April 2, 1998, common stock
   issued for cash to a lender at
   $0.003 per share                          130,500          1,305           (930)              -              -               -

May 14, 1998, common stock
   issued for cash to an employee
   at $0.003 per share                        14,755            147           (106)              -              -               -

June 16, 1998, common stock issued
   for cash, 42,178 issued to employees,
   43,152 issued to consultants, 60,900
   issued to lenders, 6,960 issued to a
   landlord and 8,352 issued to vendors,
   at $0.003 per share                       161,542          1,615         (1,152)              -              -               -

June 16, 1998, common stock
   issued for debt cancellation to the
   company's founders at $0.079 per
   share                                   1,061,400         10,614         73,267               -              -               -

July 29, 1998, common stock
   issued for cash to a consultant
   at $0.003 per share                        34,800            348           (248)              -              -               -

Net loss for the year ended
   December 31, 1998                               -              -              -               -              -      (2,917,964)
                                          ----------   ------------   ------------   -------------   ------------   -------------
Balance, December 31, 1998                 1,956,142   $     19,561   $     66,889   $           -   $          -   $  (5,224,330)
                                          ----------   ------------   ------------   -------------   ------------   -------------
</TABLE>

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

                                       F-6

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                               Common Stock            Additional        Other            and        During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance, December 31, 1998                 1,956,142   $     19,561   $     66,889   $           -   $          -       (5,224,330)

March 5, 1999, common stock
   issued for cash to an employee
   at $0.003 per share                       334,080          3,341         (2,381)              -              -                -

March 22, 1999 34,800 shares
   issued for cash to an employee
   at $0.003 per share                       286,682          2,867         (2,043)              -              -                -

March 22, 1999, 34,800 shares issued to
   an officer and founder for debt
   cancellation of $50,000, 496,248
   shares issued to a consultant for
   past due fees of $1,426 and
   18,480,172 shares issued to employees
   for past due salaries of $53,104 at
   $0.005 per share                       19,011,220        190,112        (85,582)              -              -                -

April 22, 1999, common stock
   issued for cash to a consultant
   at $0.003 per share                       129,734          1,297           (924)              -              -                -

April 27, 1999, common stock
   issued for cash to an employee
   at $0.003 per share                         5,951             59            (43)              -              -                -

April 27, 1999, common stock issued to
   a landlord, 69,600 shares, and a
   consultant, 26,100 shares for rent of
   $200 and fees of $75, at $0.003
   per share                                  95,700            957           (682)              -              -                -

April 28, 1999, common stock
   issued for cash to a consultant
   at $0.003 per share                        12,180            122            (87)              -              -                -

April 30, 1999, common stock
   issued for cash to a consultant
   at $0.003 per share                         2,888             29            (21)              -              -                -

April 30, 1999, common stock
   issued to consultants for fees
   at $0.003 per share                        22,968            230           (164)              -              -                -

May 3, 1999, common stock
   issued to a consultant for fees
   at $0.003 per share                        25,717            257           (183)              -              -                -
                                          ----------   ------------   ------------   -------------   ------------   --------------

Balance Forward                           21,883,262   $    218,832   $    (25,221)  $           -   $          -   $   (5,224,330)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</TABLE>

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

                                       F-7

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                               Common Stock            Additional        Other            and        During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance Forward                           21,883,262   $    218,832   $    (25,221)  $           -   $          -   $   (5,224,330)

May 5, 1999, common stock issued for
   cash, 16,008 shares to a vendor and
   16,008 shares to a consultant, at
   $0.003 per share                           32,016            320           (228)              -              -                -

May 7, 1999, common stock issued for
   cash to a landlord at $0.003 per
   share                                         348              3             (2)              -              -                -

May 7, 1999, common stock issued to an
   employee for salary at $0.003 per
   share                                   2,610,000         26,100        (18,600)              -              -                -

May 13, 1999, common stock issued for
   cash to a consultant at $0.003 per
   share                                     139,200          1,392           (992)              -              -                -

May 19, 1999, common stock issued for
   cash, 24,360 shares to a lender and
   348,000 shares to a consultant at
   $0.003 per share                          372,360          3,724         (2,654)              -              -                -

June 17, 1999, common stock issued for
   cash to a vendor at $0.003 per share        6,960             70            (50)              -              -                -

Recapitalization (Note 1)                  6,291,450         62,915      2,698,858               -              -                -

June 23, 1999, options issued below
   market value                                    -              -         14,097               -              -                -

July 12, 1999, options issued below
   market value                                    -              -         62,561               -              -                -

July 15, 1999, common stock issued for
   cash at $5.00 per share for exercise
   of options                                 10,000            100         49,900               -              -                -

July 15, 1999, common stock issued for
   services at $7.80 per share                15,000            150        116,850               -              -                -

July 26, 1999, common stock issued for
   cash at $5.00 per share for exercise
   of options                                 10,000            100         49,900               -              -                -

August 12, 1999, common stock issued for
   loan consideration at $2.50 per share     100,000          1,000        249,000               -              -                -
                                          ----------   ------------   ------------   -------------   ------------   --------------

Balance Forward                           31,470,596   $    314,706   $  3,193,419   $           -   $          -   $   (5,224,330)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</TABLE>

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

                                       F-8

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                                 Common Stock          Additional        Other            and         During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares         Amount        Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance Forward                           31,470,596   $    314,706   $  3,193,419   $           -   $          -   $   (5,224,330)

September 2, 1999, common stock issued
   for services valued at $1.94 per share     20,000            200         38,600               -              -                -

September 9, 1999, options issued below
   market value                                    -              -          1,139               -              -                -

September 9, 1999, common stock issued
   for cash at $1.00 per share               100,000          1,000         99,000               -              -                -

October 1, 1999, cancellation of
   common stock valued at zero.             (502,500)        (5,025)         5,025               -              -                -

November 16, 1999, value of beneficial
   conversion features of convertible
   debentures (Note 7)                             -              -        650,000               -              -                -

November 29, 1999, common stock issued
   for finders fee valued at $1.34 per
   share                                     400,000          4,000        533,200               -              -                -

Stock offering costs                               -              -       (537,200)              -              -                -

December 7, 1999, options issued below
   market value                                    -              -        130,402               -              -                -

December 8, 1999, common stock issued
   for cash at $0.70 per share                71,839            718         49,282               -              -                -

December 9, 1999, common stock issued
   for cash at $0.71 per share               175,070          1,751        123,249               -              -                -

December 9, 1999, common stock issued
   for cash at $0.71 per share                49,020            490         34,510               -              -                -

December 10, 1999, common stock issued
   for cash at $0.84 per share               111,111          1,111         98,889               -              -                -

December 10, 1999, common stock issued
   for cash at $0.90 per share                33,333            333         29,667               -              -                -

December 16, 1999, common stock issued
   for cash at $0.83 per share               193,939          1,939        158,061               -              -                -

December 21, 1999, common stock issued
   for cash at $0.83 per share               120,773          1,208         98,792               -              -                -

December 31, 1999, common stock issued
   for exercise of warrants at $1.50
   per share                                 592,744          5,928        883,189               -              -                -

Net loss for the year ended
   December 31, 1999                               -              -              -               -              -       (5,699,486)
                                          ----------   ------------   ------------   -------------   ------------   --------------

Balance, December 31, 1999                32,835,925   $    328,359   $  5,589,224   $           -   $          -   $  (10,923,816)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</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)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                                Common Stock           Additional        Other            and         During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance, December 31, 1999                32,835,925   $    328,359   $  5,589,224   $           -   $          -   $  (10,923,816)

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

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

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

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

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

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

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

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

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

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               -              -                -
                                          ----------   ------------   ------------   -------------   ------------   --------------

Balance Forward                           37,149,942   $    371,499   $ 22,307,577   $           -   $   (237,000)  $  (10,923,816)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</TABLE>

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

                                      F-10

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                               Common Stock            Additional        Other            and        During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance Forward                           37,149,942   $    371,499   $ 22,307,577   $           -   $   (237,000)  $  (10,923,816)

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)

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

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

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

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

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

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

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

Currency translation adjustment                    -              -              -         139,291              -                -

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

Balance, December 31, 2001                38,439,094   $    384,391   $ 30,254,067   $     334,549   $ (1,141,000)  $  (37,510,434)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</TABLE>

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

                                      F-11

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                                Common Stock           Additional        Other            and        During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance, December 31, 2001                38,439,094   $    384,391   $ 30,254,067   $     334,549   $ (1,141,000)  $  (37,510,434)

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

January 8, 2002, options granted to
   employee's below market value                   -              -        180,447               -              -                -

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

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

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

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

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

Revaluation of existing warrants                   -              -      1,360,574               -              -                -

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

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

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

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

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

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

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

Balance forward                           39,680,515   $    396,805   $ 34,008,023   $     334,549   $ (1,817,800)  $  (37,510,434)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</TABLE>

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

                                      F-12

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                               Common Stock            Additional        Other            and         During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance forward                           39,680,515   $    396,805   $ 34,008,023   $     334,549   $ (1,817,800)  $  (37,510,434)

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

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

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

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

Warrants issued in connection with debt
   obligations                                     -              -        930,065               -              -                -

July 1, 2002 common stock issued for
   equity line of credit at $0.026
   per share                                 687,500          6,875         10,759               -              -                -

July 1, 2002, warrants granted as
   incentive to extend debt                        -              -            259               -              -                -

July 8, 2002, common stock issued for
   equity line of credit at $0.026
   per share                                 287,159          2,872          4,494               -              -                -

July 11, 2002, common stock issued for
   equity line of credit at $0.03
   per share                               1,666,667         16,667         22,917               -              -                -

July 11, 2002, common stock issued for
   conversion of convertible debenture
   at $0.022 per share                       925,926          9,259         10,741               -              -                -

July 15, 2002, common stock issued for
   equity line of credit at $0.03
   per share                                 666,667          6,667          6,350               -              -                -

July 22, 2002, common stock issued for
   equity line of credit at $0.012
   per share                               2,521,930         25,218          3,531               -              -                -

July 29, 2002, common stock issued for
   equity line of credit at $0.011
   per share                               1,635,965         16,360          2,290               -              -                -

July 31, 2002, common stock issued for
   conversion of convertible debentures
   at $0.01 per share                      3,854,167         38,541         (1,541)              -              -                -
                                          ----------   ------------   ------------   -------------   ------------   --------------

Balance forward                           56,182,746   $    561,827   $ 35,155,326   $     334,549   $   (875,128)  $  (37,510,434)
                                          ----------   ------------   ------------   -------------   ------------   --------------
</TABLE>

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

                                      F-13

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                       Deferred        Deficit
                                                                                                     Compensation    Accumulated
                                               Common Stock            Additional        Other            and        During the
                                          -------------------------      Paid-In     Comprehensive    Consulting     Development
                                            Shares        Amount         Capital        Income          Expense         Stage
                                          ----------   ------------   ------------   -------------   ------------   --------------
<S>                                       <C>          <C>            <C>            <C>             <C>            <C>
Balance forward                           56,182,746   $    561,827   $ 35,155,326   $     334,549   $   (875,128)  $  (37,510,434)

Options granted to employees below
   market                                          -              -          5,815               -              -                -

Options granted for consulting services            -              -          7,996               -              -                -

Deferred consulting expensed                       -              -              -               -        875,128                -

Currency translations adjustment                   -              -              -        (334,549)             -                -

Net loss for the twelve months ended,
   December 31, 2002                               -              -              -               -              -      (21,480,828)
                                          ----------   ------------   ------------   -------------   ------------   --------------

Balance, December 31, 2002                56,182,746   $    561,827   $ 35,169,137   $           -   $          -   $  (58,991,262)
                                          ==========   ============   ============   =============   ============   ==============
</TABLE>

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

                                      F-14

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                        From
                                                                                                    Inception on
                                                                         For the Years Ended          March 26,
                                                                            December 31,            1992 Through
                                                                  ------------------------------    December 31,
                                                                       2002            2001             2002
                                                                  -------------   --------------   --------------
<S>                                                               <C>             <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net loss                                                       $ (21,480,828)  $  (17,481,843)  $  (58,991,262)
   Adjustments to reconcile net loss to net
      cash used by operating activities:
         Depreciation and amortization                                  458,842        1,862,614        2,804,815
         Deferred consulting expense                                  1,959,800          197,665        2,486,798
         Value of common stock, warrants, options
            discounts on equity instruments issued
            for services, contingent notes                            4,159,917                -        7,962,847
         Loss on sale of assets                                               -                -          387,649
         Amortization of debenture discount                           2,350,152        1,628,386        4,628,538
         Gain on settlement of debt and write off of subsidiary      (5,762,376)        (157,822)      (6,085,539)
         Impairment loss                                             11,615,822          286,301       12,302,123
   Change in operating asset and liability accounts,
      net of amounts acquired in business combination:
         (Increase) decrease in advances to employees,
            prepaid expenses, and deposits                               16,613           79,341       (5,790,623)
         (Increase) in debt offering costs                              108,591         (108,591)               -
         Increase (decrease) in accounts payable                      1,226,767        3,151,818        5,412,047
         Increase in accrued expenses                                 4,108,853        2,761,772       13,487,774
         Increase in deferred revenue                                   (35,550)          35,550                -
                                                                  -------------   --------------   --------------

            Net Cash Used by Operating Activities                    (1,273,397)      (7,744,809)     (21,394,833)
                                                                  -------------   --------------   --------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Cash lost in discontinued operations                                  (4,713)               -           (4,713)
   License agreement payments                                                 -                -         (400,000)
   Cash acquired in Sigma acquisition                                         -                -          142,254
   Proceeds from sale of assets                                               -                -                1
   Purchase of fixed assets                                                   -         (420,595)      (1,164,570)
   Equipment procurement costs                                                -                -         (564,110)
                                                                  -------------   --------------   --------------

            Net Cash Used by Investing Activities                        (4,713)        (420,595)      (1,991,138)
                                                                  -------------   --------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Repayment of related party notes payable                              (5,250)        (113,776)      (1,640,226)
   Repayment of note payable                                                  -         (179,988)      (1,519,062)
   Loans from related parties                                            11,500          227,000        7,462,787
   Proceeds from notes payable                                          415,000        4,400,000        4,815,000
   Issuance of convertible debentures                                   650,000        1,800,000        3,100,000
   Common stock issued for cash                                         125,000                -       11,256,032
   Stock offering costs                                                       -                -          (26,289)
                                                                  -------------   --------------   --------------

            Net Cash Provided by Financing Activities                 1,196,250        6,133,236       23,448,242
                                                                  -------------   --------------   --------------

NET INCREASE (DECREASE) IN CASH                                         (81,860)      (2,032,168)          62,271

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

CASH AT END OF PERIOD                                             $      62,271   $      144,131   $       62,271
                                                                  =============   ==============   ==============
</TABLE>

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

                                      F-15

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                     From
                                                                                                 Inception on
                                                                      For the Years Ended          March 26,
                                                                         December 31,            1992 Through
                                                               ------------------------------    December 31,
                                                                    2002            2001             2002
                                                               -------------   --------------   --------------
<S>                                                            <C>             <C>              <C>
CASH PAID FOR:

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

NON-CASH FINANCING ACTIVITIES

   Value of common stock, warrants, options and
      discounts on equity instruments issued for services      $   4,159,917   $            -   $    7,962,847
   Equity instruments issued for deferred consulting expense   $           -   $            -   $      740,000
   Common stock issued for recapitalization                    $           -   $            -   $    2,761,773
   Common stock issued for conversion of debt                  $           -   $      456,286   $    2,963,511
   Acquisition of licenses through license agreement payable   $           -   $            -   $    6,940,000
   Warrants granted in conjunction with debt instruments       $           -   $    3,261,386   $    3,261,386
</TABLE>

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

                                      F-16

<PAGE>

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

NOTE 1 -  ORGANIZATION AND DESCRIPTION OF BUSINESS

          The  consolidated  financial  statements  presented are those of Ocean
          Power Corporation and its wholly-owned Subsidiaries (the Company).

          The  Company  has  had  limited  activities  since  inception  and  is
          considered a development stage company because no significant revenues
          have been  realized  and  planned  principal  operations  have not yet
          commenced.  The Company had been planning to engage in the business of
          developing  and  marketing  water  desalination  and  renewable  power
          generation systems that will be modular and mass produced. The Company
          had  plans to  pursue  regional  joint  ventures  in water  and  power
          challenged  markets  to  build,  own,  operate  and  transfer  modular
          seawater  desalination and power plants.  However,  the Company has no
          ongoing   operations   and  is   pursuing  a  Chapter  11   bankruptcy
          reorganization.

          PTC Holdings,  Inc. (Holdings)  (formerly H Power Technologies,  Inc.)
          was  incorporated  on March  26,  1992  under the laws of the State of
          Delaware  to  engage  in  any  lawful  act  or   activity   for  which
          corporations  may be organized under the General  Corporation  Laws of
          Delaware.

          PTC Group,  Inc.,  (Group) (formerly  Intryst,  Inc.) was incorporated
          under the laws of the State of Idaho on April 24, 1969.

          On June 22, 1999,  Group and Holdings  completed an Agreement and Plan
          of Merger whereby Group issued  25,044,146  shares of its common stock
          in  exchange  for all of the  outstanding  common  stock of  Holdings.
          Immediately  prior to the  Agreement  and Plan of  Merger,  Group  had
          6,291,450  shares  of  common  stock  issued  and   outstanding.   The
          acquisition  was  accounted  for  as a  recapitalization  of  Holdings
          because  the  shareholders  of  Holdings  controlled  Group  after the
          acquisition.  At the effective date of the transaction,  each share of
          Holdings was converted  into 3.48 shares of Group with Group being the
          surviving entity in the merger.  Holdings was treated as the acquiring
          entity for accounting  purposes and Group was the surviving entity for
          legal  purposes.  There was no adjustment to the carrying value of the
          assets or liabilities of Holdings, nor was there any adjustment to the
          carrying  value of the net  assets  of Group.  Costs of  approximately
          $245,000  associated with this  transaction were expensed as incurred.
          On August 19, 1999, the shareholders of the Company authorized a 1 for
          10 reverse  stock split at which time the par value was  changed  from
          $0.001 to $0.01.  A result of this par value change is that the common
          stock  issuances  prior to June 22,  1999 which had been valued at the
          original  par value of $0.001 now reflect a deficit in the  additional
          paid-in  capital.  All  references to shares of common stock have been
          retroactively restated.

          On July 12, 1999,  Group  changed its name to Ocean Power  Corporation
          (Idaho).

          On July 21, 1999,  Ocean Power  Corporation  (Delaware) was formed for
          the  purpose of  changing  the  domicile  of Ocean  Power  Corporation
          (Idaho).

          On July 28,  1999,  Delaware  and Idaho  merged to change the domicile
          from Idaho to Delaware with Delaware being the surviving  entity.  The
          Company is not current with its  franchise  tax filings with the state
          of Delaware.

                                      F-17
<PAGE>

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

NOTE 1 -  ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)

          On December  1, 2002,  the Company  filed a voluntary  petition  under
          Chapter 11 of the  bankruptcy  code with the United States  Bankruptcy
          Court  Southern  District of New York.  See Note 17 for the discussion
          regarding the bankruptcy filing.

          The Subsidiaries:

          Integrated Water and Power Corporation (IWP) (formerly Clean Air Power
          Technologies     Corporation)    (formerly    Advanced    Technologies
          Manufacturing  Corporation)  was  incorporated,   as  a  wholly  owned
          subsidiary  on  December  11,  1996  under  the  laws of the  State of
          Delaware  to  engage  in  any  lawful  act  or   activity   for  which
          corporations  may be organized under the General  Corporation  Laws of
          Delaware. IWP is currently inactive.

          Advanced   Power  Sources   Corporation   (APS)   (formerly   ZE-Power
          Technologies    Corporation)   (formerly   P.T.C.   Corporation)   was
          incorporated, as a wholly owned subsidiary on March 26, 1992 under the
          laws of the State of  Delaware to engage in any lawful act or activity
          for which corporations may be organized under the General  Corporation
          Laws of Delaware. APS is currently inactive.

          Manufacturing  Technologies  Corporation (MTC) was incorporated,  as a
          wholly owned subsidiary on January 7, 1997 under the laws of the State
          of  Delaware  to  engage  in any  lawful  act or  activity  for  which
          corporations  may be organized under the General  Corporation  Laws of
          Delaware. MTC is currently inactive.

          SIGMA Elektroteknisk,  AS (SIGMA), a company acquired in 2000 (Note 5)
          was  incorporated  on January 6, 1994 under the laws of the Country of
          Norway to engage in the business of developing and producing  personal
          combustion  power  plants  (PCP's),  an energy  converter  utilizing a
          Stirling  engine that runs on natural gas or propane and produces heat
          and  electricity  for use in  micro  CHP  (combined  heat  and  power)
          systems,  an appliance to produce heat and power in households.  Sigma
          has been dissolved through a bankruptcy filing in Norway (Note 16).

          Ocean  Power  UK  Limited  (UK)  was  incorporated  as a  wholly-owned
          subsidiary  on October  31,  2000  under the laws of Great  Britain to
          serve as a sales and marketing  company in Europe.  This company is no
          longer  deemed to be a subsidiary of the Company as it is no longer in
          existence.

          Powerco  US,  Inc.   (Powerco)  was  incorporated  as  a  wholly-owned
          subsidiary  under the laws of the State of  Delaware  to engage in any
          lawful activity under the General Corporation Laws of Delaware.

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          a. Accounting Method

          The Company's consolidated financial statements are prepared using the
          accrual  method of  accounting.  The Company has elected a December 31
          year end.

                                      F-18
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          b. Basic Loss Per Share

          The  computation  of basic loss per share of common  stock is based on
          the weighted average number of shares outstanding during the period of
          the  financial  statements.  Diluted  loss per share is not  presented
          because  it is  equal  to basic  loss  per  share  as a result  of the
          antidilutive nature of the stock equivalents.

<TABLE>
<CAPTION>
                                                            For the Years Ended
                                                                December 31,
                                                  ----------------------------------------
                                                        2002                    2001
                                                  ----------------        ----------------
<S>                                               <C>                     <C>
Net loss before discontinued operations
   (numerator)                                    $     (3,877,129)       $     (3,271,591)
Net loss from discontinued operations
   (numerator)                                         (17,603,699)            (14,210,252)
                                                  ----------------        ----------------
Net loss                                               (21,480,828)            (17,481,843)

Weighted average number of shares
   outstanding (denominator)                            45,482,636              38,312,532
                                                  ----------------        ----------------

Loss per share                                    $          (0.47)       $          (0.46)
                                                  ================        ================
</TABLE>

          c. Provision for Taxes

          The  Company  accounts  for  income  taxes  under  the  provisions  of
          Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
          for Income Taxes, using the liability method. The estimated future tax
          effect of differences  between the basis in assets and liabilities for
          tax and  accounting  purposes is accounted for as deferred  taxes.  In
          accordance with the provisions of SFAS No. 109, a valuation  allowance
          would be  established  to reduce  deferred  tax assets if it were more
          likely than not that all, or some portion, of such deferred tax assets
          would not be realized.  A full allowance  against  deferred tax assets
          was provided as of December 31, 2002.

          Deferred taxes are provided on a liability method whereby deferred tax
          assets  are  recognized  for  deductible  temporary   differences  and
          operating  loss  and  tax  credit   carryforwards   and  deferred  tax
          liabilities   are  recognized  for  taxable   temporary   differences.
          Temporary differences are the differences between the reported amounts
          of assets and liabilities and their tax bases. Deferred tax assets are
          reduced by a valuation  allowance  when, in the opinion of management,
          it is more  likely than not that some  portion or all of the  deferred
          tax assets will not be realized.  Deferred tax assets and  liabilities
          are  adjusted  for the effects of changes in tax laws and rates on the
          date of enactment.

                                      F-19
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          c. Provision for Taxes (Continued)

          Net  deferred  tax assets  and  liabilities  consist of the  following
          components as of December 31, 2002:

                                                                    2002
                                                               ----------------
            Deferred tax assets:
               NOL carryover                                   $      9,736,600
               Accrued expenses                                         884,600

            Deferred tax liabilities:
               Depreciation                                              (2,900)

            Valuation allowance                                     (10,618,300)
                                                               ----------------

               Net Deferred Tax Asset                          $              -
                                                               ================

          The  income  tax  provision  differs  from the  amount of  income  tax
          determined  by  applying  the U.S.  federal  income tax rate to pretax
          income from  continuing  operations  for the years ended  December 31,
          2002 due to the following:
                                                                     2002
                                                               ----------------
            Book income                                        $     (6,864,307)
            Loss on disposal of assets                                  539,773
            Debt discount                                               268,614
            Meals & entertainment                                        20,334
            Warrant revaluation                                         530,624
            Debt issue                                                   12,250
            Contingency                                                  86,740
            Stock for services                                          751,901
            Penalties & interest                                         59,109
            Related party accrued interest                               45,276
            Valuation allowance                                       4,549,686
                                                               ----------------

                                                               $              -
                                                               ================

          At December 31, 2002, the Company had net operating loss carryforwards
          of approximately $24,000,000 that may be offset against future taxable
          income  from the year  2002  through  2022.  No tax  benefit  has been
          reported in the December 31, 2002  consolidated  financial  statements
          since the potential tax benefit is offset by a valuation  allowance of
          the same amount.

          Due to the  change in  ownership  provisions  of the Tax Reform Act of
          1986,  net  operating  loss   carryforwards  for  Federal  income  tax
          reporting purposes are subject to annual limitations.  Should a change
          in ownership occur, net operating loss carryforwards may be limited to
          use in future years.

                                      F-20
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          d. Cash and Cash Equivalents

          The Company considers all highly liquid investments with a maturity of
          three months or less when purchased to be cash equivalents.

          e. Principles of Consolidation

          The financial  statements  for the year ended  December 31, 2002,  are
          consolidated   with  Ocean  Power  Corporation  and  its  wholly-owned
          subsidiaries,  Integrated Water and Power Corporation,  Advanced Power
          Sources Corporation,  Manufacturing  Technologies  Corporation,  SIGMA
          Elektroteknisk,  AS, Ocean Power UK Limited,  and PowerCo US, Inc. All
          significant   intercompany   accounts  and   transactions   have  been
          eliminated.  The  subsidiaries  were all  defunct or  dissolved  as of
          December 31, 2002.

          f. Equipment

          Office  equipment and software are recorded at cost.  Major  additions
          and renewals are  capitalized  and  depreciated  over their  estimated
          useful lives using the straight-line  method.  Leasehold  improvements
          are  depreciated  over the shorter of their  useful lives or the lease
          term.  Depreciation  expense for the years ended December 31, 2002 and
          2001 was $131,842 and $186,872, respectively.

          Equipment consists of the following:

            Estimated Useful                                       December 31,
                  Life                                                 2002
            ----------------                                      -------------
                20 years       Equipment                          $     114,195
               5 - 7 years     Office equipment and furniture            99,274
               3 - 5 years     Computers and software                   159,287
                 7 years       Phone system                              20,466
                 7 years       Leasehold improvements                   280,843
                               Artwork                                    1,393
                               Accumulated depreciation                (308,855)
                                                                  -------------

                               Net Equipment                      $     366,603
                                                                  =============

          g. Goodwill

          The cost of investment in  subsidiaries in excess of the fair value of
          net  assets  at  the  date  of  purchase  is  being  amortized  by the
          straight-line method over a period of ten years.

          Because of the  adoption  of SFAS No.  142,  the  Company is no longer
          amortizing the goodwill generated from the purchase of Sigma.  Instead
          the  goodwill  is  subject  to  impairment  testing.  Because  of  the
          bankruptcy  of Sigma as discussed in Note 16, the Company  recorded an
          impairment  of goodwill of  $5,656,207  which is part of the loss from
          discontinued operations.

                                      F-21
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          h. Estimates

          The  preparation of financial  statements in conformity with generally
          accepted  accounting  principles requires management to make estimates
          and  assumptions  that  affect  the  reported  amounts  of assets  and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial  statements and the reported amounts of revenues
          and expenses during the reporting period.  Actual results could differ
          from those estimates.

          i. Recent Accounting Pronouncements

          In November 2004, the FASB issued SFAS No. 151  "Inventory  Costs,  an
          amendment of ARB No. 43, Chapter 4. The  amendments  made by Statement
          151 clarify that abnormal amounts of idle facility  expense,  freight,
          handling costs, and wasted materials  (spoilage)  should be recognized
          as  current-period   charges  and  require  the  allocation  of  fixed
          production  overheads to inventory based on the normal capacity of the
          production  facilities.  The guidance is effective for inventory costs
          incurred during fiscal years  beginning  after June 15, 2005.  Earlier
          application is permitted for inventory  costs  incurred  during fiscal
          years beginning after November 23, 2004. The Company has evaluated the
          impact of the  adoption  of SFAS 151,  and does not believe the impact
          will be significant to the Company's  overall results of operations or
          financial position.

          In December  2004, the FASB issued SFAS No.152,  "Accounting  for Real
          Estate Time-Sharing  Transactions--an amendment of FASB Statements No.
          66 and 67"  ("SFAS  152) The  amendments  made by  Statement  152 This
          Statement  amends FASB Statement No. 66,  Accounting for Sales of Real
          Estate, to reference the financial  accounting and reporting  guidance
          for real estate  time-sharing  transactions  that is provided in AICPA
          Statement  of  Position   (SOP)  04-2,   Accounting  for  Real  Estate
          Time-Sharing  Transactions.  This Statement also amends FASB Statement
          No. 67,  Accounting  for Costs and Initial  Rental  Operations of Real
          Estate  Projects,  to  state  that  the  guidance  for (a)  incidental
          operations  and (b) costs  incurred to sell real estate  projects does
          not apply to real estate time-sharing transactions. The accounting for
          those  operations  and costs is subject to the  guidance  in SOP 04-2.
          This Statement is effective for financial  statements for fiscal years
          beginning after June 15, 2005. The Company has evaluated the impact of
          the  adoption  of SFAS 152,  and does not  believe  the impact will be
          significant  to  the  Company's   overall  results  of  operations  or
          financial position.

                                      F-22
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          i. Recent Accounting Pronouncements (Continued)

          In  December  2004,  the  FASB  issued  SFAS  No.153,   "Exchanges  of
          Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
          Nonmonetary  Transactions.  "The  amendments made by Statement 153 are
          based on the principle that exchanges of nonmonetary  assets should be
          measured based on the fair value of the assets exchanged. Further, the
          amendments eliminate the narrow exception for nonmonetary exchanges of
          similar  productive assets and replace it with a broader exception for
          exchanges of nonmonetary assets that do not have commercial substance.
          Previously, Opinion 29 required that the accounting for an exchange of
          a productive  asset for a similar  productive  asset or an  equivalent
          interest in the same or similar  productive  asset  should be based on
          the recorded amount of the asset relinquished.  Opinion 29 provided an
          exception  to  its  basic  measurement   principle  (fair  value)  for
          exchanges  of  similar  productive  assets.  The Board  believes  that
          exception   required  that  some   nonmonetary   exchanges,   although
          commercially  substantive,  be  recorded  on  a  carryover  basis.  By
          focusing the exception on exchanges  that lack  commercial  substance,
          the Board believes this Statement  produces  financial  reporting that
          more  faithfully  represents  the economics of the  transactions.  The
          Statement is effective for nonmonetary  asset  exchanges  occurring in
          fiscal periods beginning after June 15, 2005.  Earlier  application is
          permitted for nonmonetary asset exchanges  occurring in fiscal periods
          beginning after the date of issuance. The provisions of this Statement
          shall be applied  prospectively.  The Company has evaluated the impact
          of the  adoption of SFAS 153,  and does not believe the impact will be
          significant  to  the  Company's   overall  results  of  operations  or
          financial position.

          In  December  2004,  the  FASB  issued  SFAS  No.123  (revised  2004),
          "Share-Based  Payment".  Statement  123(R) will provide  investors and
          other users of  financial  statements  with more  complete and neutral
          financial information by requiring that the compensation cost relating
          to  share-based  payment   transactions  be  recognized  in  financial
          statements.  That cost will be measured based on the fair value of the
          equity or liability instruments issued. Statement 123(R) covers a wide
          range  of  share-based   compensation   arrangements  including  share
          options,  restricted  share  plans,  performance-based  awards,  share
          appreciation  rights,  and employee  share purchase  plans.  Statement
          123(R)  replaces FASB Statement No. 123,  Accounting  for  Stock-Based
          Compensation,  and supersedes APB Opinion No. 25, Accounting for Stock
          Issued to  Employees.  Statement  123, as  originally  issued in 1995,
          established as preferable a fair-value-based  method of accounting for
          share-based  payment  transactions  with  employees.   However,   that
          Statement  permitted  entities the option of  continuing  to apply the
          guidance  in  Opinion  25,  as  long  as the  footnotes  to  financial
          statements   disclosed  what  net  income  would  have  been  had  the
          preferable  fair-value-based  method been used. Public entities (other
          than those filing as small business issuers) will be required to apply
          Statement  123(R) as of the first interim or annual  reporting  period
          that begins after June 15, 2005. The Company adopted  Statement 123(R)
          in December of 2005.

                                      F-23
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          i. Recent Accounting Pronouncements (Continued)

          In December 2004, the Financial  Accounting Standards Board issued two
          FASB Staff  Positions - FSP FAS 109-1,  Application  of FASB Statement
          109  "Accounting  for Income  Taxes" to the Tax Deduction on Qualified
          Production  Activities  Provided by the American  Jobs Creation Act of
          2004, and FSP FAS 109-2  Accounting  and  Disclosure  Guidance for the
          Foreign  Earnings  Repatriation  Provision  within the  American  Jobs
          Creation Act of 2004. Neither of these affected the Company as it does
          not participate in the related activities.

          In March 2005,  the SEC released  Staff  Accounting  Bulletin No. 107,
          "Share-Based   Payment"  ("SAB  107"),  which  provides   interpretive
          guidance  related to the  interaction  between SFAS 123(R) and certain
          SEC rules and  regulations.  It also  provides  the SEC staff's  views
          regarding  valuation of  share-based  payment  arrangements.  In April
          2005, the SEC amended the compliance  dates for SFAS 123(R),  to allow
          companies  to implement  the  standard at the  beginning of their next
          fiscal year, instead of the next reporting period beginning after June
          15, 2005.  Management is currently  evaluating the impact SAB 107 will
          have on our consolidated financial statements.

          In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting
          for  Conditional  Asset  Retirement  Obligations"  ("FIN 47").  FIN 47
          provides  guidance  relating to the  identification  of and  financial
          reporting  for  legal  obligations  to  perform  an  asset  retirement
          activity.  The Interpretation  requires recognition of a liability for
          the fair  value of a  conditional  asset  retirement  obligation  when
          incurred if the  liability's  fair value can be reasonably  estimated.
          FIN 47 also defines when an entity would have  sufficient  information
          to  reasonably   estimate  the  fair  value  of  an  asset  retirement
          obligation. The provision is effective no later than the end of fiscal
          years  ending after  December 15, 2005.  The Company will adopt FIN 47
          beginning  the first  quarter of fiscal year 2006 and does not believe
          the adoption will have a material impact on its consolidated financial
          position or results of operations or cash flows.

                                      F-24
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          i. Recent Accounting Pronouncements (Continued)

          In May 2005,  the FASB issued  FASB  Statement  No.  154,  "Accounting
          Changes and Error Corrections." This new standard replaces APB Opinion
          No. 20,  "Accounting  Changes,  and FASB  Statement  No. 3,  Reporting
          Accounting  Changes in Interim  Financial  Statements," and represents
          another step in the FASB's goal to converge its  standards  with those
          issued by the IASB. Among other changes, Statement 154 requires that a
          voluntary  change in accounting  principle be applied  retrospectively
          with  all  prior  period  financial  statements  presented  on the new
          accounting  principle,  unless it is impracticable to do so. Statement
          154 also  provides  that (1) a change  in method  of  depreciating  or
          amortizing a  long-lived  non-financial  asset be  accounted  for as a
          change in estimate  (prospectively)  that was  effected by a change in
          accounting  principle,  and (2)  correction  of errors  in  previously
          issued financial  statements should be termed a "restatement." The new
          standard is effective for accounting  changes and correction of errors
          made in fiscal years beginning after December 15, 2005. Early adoption
          of this standard is permitted for accounting changes and correction of
          errors made in fiscal years beginning after June 1, 2005.  The Company
          has evaluated the impact of the adoption of Statement 154 and does not
          believe  the  impact  will be  significant  to the  Company's  overall
          results of operations or financial position.

          In February of 2006,  the FASB  issued SFAS No. 155,  "Accounting  for
          Certain Hybrid Financial  Instruments",  which is intended to simplify
          the accounting  and improve the financial  reporting of certain hybrid
          financial  instruments (i.e.,  derivatives embedded in other financial
          instruments).  The  statement  amends  SFAS No. 133,  "Accounting  for
          Derivative  Instruments  and  Hedging  Activities",  and SFAS No. 140,
          "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
          Extinguishments  of  Liabilities--a  replacement of FASB Statement No.
          125." SFAS No. 155 is effective for all financial  instruments  issued
          or acquired  after the beginning of an entity's first fiscal year that
          begins after September 15, 2006.. The Company is currently  evaluating
          the  impact  SFAS No.  155  will  have on its  consolidated  financial
          statements, if any.

          In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
          of Financial  Assets",  which will be effective  for fiscal years that
          begin  after  December  15,  2006.  This  statement  amends  SFAS 140,
          Accounting  for  Transfers  and  Servicing  of  Financial  Assets  and
          Extinguishments  of Liabilities,  a replacement of FASB Statement 125,
          or SFAS 140,  regarding (1) the circumstances  under which a servicing
          asset or servicing  liability must be recognized,  (2) the initial and
          subsequent measurement of recognized servicing assets and liabilities,
          and (3)  information  required to be  disclosed  relating to servicing
          assets and  liabilities.  The Company does not anticipate  adoption of
          this  standard  will  have  a  material  impact  on  its  consolidated
          financial statements.

          In  September   2006,  the  FASB  issued  SFAS  No.  157,  Fair  Value
          Measurements, ("SFAS 157"). SFAS 157 defines fair value, establishes a
          framework for measuring  fair value in generally  accepted  accounting
          principles and expands disclosures about fair value measurements. SFAS
          157 is  effective  for  financial  statements  issued for fiscal years
          beginning after November 15, 2007 and interim periods within those

                                      F-25
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          i. Recent Accounting Pronouncements (Continued)

          fiscal  years.  The  Company  does  not  anticipate  adoption  of this
          standard  will have a material  impact on its  consolidated  financial
          statements.

          In  September  2006,  the  FASB  issued  SFAS  No.  158,   "Employers'
          Accounting  for  Defined  Benefit  Pension  and  Other  Postretirement
          Plans."  This  Statement  requires an employer to  recognize  the over
          funded or under funded  status of a defined  benefit  post  retirement
          plan (other than a multiemployer plan) as an asset or liability in its
          statement of  financial  position,  and to  recognize  changes in that
          funded  status  in  the  year  in  which  the  changes  occur  through
          comprehensive  income.  SFAS No. 158 is  effective  for  fiscal  years
          ending after  December  15, 2006.  The adoption of SFAS No. 158 had no
          impact on our financial position and results of operations.

          In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
          for  Financial  Assets  and  Financial  Liabilities".  This  Statement
          permits  entities  to choose to  measure  many  financial  assets  and
          financial  liabilities at fair value.  Unrealized  gains and losses on
          items for which the fair value option has been elected are reported in
          earnings.  SFAS No. 159 is effective for fiscal years  beginning after
          November 15, 2007. We are  currently  assessing the impact of SFAS No.
          159 on our financial position and results of operations.

          j. Revenue Recognition Policy

          The Company's  policy to record revenue will be to record revenue upon
          shipment of goods and after all risks and rewards of  ownership of the
          related  products  has passed to the buyer.  The  Company  will record
          sales for services upon the  completion of training,  ratably over the
          life of any maintenance or support agreement and in the current period
          for any access or rental fees. The Company  records  billings and cash
          received in excess of revenue earned as deferred revenue.  The Company
          had $-0- and $-0-  revenue  for the year ended  December  31, 2002 and
          2001, respectively,  and $-0- and $35,550 deferred revenue at December
          31, 2002 and 2001,  respectively.  The deferred revenue is included in
          accrued expenses because of the Company's bankruptcy filing.

                                      F-26
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          k. Advertising

          The Company follows the policy of charging the costs of advertising to
          expense as incurred.  Advertising expense for the years ended December
          31, 2002 and 2001 was $-0- and $38,006, respectively.

          l. Long-lived Assets

          In  accordance  with SFAS No. 121,  Accounting  for the  Impairment of
          Long-Lived  Assets  and  for  Long-Lived  Assets  to Be  Disposed  Of,
          long-lived assets, including goodwill associated with other long-lived
          assets,  are evaluated for  impairment  whenever  events or changes in
          circumstances indicate that the carrying amount of an asset may not be
          recoverable.  Goodwill  acquired as part of business  combinations  is
          also evaluated continuously per ABP No. 17, Intangible Assets, for the
          need for  adjustments  to useful life and  reductions  in  unamortized
          costs. Any changes in estimated useful life are recorded prospectively
          and any impairment  adjustments  are recorded as expense in the period
          the  impairment  occurs.  Since  the  Company's  goodwill  and  patent
          intangible assets are related to the Company's subsidiary, Sigma, they
          are assessed to determine the  appropriateness of the useful life used
          for  amortization  and  are  assessed  to  determine  whether  or  not
          impairment  exists under both APB No. 17 and SFAS No. 121 by comparing
          Sigma's   progress  to  the  Company's   benchmark   expectations  for
          development  of  its  technology   and   positioning   for  commercial
          operations of its alternative energy business.

          Likewise,  the  intangible  assets  recorded  in  connection  with the
          Company's  licensing  agreement  with  Aquamax and Keeran (Note 10(e))
          were  assessed  to  determine  whether  or not  impairment  existed by
          comparing the Company's  progress in development  of the  desalination
          business as  compared  to the  Company's  benchmark  expectations  for
          development  of its technology  and  positioning  of the  desalination
          business for commercial operations.

          The amount of any impairment  considered necessary would be determined
          by comparing the book value of the net assets in the  applicable  line
          of business to fair value using methods such as the  present-value  of
          estimated   future   cash  flows,   sale  value  or  other   valuation
          methodologies  available  at  the  time,  depending  on the  stage  of
          development  of the line of business and the  Company's  intentions at
          the time an impairment  adjustment were considered  necessary.  All of
          the intangible assets were fully impaired in the 3rd Quarter of 2002.

                                      F-27
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          m. Research and Development

          All amounts  expended  for  research  and  development  are charged to
          expense as incurred.  Research and  development  expense for the years
          ended   December   31,   2002  and  2001  was  $-0-  and   $4,144,063,
          respectively.

          n. Software Costs

          The Company  applies the  provisions of SOP 98-1  "Accounting  for the
          Costs of Computer  Software  Developed or Obtained for Internal  Use".
          All software used by the Company is considered to be purchased general
          use software and is capitalized  pursuant to the Company's fixed asset
          capitalization policies.

          o. Stock Options

          As  permitted  by FASB  Statement  123  "Accounting  for  Stock  Based
          Compensation"  (SFAS No.  123),  the  Company  elected to measure  and
          record  compensation  cost relative to employee  stock option costs in
          accordance  with  Accounting  Principles  Board  ("APB")  Opinion  25,
          "Accounting    for   Stock   Issued   to   Employees,"   and   related
          interpretations  and  make  proforma  disclosures  of net  income  and
          earnings  per  share as if the fair  value  method  of  valuing  stock
          options had been applied.  Under APB Opinion 25,  compensation cost is
          recognized  for stock  options  granted to  employees  when the option
          price is less than the market price of the underlying  common stock on
          the date of grant.

          p. Valuation of Options and Warrants

          The valuation of options and warrants granted to unrelated parties for
          services  are  measured  as of the  earlier  (1) the  date at  which a
          commitment  for  performance  by the  counterparty  to earn the equity
          instrument is reached or (2) the date the  counterparty's  performance
          is complete.  Pursuant to the  requirements of EITF 96-18, the options
          and warrants will continue to be revalued in situations where they are
          granted prior to the completion of the performance.

                                      F-28
<PAGE>

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

NOTE 2 -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

          q. Foreign Currency Translation

          The value of the U.S.  dollar  rises and falls  day-to-day  on foreign
          currency exchanges. Since the Company does business in certain foreign
          countries   (principally   Norway),   these  fluctuations  affect  the
          Company's financial position and results of operations.  In accordance
          with SFAS No. 52, "Foreign  Currency  Translation," all foreign assets
          and  liabilities  have  been  translated  in  the  preparation  of the
          consolidated  financial statements at the exchange rates prevailing at
          the respective  balance sheet dates,  and all income  statement  items
          have been translated  using the weighted average exchange rates during
          the  respective   periods.   The  net  gain  or  loss  resulting  from
          translation upon consolidation of the financial statements is reported
          as a  component  of  comprehensive  income  of each  period  with  the
          accumulated  foreign  currency gain or loss reported as a component of
          the equity category for comprehensive income.

          Some transactions of the Company and its foreign subsidiaries are made
          in currencies  different from their own.  Translation gains and losses
          from these  transactions in foreign  currencies are included in income
          as they occur.

          In  accordance  with SFAS No. 95,  "Statement of Cash Flows," the cash
          flows of the Company's  foreign  subsidiary  is  translated  using the
          weighted  average  exchange rates during the respective  period.  As a
          result,  amounts in the  statement of cash flows related to changes in
          asset and liabilities  will not necessarily  agree with the changes in
          the corresponding  balances on the balance sheet which were translated
          at the exchange rate at the end of the period.  The effect of exchange
          rate  changes on foreign  cash and cash  equivalents  is reported as a
          separate element of the statement of cash flows, if significant.

          Because Sigma is no longer consolidated with the Company,  there is no
          foreign currency translation as of December 31, 2002.

NOTE 3 -  ADVANCES TO EMPLOYEES

          During 1997,  1998,  1999 and 2000,  the Company made cash advances of
          $663,965  to  employees.  The  advances  were  formalized  through the
          signing of notes receivable bearing interest at 7% per annum with each
          employee at the end of each year. Per the terms of the notes, interest
          is added to the  balance  of the  notes  at the end of each  year.  At
          December 31, 2001, the Company had  outstanding  employee  advances of
          $370,107.  Due to the bankruptcy of the Company, the employee advances
          were  written off against the  liabilities  due to the  employees  for
          unpaid payroll.

                                      F-29
<PAGE>

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

NOTE 4 -  PATENTS AND LICENSING AGREEMENT

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

                                                                 December 31,
                                                                     2002
                                                               ----------------
            Patents                                            $              -
            Licensing Agreement - Aquamax and Keeran                  6,540,000
            Licensing Agreement - STM                                 2,000,000
            Accumulated amortization (impairment)                    (8,540,000)
                                                               ----------------
                                                               $              -
                                                               ================

          As part of the  purchase  of Sigma  (Note  5),  the  Company  acquired
          patents valued at their fair value of $1,006,670, adjusted for foreign
          currency fluctuations since the date of purchase.  The patents have an
          estimated  remaining  life  of  90  months  from  the  date  of  Sigma
          acquisition.  See  also  Note  16 for a  discussion  about  the  Sigma
          operations  being  discontinued.  The  patents  at their  net value of
          $719,421 are included in loss from discontinued operations.

          The  license  agreement  relates  to  rights  to  patents  and  patent
          applications pertaining to technology acquired from Aquamax and Keeran
          (Note 10). The cost of the license  agreement was being amortized over
          its estimated  useful life of 10 years.  Because of the Company's cash
          flow shortages and subsequent  bankruptcy filing, the Company recorded
          amortization  expense of $163,500 and elected to record an  impairment
          expense  of  $5,348,150  associated  with the  remaining  value of the
          Aquamax  and  Keeran  rights  and  technology  during  the year  ended
          December 31, 2002.

          At December 31, 2002, the Company has recognized a payable  balance in
          the amount of $2,000,000 for the STM license,  amortization expense of
          $213,670,  and loss on  impairment  of the  license  in the  amount of
          $1,786,330.

NOTE 5 -  BUSINESS COMBINATION

          In August 2000, the Company acquired SIGMA Elektroteknisk,  AS (SIGMA)
          by  exchanging  1,718,748  shares of its  common  stock for all of the
          common stock of SIGMA. The acquisition was accounted for as a purchase
          in accordance with APB 16, "Business  Combinations." The excess of the
          total  acquisition cost over the fair value of the net assets acquired
          of $6,589,756 was being  amortized over 10 years by the  straight-line
          method.  Amortization  expense  amounted to $-0- and  $658,976 for the
          years ended December 31, 2002 and 2001, respectively.

          Because of the  adoption  of SFAS No.  142,  the  Company is no longer
          amortizing the goodwill generated from the purchase of Sigma.  Instead
          the  goodwill  is  subject  to  impairment  testing.  Because  of  the
          bankruptcy  of Sigma as discussed in Note 16, the Company  recorded an
          impairment  of goodwill of  $5,656,207  which is part of the loss from
          discontinued operations.

                                      F-30
<PAGE>

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

NOTE 6 -  NOTES PAYABLE - RELATED PARTIES

          Notes payable - related  parties at December 31, 2002 consisted of the
          following:

<TABLE>
<S>                                                                       <C>
Unsecured note payable to a shareholder bearing interest
   at 10% per annum, all unpaid interest and principal due
   upon demand, secured by personal guarantee of officer.                 $         20,314

Unsecured note payable to an employee bearing interest
   at 10% per annum, all unpaid interest and principal due
   upon demand.                                                                    282,767

Unsecured note payable to an officer bearing interest at
   10% per annum, due upon demand.                                                  53,280

Unsecured note payable to an employee bearing interest at
   10% per annum, due upon demand.                                                  40,745

Unsecured note payable to an employee bearing interest at
   10% per annum, due upon demand.                                                 193,322

Unsecured note payable to an employee bearing interest at
   10% per annum, due upon demand.                                                  61,884

Unsecured note payable to an employee bearing interest at
   10% per annum, due upon demand.                                                  90,333

Unsecured note payable to an employee bearing interest at
   10% per annum due upon demand.                                                   52,324

Unsecured note payable to an employee bearing interest at
   5% per annum, due on November 20, 2004.                                         215,000

Unsecured note payable to an officer bearing no interest,
   due on demand                                                                    23,500
                                                                          ----------------

    Total Notes Payable - Related Parties                                 $      1,033,469
                                                                          ================
</TABLE>

          Total interest expense to related parties was $116,093 and $93,909 for
          the years ended December 31, 2002 and 2001, respectively.

                                      F-31
<PAGE>

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

NOTE 6 -  NOTES PAYABLE - RELATED PARTIES (Continued)

          Annual maturities of notes related parties payable are as follows:

<TABLE>
<CAPTION>
Years Ending
 December 31,
-------------
<S>                                                                       <C>
    2003                                                                  $      1,028,469
    2004                                                                             5,000
                                                                          ----------------
                                                                          $      1,033,469
                                                                          ================
</TABLE>

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE

          Notes and  debentures  payable at  December  31,  2002  consist of the
          following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                                2002
                                                                          ----------------
<S>                                                                       <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. In default.              $      3,060,000

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 eighteen parties bearing interest at 10% to
   13%, without collateral, due in full one year from issue.                     3,755,965

Post-petition notes payable to two parties bearing interest at
   15% without collateral, due on demand.                                          100,000

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

Fifteen (15) convertible debentures payable due August to
   December 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.                           1,350,000

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
                                                                          ----------------

   Balance forward                                                        $      9,486,965
                                                                          ----------------
</TABLE>

                                      F-32
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

<TABLE>
<S>                                                                       <C>
   Balance forward                                                        $      9,486,965

Convertible debenture payable to Cornell Capital Corporation,
   due November 30, 2006, bearing interest at 6% per annum,
   convertible into shares of common stock at either 120% of
   closing bid price on November 29, 2001 or 80% of
   lowest closing bid price for five trading days prior to conversion.             403,000
                                                                          ----------------

   Total Notes and Debentures Payable                                     $      9,889,965
                                                                          ================

</TABLE>

          Annual maturities of notes and debentures payable are as follows:

<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S>                                                                       <C>
    2003                                                                  $      9,889,965
    2004                                                                                 -
    2005                                                                                 -
    2006                                                                                 -
 Thereafter                                                                              -
                                                                          ----------------

                                                                          $      9,889,965
                                                                          ================
</TABLE>

          As additional  consideration for $3,000,000 of the notes payable,  the
          Company granted  1,200,000  warrants valued at $3,730,212  pursuant to
          the Black  Scholes  pricing  model using a risk-free  interest rate of
          6.43%,  expected  volatility of 228%, and an expected life of 3 years.
          The  proceeds  of the  loans  have  been  allocated  between  debt and
          additional paid-in capital in proportion to the relative fair value of
          the debt  and the  warrants.  The  portion  allocated  to  equity  was
          $1,662,746,  and the remaining  balance of $1,337,254  was recorded as
          debt, net of discount. The discount was fully amortized as of December
          31, 2002.

          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 $203,048 and the remaining  balance of $396,952 has been
          recorded as debt, net of discount.  The discount of $203,048, and debt
          issue costs of $12,000 were fully amortized to interest  expense as of
          December 31, 2002

                                      F-33
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

          As additional  consideration  for  $1,400,000  of the  non-convertible
          notes payable,  the Company granted 425,002  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.  The  warrants  were valued at an average of $2.50 per
          share  ($1,811,420  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  $773,102,  and the
          remaining  balance  of  $626,898  has been  recorded  as debt,  net of
          discount.  The  discount of $773,102  was fully  amortized to interest
          expense as of December 31, 2002.

          During  the  year  ended   December  31,  2001,   the  Company  issued
          convertible debentures with detached warrants in exchange for $700,000
          in cash from one  entity  and for  interest  due of  $71,000  to three
          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
          1,694,667 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 $3,680,668  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  allocated  to equity  was  $621,488.  The
          discount of $621,488 was fully amortized as of December 31, 2002.

          For the year ended December 31, 2002, the Company amortized $2,350,149
          of the discounts to interest expense.

          During November 1999, the Company issued three convertible  debentures
          for  $100,000   each  in  exchange  for  Company   expenses   such  as
          advertising,  promotion, travel and investor relations incurred by the
          Company and paid on behalf of the Company  from  January  1999 through
          November  1999.  Two of the  debentures are due August 1, 2004 and the
          third is due November 1, 2004. The debentures  accrue  interest at 12%
          per annum. The holders of the debentures  retain the option to convert
          for a period of five years any portion of the debt into the  Company's
          restricted  common  stock at a price of $1.50 per  share.  Any  shares
          issued under the conversion  privileges of these  debentures carry two
          purchase  warrants  allowing  the holder to  purchase  one  additional
          restricted  share for each share  purchase  warrant held at a price of
          $0.75 per share. The share purchase  warrants are valid for five years
          after the date of conversion.

          During  March  2000,  66,667  shares of common  stock  were  issued to
          convert one of the three  $100,000  debentures  and  133,333  warrants
          associated with the convertible debenture were granted and exercised.

                                      F-34
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

          During August 2001,  the Company  issued a  convertible  debenture for
          $5,000 in exchange  for accrued  interest  on the  $100,000  converted
          debenture  discussed  above. The debenture is due August 19, 2006. The
          debentures  accrue  interest  at 12%  per  annum.  The  holder  of the
          debenture retains the option to convert for a period of five years any
          portion of the debt into the  Company's  restricted  common stock at a
          price of $1.50 per  share.  The  debentures  also  carry  warrants  to
          purchase  6,667  shares of the  Company's  common  stock at a price of
          $1.25 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $218 at December 31, 2002 and 2001, respectively.

          During  August  2001,  the  Company  issued  two  amended  convertible
          debentures for the two remaining $100,000 debentures  discussed above.
          The amended  debentures are due August 1, 2004. The amended debentures
          accrue interest at 12% per annum. The holders of the debentures retain
          the  option to convert  for a period of five years any  portion of the
          debt into the  Company's  restricted  common stock at a price of $1.50
          per share.  The  debentures  also carry  warrants to purchase  133,333
          shares of the  Company's  common  stock at a price of $0.75 per share.
          The warrants are exercisable immediately and are valid for a period of
          five years after the date of  issuance.  Interest  expense  associated
          with the amended  convertible  debentures amounted to $-0- and $19,267
          at December 31, 2002 and 2001, respectively.

          During August 2001, the Company issued two convertible  debentures for
          $12,000 each in exchange  for accrued  interest on the  remaining  two
          $100,000 debentures discussed above. The debentures are due August 19,
          2006. The debentures  accrue interest at 12% per annum. The holders of
          the debentures retain the option to convert for a period of five years
          any portion of the debt into the Company's  restricted common stock at
          a price of $1.50 per share.  The  debentures  also carry  warrants  to
          purchase  16,000  shares of the  Company's  common stock at a price of
          $1.25 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $1,048 at December 31, 2002 and 2001, respectively.

          During  November 1999, the Company issued a convertible  debenture for
          $350,000 in exchange  for  expenses  such as  advertising,  promotion,
          travel and  investor  relations  expenses  incurred by the Company and
          paid on behalf of the Company from January 1999 through November 1999.
          The  debenture  is due August 1, 2004 and accrues  interest at 12% per
          annum. The holder of the debenture retains the option to convert for a
          period  of five  years  any  portion  of the debt  into the  Company's
          restricted  common  stock at a price of $1.50 per  share.  Any  shares
          issued under the  conversion  privileges of this  debenture also carry
          two purchase  warrants  allowing the holder to purchase one additional
          restricted  share for each share  purchase  warrant held at a price of
          $0.75 per share. The share purchase  warrants are valid for five years
          after the date of conversion.

                                      F-35
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

          During  August  2001,  the  Company  issued  an  amended   convertible
          debenture  for the $350,000  debenture  discussed  above.  The amended
          debenture  is due  August  1,  2004.  The  amended  debentures  accrue
          interest at 12% per annum.  The holders of the  debentures  retain the
          option to convert  for a period of five years any  portion of the debt
          into the  Company's  restricted  common  stock at a price of $1.50 per
          share.  The debentures also carry warrants to purchase  466,667 shares
          of the  Company's  common  stock at a price of $0.75  per  share.  The
          warrants are exercisable  immediately valid for a period of five years
          after  the date of  issuance.  Interest  expense  associated  with the
          amended  debenture  amounted to $-0- and $47,250 at December  31, 2002
          and 2001, respectively.

          During August 2001,  the Company  issued a  convertible  debenture for
          $42,000 in exchange  for accrued  interest on the  $350,000  debenture
          discussed  above.  The debenture is due August 19, 2006. The debenture
          accrues interest at 12% per annum. The holder of the debenture retains
          the  option to convert  for a period of five years any  portion of the
          debt into the  Company's  restricted  common stock at a price of $1.50
          per share.  The  debenture  also carry's  warrants to purchase  56,000
          shares of the  Company's  common  stock at a price of $1.25 per share.
          The warrants are exercisable immediately and are valid for a period of
          five years after the date of  issuance.  Interest  expense  associated
          with the amended debenture amounted to $-0- and $1,834 at December 31,
          2002 and 2001, respectively.

          During August 2001,  the Company  issued a  convertible  debenture for
          $200,000 in exchange for cash.  The  debenture is due August 19, 2006.
          The  debenture  accrues  interest at 12% per annum.  The holder of the
          debenture retains the option to convert for a period of five years any
          portion of the debt into the  Company's  restricted  common stock at a
          price of $1.50 per  share.  The  debentures  also  carry  warrants  to
          purchase  266,667  shares of the Company's  common stock at a price of
          $1.25 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $8,733 at December 31, 2002 and 2001, respectively.

          During August 2001,  the Company  issued a  convertible  debenture for
          $100,000 in exchange for cash.  The  debenture is due August 22, 2006.
          The  debenture  accrues  interest at 12% per annum.  The holder of the
          debenture retains the option to convert for a period of five years any
          portion of the debt into the  Company's  restricted  common stock at a
          price of $1.50 per  share.  The  debentures  also  carry  warrants  to
          purchase  133,333  shares of the Company's  common stock at a price of
          $1.25 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $4,366 at December 31, 2002 and 2001, respectively.

                                      F-36
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

          During September 2001, the Company issued a convertible  debenture for
          $100,000 in exchange  for cash.  The  debenture is due  September  14,
          2006. The debenture  accrues  interest at 12% per annum. The holder of
          the debenture retains the option to convert for a period of five years
          any portion of the debt into the Company's  restricted common stock at
          a price of $1.00 per share.  The  debentures  also carry  warrants  to
          purchase  300,000  shares of the Company's  common stock at a price of
          $1.00 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $3,533 at December 31, 2002 and 2001, respectively.

          During October 2001,  the Company  issued a convertible  debenture for
          $100,000 in exchange for cash.  The debenture is due October 29, 2006.
          The  debenture  accrues  interest at 12% per annum.  The holder of the
          debenture retains the option to convert for a period of five years any
          portion of the debt into the  Company's  restricted  common stock at a
          price of $1.00 per  share.  The  debentures  also  carry  warrants  to
          purchase  300,000  shares of the Company's  common stock at a price of
          $1.00 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $2,067 at December 31, 2002 and 2001, respectively.

          During  November 2001, the Company issued a convertible  debenture for
          $100,000 in exchange for cash. The debenture is due November 16, 2006.
          The  debenture  accrues  interest at 12% per annum.  The holder of the
          debenture retains the option to convert for a period of five years any
          portion of the debt into the  Company's  restricted  common stock at a
          price of $1.00 per  share.  The  debentures  also  carry  warrants  to
          purchase  300,000  shares of the Company's  common stock at a price of
          $1.00 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $1,500 at December 31, 2002 and 2001, respectively.

          During  November 2001, the Company issued a convertible  debenture for
          $500,000 in exchange for cash. The debenture is due November 29, 2006.
          The  debenture  accrues  interest  at 6% per annum.  The holder of the
          debenture retains the option to convert for a period of five years any
          portion of the debt and accrued interest into the Company's restricted
          common  stock at a price equal to 120% of the closing bid price of the
          Company's  common stock as of the issue date of the  debenture,  or an
          amount equal to 80% of the lowest  closing bid price of the  Company's
          common for the five trading days immediately  preceding the conversion
          date.  Interest expense associated with the amended debenture amounted
          to $-0- and $32,548 at December 31, 2002 and 2001, respectively.

                                      F-37
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

          During  December 2001, the Company issued a convertible  debenture for
          $100,000 in exchange for cash. The debenture is due December 18, 2006.
          The  debenture  accrues  interest at 12% per annum.  The holder of the
          debenture retains the option to convert for a period of five years any
          portion of the debt into the  Company's  restricted  common stock at a
          price of $1.00 per  share.  The  debentures  also  carry  warrants  to
          purchase  300,000  shares of the Company's  common stock at a price of
          $1.00 per share.  The warrants  are  exercisable  immediately  and are
          valid for a period of five years after the date of issuance.  Interest
          expense  associated  with the amended  debenture  amounted to $-0- and
          $433 at December 31, 2002 and 2001, respectively.

          The Company  recorded a discount on the  convertible  debentures  from
          1999 in order to allocate to additional  paid-in  capital the value of
          the beneficial  conversion features of the debentures.  The beneficial
          conversion  features  consist  of the  debenture  holder's  rights  to
          convert the debentures  into units,  each unit consisting of one share
          of restricted  common stock (at a conversion  ratio equal to $1.50 per
          share which was the trading value of the Company's unrestricted common
          stock measured as of the date of issuance of the  debentures)  and two
          attached  warrants giving the holders the right to purchase two shares
          of restricted  common stock (each at an exercise  price equal to $0.75
          per share less than the trading  value of the  Company's  unrestricted
          stock measured at the date of issuance of the  debentures).  The value
          of the  beneficial  conversion  features was computed as the lesser of
          (1) the value of the warrants or (2) total proceeds of the debentures.
          As of the date of the issuance of the debentures,  the entire proceeds
          were  allocated  to  additional  paid-in  capital and a  corresponding
          discount  offsetting the liability under the debentures.  The discount
          was fully amortized to interest expense because the debenture  holders
          could have  converted the debentures  immediately  when the debentures
          were issued.  During 1999, interest expense of $550,000 was recognized
          as the result of amortization of the discount.

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

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

                                      F-38
<PAGE>

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

NOTE 7 -  NOTES AND CONVERTIBLE DEBENTURES PAYABLE (Continued)

          During the quarter ended June 30, 2002, the Company received  $100,000
          from  the  issuance  of a  convertible  debenture.  The  debenture  is
          convertible  at a price of $0.65 per share for a period of five years,
          bears  interest at 12.00%,  is  unsecured  and is due 5 years from the
          date  of  issue.  As  additional  consideration  for  $100,000  of the
          convertible debenture payable, the Company granted warrants to acquire
          769,231 shares of common stock at an exercise price of $0.65 per share
          with an expiration  date 5 years from the date of grant.  The warrants
          were valued at $676,923 pursuant to the  Black-Scholes  pricing model.
          The  proceeds  were  allocated  between  debt and  additional  paid-in
          capital  in  proportion  to the  relative  fair  value of the debt and
          equity  (warrants and beneficial  conversion  rights)  elements of the
          transaction. The portion allocated to equity was $100,000 or 100%.

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

          During the quarter  ended  September  30, 2002,  the Company  received
          $135,000  from the issuance of notes  payable to various  individuals.
          The interest  rates vary from 12% to 15%. One is due June 24, 2003 and
          the remainder of the notes are due on demand.  They are all unsecured.
          Additionally, the Company repaid $7,000 on a note payable to a related
          party.

          During the quarter ended September 30, 2002, a holder of a convertible
          debenture elected to convert $57,000 in principle for 4,780,093 shares
          of common  stock at a rate of 80% of the lowest  closing  bid price of
          the  Company's  common  stock for the five  trading  days  immediately
          proceeding the conversion date.

          During the quarter  ended  September  30, 2002,  the Company  received
          $125,000 in advances on the Equity Line of Credit,  which  resulted in
          the issuance of 7,465,888  shares of common stock based upon a rate of
          95% of the lowest  closing  bid price of the  Company's  common  stock
          during the respective pricing periods.

          During the quarter  ending  December  31, 2002,  the Company  received
          $100,000  from  the  issuance  of notes  and  advances  pursuant  to a
          debtor-in-possession financing facility, approved pursuant to an order
          by the United States Bankruptcy Court for the Southern District of New
          York. The applicable interest rate was 15%.

                                      F-39
<PAGE>

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

NOTE 8 -  ACCRUED EXPENSES

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

                                                                 December 31,
                                                                     2002
                                                               ----------------
            Accrued payroll taxes payable                      $         60,266
            Accrued interest payable - payroll                           52,717
            Accrued payroll tax penalty                                  98,845
            Accrued franchise taxes payable                             107,005
            Accrued payroll payable                                   2,103,656
            Aquamax/Keeran license fee payable                        3,600,000
            Accrued STM license fee payable                           2,000,000
            Due to EpriSolutions                                         35,500
            Accrued legal settlement - Mchargue                          66,863
            Accrued interest payable                                  2,008,496
            Accrued contingency for additional post
              petition claims                                           222,411
                                                               ----------------

               Total                                           $     10,355,759
                                                               ================

NOTE 9 -  GOING CONCERN

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

          The Company has incurred  losses from its inception  through  December
          31, 2002 of  approximately  $58,991,262.  The Company does not have an
          established  source of funds  sufficient to cover its operating costs,
          has a substantial  working capital  deficit has relied  exclusively on
          debt and equity  financing,  accordingly,  there is substantial  doubt
          about its ability to continue as a going concern.

          In October of 2006,  the Company signed a term sheet with a company to
          sponsor a plan of reorganization. Prior to confirmation of the Chapter
          11 plan of  reorganization,  the plan sponsor  will  identify a merger
          candidate  to be merged into the  Company.  Before the merger can take
          place, the Company is required to bring all of its financial,  tax and
          SEC filings current from the last filing date of 6/30/02.  Pursuant to
          orders of the United States Bankruptcy Court for the Southern District
          of New York,  the Company has engaged  accountants,  auditors  and SEC
          counsel to complete this task.  Under the terms of the proposed  plan,
          creditors  of the  Company  will  receive  a cash  payment  and  stock
          consideration   in  the  new   merged   entity.   The   aforementioned
          consideration  will be  distributed  to creditors of the Company under
          the plan of reorganization.

                                      F-40
<PAGE>

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

NOTE 9 -  GOING CONCERN (Continued)

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES

          a. Consulting Agreements

          During January 2000, the Company entered into a three-year  consulting
          agreement  with Clement J. Wohlreich to receive  financial,  marketing
          and management services. The agreement called for the Company to issue
          100,000 units,  each  consisting of one share of the Company's  common
          stock and one attached  warrant  granting the right for three years to
          purchase one share of common stock for an exercise price of $1.50.  As
          the agreement  provided for issuance of the units upon commencement of
          services,  the Company  accrued a liability  and  deferred  consulting
          expense as a reduction of  shareholders'  equity in an amount equal to
          the value of the  common  stock and  warrant at the  inception  of the
          agreement.

          The  liability  was converted to equity upon issuance of the units and
          the value of the stock and warrants  will be expensed over the term of
          the agreement  upon  completion of services each quarter.  Pursuant to
          EITF  96-18,  "Accounting  For Equity  Instruments  That Are Issued To
          Other Than  Employees  For Acquiring Or In  Conjunction  With Selling,
          Goods Or Services",  the Company will continue to revalue the warrants
          until  earned upon  completion  of services.  At January 1, 2000,  the
          consulting agreement was valued at $1,500,000, representing the market
          value of 100,000  shares of the  Company's  common  stock and  100,000
          warrants.  As of December 31, 2000, the consulting contract was valued
          at $740,000, representing the 100,000 shares of common stock issued on
          July 25,  2000 at the then  trading  price of $4.00  per share and the
          value of the warrants at December 31, 2000 of $340,000,  as determined
          by the Black Scholes pricing model.

          For the year ended  December  31,  2000,  the  Company  had  amortized
          $279,334 of the contract,  leaving a remaining  balance of $410,667 at
          December  31, 2000 which is included as a reduction  of  stockholders'
          equity. At December 31, 2001, the remaining balance was $152,166 which
          is included as a reduction of stockholders  equity. As a result of the
          bankruptcy the Company is no longer receiving services from Clement J.
          Wohlreich.  At December 31, 2002,  the remaining  balance was expensed
          and is no longer a reduction.

                                      F-41
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          a. Consulting Agreements (Continued)

          During  June 2001,  the  Company  entered  into a two-year  consulting
          agreement  with  Gene  Martineau  to  receive   services   related  to
          interfacing  with  institutional  investors and brokerage  firms.  The
          Company  issued  120,000  shares of common  stock and granted  120,000
          warrants  exercisable for two years at $1.50.  Pursuant to EITF 96-18,
          "Accounting  For  Equity  Instruments  that Are  Issued To Other  Than
          Employees  For  Acquiring Or In  Conjunction  With  Selling,  Goods or
          Services",  the Company will  continue to revalue the  warrants  until
          earned upon  completion  of services.  The  unamortized  fair value at
          December  31, 2001 was  $271,833  which is included as a reduction  of
          stockholders  equity.  As a result of the bankruptcy the Company is no
          longer receiving  services from Gene Martineau.  The unamortized value
          at December  31, 2002 was  expensed and is not included as a reduction
          of stock holders equity.

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

          The Company laid off David Moard on July 31, 2002.  At the time of the
          lay-off,  Mr.  Moard had accrued  payroll,  paid time off and vacation
          time in the amount of $235,947  and  accrued  expenses of $6,993 for a
          total of $242,940 and has an unsecured  priority claim for that amount
          in the bankruptcy.

                                      F-42
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          b. Options for Consulting Services

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

          The unamortized  portion of the deferred  compensation at December 31,
          2002 was zero as the  entire  amount  was  expensed  during the twelve
          months ended December 31, 2002.

          c. Extension of Consulting Agreement

          On January 8, 2002,  pursuant to an Extension and Expansion  Agreement
          with  Weckstein,  the Company  extended the consulting  agreement with
          Weckstein for a minimum period of nine months and up to three years at
          the option of the Company.  As compensation  for this  extension,  the
          Company has issued to Weckstein  200,000 shares of common stock valued
          at  $1.06  per  share.   The  unamortized   portion  of  the  deferred
          compensation at December 31, 2002 was $-0-.

          On June 14, 2002, the Company  extended the consulting  agreement with
          Weckstein for a period of one year from June 30, 2002. As compensation
          for this  extension,  the  Company  has  issued to  Weckstein  400,000
          options with an exercise price of $0.40 per share.  On August 1, 2002,
          the  exercise  price of these  options was changed to $0.05 per share.
          This  change  did not result in an  increase  to the  related  expense
          previously  recognized.   The  unamortized  portion  of  the  deferred
          compensation  at December  31, 2002 was zero and is not  included as a
          reduction of stockholders' equity.

          d. Investor Relations Agreement

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

          The unamortized  portion of the deferred  compensation at December 31,
          2002 was zero as the full amount has been expensed.

                                      F-43
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements

          STM
          ---

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

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

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

          The Company paid an initial amount of $500,000 that was amortized over
          twelve months. The second annual payment in the amount of $500,000 was
          due and  payable on April 20,  2001 and the third  payment was due and
          payable on April 20,  2002.  The Company  defaulted  on the second and
          third annual  payments and under the terms of the  contract,  lost the
          exclusive  rights to the Technology,  but has retained the rights on a
          non  exclusive  basis.  Due to this  default and the  inability of the
          Company to raise sufficient capital to develop the Company's products,
          the  technology was deemed to be impaired as of September 23, 2001, or
          60 days after  notification  of default.  As of December 31, 2002, the
          Company  has  recognized  a  payable  in  the  amount  of  $2,000,000,
          amortization  expense in the amount of $213,670 and loss on impairment
          in the amount of $1,786,330.

          Even though the license  agreement called for three separate  payments
          as detailed above, STM has a general unsecured claim in the bankruptcy
          filing for $2,000,000.

          AQUAMAX/KEERAN
          --------------

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

                                      F-44
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

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

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

          The  remaining   amount  payable  under  the  License   Agreement  was
          $6,540,000  at September  30,  2000,  which  consisted  of  $3,600,000
          payable in cash and $2,940,000  payable in common stock  (representing
          the value of 600,000  shares of common  stock to be issued,  valued at
          the market  value of shares of the  Company's  common  stock as of the
          effective date of the  transaction,  September 21, 2000), and has been
          accrued  as a  liability  and  included  in the amount  recorded  as a
          licensing  agreement  asset along with the $400,000 paid in cash,  and
          $2,940,000 paid through the issuance of common stock. The asset,  with
          a cost of $6,940,000  ($6,540,000  after an  impairment  adjustment of
          $400,000),  has been amortized  over its estimated  useful life of ten
          years using the straight-line method.

          The license  agreement  was signed by the  Company and  Aquamax/Keeran
          representatives  as of September  21,  2000,  but because of questions
          raised  as  to  the  identity  and  authority  of  one  Aquamax/Keeran
          signatory, an exhibit was added to the agreement solely to clarify the
          matter. Revised signature pages (signed by the original Aquamax/Keeran
          parties  and  dated  on the  original  September  signing  date)  were
          extended on October 2, 2000. The transaction  was originally  recorded
          in October 2000 in the belief that, until properly executed  signature
          pages were received,  it was not effective.  Based on our reassessment
          of the  circumstances,  we have determined  that the agreement  became
          binding on September 21, 2000.

                                      F-45
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

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

          The License  Agreement  provided  that all  technology  covered by the
          Agreement  was to be  exclusive  within  the  specified  field of use.
          Subsequent to the  execution of the License  Agreement and the initial
          payments to the Licensors,  the Company  discovered that the Licensors
          rights to Hadwaco's  patent  application  that was sub-licensed to the
          Company  pursuant  to the  License  Agreement,  was  not an  exclusive
          license,  as was  represented  and warranted by the Licensors but was,
          rather,  a non-exclusive  license.  As a result,  the Company served a
          notice of  default  under the terms of the  License  Agreement  on the
          Licensors  on December  22,  2000.  The Company  demanded  arbitration
          pursuant  to the  License  Agreement  to  determine  the  value of the
          technology,  which the  Licensors  agreed to license  on an  exclusive
          basis, but actually licensed on a non-exclusive  basis.  Consequently,
          the value of the licensed  technology  is  diminished  due to the fact
          that   Hadwaco  is  free,   contrary   to  the   Licensors'   original
          representations,  to license the same  technology to third parties for
          its (potentially competitive) use.

                                      F-46
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

          The Company's request for arbitration does not assert that the license
          does not exist or is not  effective.  The  Company has  suspended  all
          payments  beyond the $400,000  paid in September  2000 and  $2,940,000
          paid  through  the  issuance  of common  stock in June 2002  under the
          License Agreement pending the outcome of the resolution of the dispute
          in connection with the one element of the Agreement. In any event, the
          Company  intends to proceed with its planned  uses of the  technology,
          whether on an exclusive or non-exclusive  basis. A portion of the cost
          of the  License  Agreement  amounting  to  $400,000  was  expensed  in
          September  2000 which  management  has determined to be an appropriate
          impairment  adjustment to reduce the asset book value by  management's
          estimate of the  difference  between the amount the Company is obliged
          to  pay  under  the  License  Agreement  and  the  fair  value  of the
          technology based on management's estimate of the reduction in purchase
          price had it been known that one patent application was non-exclusive.

          The full purchase price has been recorded as a liability and offset by
          the  $400,000  and  $2,940,000  paid to date.  The full  amount of the
          liability  was recorded  (without  offset for  potential  reduction in
          resolution  of the  Hadwaco  sublicense  dispute)  because  management
          believes that: (1) based on the oral opinion of the Company's  General
          Counsel,  the full  amount of the  liability,  until  amended  through
          negotiation or legal process,  represents an enforceable  liability as
          long as the  Company  retains  the patent  rights  conveyed  under the
          agreement;  (2) the  liability  meets the  accounting  definition of a
          liability as stated in Statement of Financial  Accounting Concepts No.
          6,  Elements of  Financial  Statements;  and (3) the  reduction of the
          liability to anticipate a reduction in  negotiations  or legal process
          would  result in recording a contingent  asset that is  prohibited  by
          SFAS No.  5,  Accounting  for  Contingencies.  Accordingly,  since the
          Company  intends to keep the patent  rights,  the Company has recorded
          the  liability,  and  related  asset,  because  under the terms of the
          agreement the Company has no discretion to avoid future payment of the
          remaining cash and common stock  payable.  The amount of payment under
          the  agreement  withheld  pending  resolution  of the  dispute was not
          indicative of the  diminished  value of the patent rights  received as
          the Company's management has estimated that approximately  $400,000 of
          the purchase price represents the value of the exclusivity  feature of
          the one patent that was not received. The failure of Aquamax/Keeran to
          deliver  exclusive  rights to all patents  resulted in a condition  of
          default  by  Aquamax/Keeran.  Aquamax/Keeran  has  asserted  that  the
          Company's subsequent withholding of payment resulted in a condition of
          default by the Company.

                                      F-47
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

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

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

                                      F-48
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

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

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

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

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

                                      F-49
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

          The Company,  as a  debtor-in-possession  in its Chapter 11 bankruptcy
          case,  determined,  in the  exercise of its  business  judgment,  that
          neither  the  Licensing  Agreement  nor the  Licensed  Technology  was
          required  for  the  operation  of the  Company's  business  or for its
          reorganization efforts.  Accordingly, upon application by the Company,
          the United States  Bankruptcy Court so-ordered a Stipulation and Order
          Providing  for  the   Rejection  of  the  Executory   Contract/License
          Agreement  with  Aquamax/Keeran,   pursuant  to  section  365  of  the
          Bankruptcy  Code  on  June  12,  2003.  Aquamax/Keeran  has a  general
          unsecured claim in the bankruptcy for $3,600,000.

          In addition,  the Company determined,  in the exercise of its business
          judgment,  to reject  the  transaction  contemplated  in the Letter of
          Intent  executed by the Company,  Aquamax/Keeran,  Hadwaco Ltd. Oy and
          Hackman Oy Abp prior to the Company's  bankruptcy  filing. On June 12,
          2003, the United States  Bankruptcy Court so-ordered a Stipulation and
          Order Providing for the Rejection of the Executory  Contract/Letter of
          Intent pursuant to section 365 of the Bankruptcy Code.

          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

                                      F-50
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

          quarter,  the Company will deliver to SAIC a report of its  activities
          relating to the preceding calendar quarter.

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

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

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

                                      F-51
<PAGE>

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

          e. License Agreements (Continued)

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

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

          As a result of the  bankruptcy  filing,  SAIC has a general  unsecured
          claim in the bankruptcy for $112,365.

          f. License Option Agreement

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

                                      F-52

<PAGE>

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

NOTE 11 - DILUTIVE INSTRUMENTS

          a. Stock Options

          A summary  of the  Company's  outstanding  stock  options  granted  to
          non-employees  and weighted average  assumptions used for grants as of
          December 31, 2002 is presented below:

<TABLE>
<CAPTION>
                        Date of                  Exercise      Exercise      Trading      Amount
     Description         Grant       Vesting      Number        Price         Price      Exercised
-------------------   -----------  -----------  -----------  ------------  -----------  -----------
<S>                   <C>          <C>          <C>          <C>           <C>          <C>
1) D. Weckstein        06/23/99     Immediate       30,000   $       5.00  $      5.20     Canceled
2) Xcel Associates     07/12/99     Immediate      100,000   $       5.00  $      7.80       20,000
3) Xcel Associates     09/09/99     Immediate      100,000   $       1.00  $      2.90      100,000
4) D. Weckstein        12/07/99     Immediate      125,000   $       1.00  $      1.16     Canceled
5) D. Weckstein        02/18/00     Immediate      100,000   $       6.00  $      6.25     Canceled
6) EBM, Inc.           02/22/00     Immediate      100,000   $       1.50  $      6.25            -
7) D. Weckstein        04/19/00     Immediate      110,000   $       3.00  $      3.31            -
8) D. Weckstein        08/08/00     Immediate      100,000   $       3.50  $      3.58            -
9) Consultants         01/08/02     Immediate       87,132   $       1.00  $      1.06            -
10) D. Weckstein       08/01/02     Immeidate      400,000   $       0.05  $      0.05            -
11) Carl Fricke        09/01/02     Immediate      500,000   $       0.02  $      0.02            -
                                                -----------                             -----------

   Balance December 31, 2002                      1,752,132                                 120,000
                                                ===========                             ===========
</TABLE>

<TABLE>
<CAPTION>
                                    Risk-Free
                      Expiration    Interest     Expected      Expected     Expected
     Description         Date         Rate         Life       Volatility    Dividends     Expense
-------------------   -----------  -----------  -----------  ------------  -----------  -----------
<S>                   <C>          <C>          <C>          <C>           <C>          <C>
1) D. Weckstein        Canceled       5.57%        3              186%          0       $    14,097
2) Xcel Associates     07/12/00       4.97%        1              227%          0            62,561
3) Xcel Associates     03/09/00       5.14%       0.5             113%          0             1,139
4) D. Weckstein        Canceled       5.92%        5              394%          0           130,402
5) D. Weckstein        Canceled       6.67%        3              415%          0           424,596
6) EBM, Inc.           02/22/04       6.67%        4              415%          0           624,998
7) D. Weckstein        04/19/03       6.75%        3              418%          0                 -
8) D. Weckstein        08/31/03       6.75%        3              427%          0           358,000
9) Consultants         01/08/12       3.48%       10              137%          0            90,106
10) D Weckstein        06/14/05       2.60%        3              202%          0                 -
11) Carl Fricke        09/01/04       2.14%        2              220%          0             7,996
                                                                                        -----------

   Balance December 31, 2002                                                            $ 1,713,895
                                                                                        ===========
</TABLE>

                                      F-53

<PAGE>

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

NOTE 11 - DILUTIVE INSTRUMENTS (Continued)

          a. Stock Options (Continued)

          During  May  2000,   598,680   options  were  granted  to  an  officer
          exercisable at $1.50 per share.  The options vested  immediately  upon
          issuance.  Compensation  expense of $1,272,195 was recorded to reflect
          the excess of market  value at the date of  issuance  over the options
          price. These options expired in May 2002.

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

          During August 2002,  387,694  options were granted to employees of the
          Company exercisable at $0.05 per share. The options vested immediately
          upon issuances. Compensation expense of $5,815 was recorded to reflect
          the excess of market  value at the date of  issuance  over the options
          price. These options expire in August 2012.

          The  following  table  summarizes  information  about  employee  stock
          options outstanding at December 31, 2002:

                        Number of      Weighted
                         Options        Average       Weighted       Number of
                       Outstanding     Remaining       Average    Exercisable at
            Exercise  December 31,    Contractual     Exercise     December 31,
             Price        2002           Life           Price         2002
            --------  --------------  -------------  -----------  --------------

            $   1.00     3,007,456        9 years    $    1.00       3,007,456
            $   0.05       387,694      9.5 years    $    0.05         387,694

          Had compensation cost for the Company's stock-based  compensation plan
          been determined  based on the fair value at the grant dates for awards
          under  such plan  consistent  with the method of FASB  Statement  123,
          "Accounting  for Stock-Based  Compensation,"  the Company's net income
          (loss) and  earnings  (loss) per share would have been  reduced to the
          pro forma amounts indicated below:

                                                      For the Years Ended
                                                         December 31,
                                               --------------------------------
                                                   2002                2001
                                               --------------    --------------

            Net (loss) as reported             $ (21,480,828)    $  (17,481,843)
            Proforma                             (24,384,972)       (17,481,843)
            Basic and diluted (loss) per
              share as reported                        (0.47)             (0.46)
            Pro forma                                  (0.47)             (0.46)

                                      F-54

<PAGE>

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

NOTE 11 - DILUTIVE INSTRUMENTS (Continued)

          a. Stock Options (Continued)

          The Company estimates the fair value of each stock option at the grant
          date by using the  Black-Scholes  option  pricing  model  based on the
          following assumptions:

                                                                           2002
                                                                           -----

            Risk free interest rate                                        3.96%
            Expected life                                                    11
            Expected volatility                                             180%
            Dividend yield                                                  0.0

          b. Warrants

          A  summary  of the  Company's  outstanding  warrants  and  fair  value
          assumptions  for grants as  determined  by the Black  Scholes  pricing
          model as of December 31, 2002 is presented below:

<TABLE>
<CAPTION>
                                                                Average    Trading
                         Date of                   Exercise    Exercise    Price at     Amount
  Description             Grant       Vesting       Number       Price     Issuance    Exercised
---------------------  -----------  ------------ -----------  ----------  ----------  -----------
<S>                    <C>          <C>          <C>          <C>         <C>         <C>
1) Various lenders         5/17/99  Upon             720,730  $     1.50  $     0.50        2,913
                                    debenture
                                    conversion
2) Conner Corp, Intl.       2/1/00  Immediately       10,000  $     2.17  $    4.125            -
3) Clement Wohlreich       7/25/00  Immediately      100,000  $     1.50  $     4.00            -
4) Gene Martineau          6/29/01  Immediately      120,000  $     1.50  $     2.80            -
5) Various Lenders         Various  Immediately    3,739,669  $     1.00  $     1.50            -
6) Frankie Foo              3/7/02  Immediately      140,000  $     0.70  $     0.86            -
7) Various Lenders      Various-02  Upon           3,614,944  $     0.76  $     0.92            -
                                    debenture
                                    conversion
8) Various Lenders      Various-02  Immediately    1,350,000  $     0.92  $     0.83            -
                                                 -----------                          -----------

   Balance, 12/31/02                               9,795,343                                2,913
                                                 ===========                          ===========
</TABLE>

<TABLE>
<CAPTION>
                                     Risk-Free
                       Expiration    Interest     Expected     Expected    Expected
  Description             Date         Rate         Life      Volatility   Dividends    Expense
-------------------    -----------  -----------  -----------  ----------  ----------  -----------
<S>                    <C>          <C>          <C>          <C>         <C>         <C>
1) Various lenders         5/19/04     4.77%          5          319%         -           360,173
2) Conner Corp, Intl.       2/1/03     6.43%          3          419%         -            41,242
3) Clement Wohlreich       7/25/03     6.43%          3          419%         -           340,000
4) Gene Martineau          6/29/06     4.97%          5          216%         -                 -
5) Various Lenders        12/20/06     4.53%         3.5         220%         -         1,628,386
6) Frankie Foo              3/7/07      3.5%          5          131%         -           106,375
7) Various Lenders       2/03-4/07      3.5%      1-5 years      150%         -           823,687
8) Various Lenders       9/02-4/06      3.5%      1-5 years      150%         -           954,945
                                                                                      -----------

   Balance, 12/31/02                                                                  $ 4,254,808
                                                                                      ===========
</TABLE>

                                      F-55

<PAGE>

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

NOTE 12 - STOCK ISSUANCES

          On September 1, 2002, the Company granted options to purchase  500,000
          shares of common  stock at $0.02 per share and a term of 2 years.  The
          fair market value of the warrants as  determined  by the  Black-Sholes
          pricing model was $7,996.

          On August 2, 2002, the Company  granted  387,694  options to employees
          that were laid off on July 31, 2002 as  additional  consideration  for
          late  payroll.  The options have an exercise  price of $0.05 per share
          and a term of 10 years. The Company recorded $5,815 of expense,  which
          related to the  difference  between  the  closing  price of $0.065 per
          share on August 2, 2002 and the exercise price of the options.

          During the quarter  ended  September  30, 2002,  the Company  issued a
          total of  7,465,888  shares of common  stock  for  total  advances  of
          $125,000  on their  Equity  Line of  Credit,  see note 15 for  further
          discussion of these issuances.

          On July 31, 2002, the Company issued  3,854,167 shares of common stock
          for the conversion of $37,000 in principle of a convertible  debenture
          payable at $0.0096 per share.

          On July 11, 2002,  the Company  issued  925,926 shares of common stock
          for the conversion of $20,000 in principle of a convertible  debenture
          payable at $0.0216 per share.

          On July 1, 2002,  the Company  granted  50,000  warrants as additional
          consideration for a loan to the Company.  The fair market value of the
          warrants as determined by the Black-Sholes pricing model was $259.

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

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

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

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

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

                                      F-56
<PAGE>

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

NOTE 12 - STOCK ISSUANCES (Continued)

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

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

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

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

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

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

          On February 7, 2002, the Company granted 100,000  warrants for prepaid
          consulting  services  (See  Note  10).  The fair  market  value of the
          warrants as determined by the Black-Scholes pricing model was $79,000.

          On January 8, 2002,  the Company issued 130,000 shares of common stock
          for prepaid consulting  services (See Note 10). The shares were valued
          at the  closing  price  of  $1.06  per  share  on the  date of  issue.
          Concurrant  with the  issuance  of the  shares,  the  Company  granted
          300,000  warrants with an exercise price of $1.25 per share.  The fair
          market  value  of the  warrants  as  determined  by the  Black-Scholes
          pricing model was $120,000.

                                      F-57
<PAGE>

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

NOTE 12 - STOCK ISSUANCES (Continued)

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

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

          On January 8, 2002,  the Company issued 200,000 shares of common stock
          for prepaid consulting  services (See Note 10). The shares were valued
          at the closing price of $1.06 per share on the date of issue.

          On June 29, 2001,  the Company  issued  120,000 shares of common stock
          for  consulting  services  valued  at the  closing  price of $2.80 per
          share.

          On June 8, 2001, the Company issued 119,152 shares of common stock for
          the conversion of research  advances payable to equity valued at $3.20
          per share.

          On April 23, 2001,  the Company  issued  50,000 shares of common stock
          for the  conversion of accounts  payable to equity valued at $1.50 per
          share.

          On  September  15, 2000,  the Company  issued  1,000,000  units of its
          common stock in conjunction with a private placement  memorandum dated
          August 29, 2000 for cash of $3,000,000,  or $3.00 per share. Each unit
          contains  one share of common  stock,  and one warrant with a purchase
          price of $1.50 and  exercisable  for 3 years.  None of the units  were
          purchased by employees, officers or affiliates of the Company, nor was
          any business conducted with these investors.

          From January 25 to August 14, 2000, the Company issued 1,930,792 units
          of its common  stock valued at a weighted  average  price of $3.58 per
          unit  pursuant to a private  placement  memorandum  for  $6,915,731 of
          cash.  Each unit  contains  one share of common  stock and one warrant
          with  exercise  price of 50% of the  5-day  average  trading  value of
          unrestricted  common  stock at the date of the  purchase  of the unit.
          Each warrant has a term of 3 years.

          On July 25, 2000,  the Company issued  1,718,748  shares of its common
          stock for the purchase of SIGMA in the amount of $5,500,000,  or $3.20
          per share.

          On July 25,  2000,  the Company  issued  100,000  shares of its common
          stock valued at $4.00 per share for the conversion of accounts payable
          of $400,000.

          On March 27,  2000,  the Company  issued  46,486  shares of its common
          stock in three  issuances  at a  weighted  average  price of $4.95 per
          share to unrelated parties for debt cancellation of $231,812.

                                      F-58
<PAGE>

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

NOTE 12 - STOCK ISSUANCES (Continued)

          On March 16,  2000,  the Company  issued  66,667  shares of its common
          stock for the conversion of a convertible debenture,  related party at
          $1.50 per share, or $100,000.

          On March 16, 2000,  the Company  issued  133,333  shares of its common
          stock  for  the  exercise  of  warrants  attached  to the  convertible
          debenture  described  above held at $0.75 per share,  or  $100,000  of
          cash.

          On March 9, 2000, the Company issued 62,792 shares of its common stock
          for  $125,019  pursuant  to the  exercise  of  warrants  attached to a
          private placement.

          On January 26, 2000,  the Company issued 47,619 shares of common stock
          at $2.10 per share for cash proceeds of $100,000.

          On January 5, 2000,  the Company  issued  60,000  shares of its common
          stock  valued at $4.34 per share  for  consulting  services  valued at
          $260,400.

          On January 4, 2000,  the Company  issued  97,580  shares of its common
          stock to its  landlord  for the  cancellation  of $100,000 of debt and
          50,000  shares  of its  common  stock  valued  at $2.75  per share for
          consideration for default on a loan valued at $137,500.

          On November 4, 1998,  the Company  issued a convertible  debenture for
          $800,000 to related parties for funds advanced to Group. The Debenture
          was convertible into common stock at $1.50 per share which represented
          the closing price on the date of the issuance of the  debenture.  Each
          share converted carried one (1) warrant which was exercisable at $1.50
          per share for a period of 4 years.  At December 31, 1998,  the related
          parties had  converted  the entire  debenture  into 533,333  shares of
          common stock and exercised 13,502 warrants for total  consideration of
          $820,252.  On January  5,  1999,  the  original  debenture  terms were
          amended as follows:  The debenture  amount was increased to $2,000,000
          convertible into common stock at $1.50 per share with one (1) attached
          warrant  exercisable  for 5 years  from  the  dates  of the  debenture
          conversions.

          On March 30,  1999,  the Company  issued  70,000  shares and  warrants
          pursuant to the  conversion of this  debenture.  On May 17, 1999,  the
          Company issued 720,730 and warrants  shares pursuant to the conversion
          of the  debenture.  Pursuant to the  modification,  the  debenture was
          canceled as of the date of the recapitalization. On December 31, 1999,
          the Company  issued  592,744  shares of common  stock  pursuant to the
          exercise  of  warrants  attached  to  the  convertible  debenture.  At
          December 31, 1999,  there were  717,817  warrants  which have not been
          exercised and expire by May 17, 2004. All share issuances prior to the
          recapitalization  are  included  in the  recapitalization  line on the
          statement of stockholders' equity.

          On December  21, 1999,  the Company  issued  120,773  shares of common
          stock  valued  at $0.83  per share  for  $100,000  of cash.  The share
          issuance was a part of a $600,000 private placement.

                                      F-59
<PAGE>

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

NOTE 12 - STOCK ISSUANCES (Continued)

          On December  16, 1999,  the Company  issued  193,939  shares of common
          stock  valued  at $0.83  per share  for  $160,000  of cash.  The share
          issuance was a part of a $600,000 private placement.

          On December 10, 1999, the Company issued 33,333 shares of common stock
          valued at $0.90 per share for $30,000 of cash.  The share issuance was
          a part of a $600,000 private placement.

          On December  10, 1999,  the Company  issued  111,111  shares of common
          stock  valued  at $0.90  per share  for  $100,000  of cash.  The share
          issuance was a part of a $600,000 private placement.

          On December 9, 1999, the Company issued 175,070 shares of common stock
          valued at $0.71 per share for $125,000 of cash. The share issuance was
          a part of a $600,000 private placement.

          On December 9, 1999,  the Company issued 49,020 shares of common stock
          valued at $0.71 per share for $35,000 of cash.  The share issuance was
          part of a $600,000 private placement

          On December 8, 1999,  the Company issued 71,839 shares of common stock
          valued at $0.70 per share for $50,000 of cash.  The share issuance was
          a part of a $600,000 private placement.

          On November  29, 1999,  the Company  issued  400,000  shares of common
          stock valued at the trading  price of $1.34 per share for finders fees
          relating  to cash raised by  shareholders  of the  Company.  The total
          valuation  of $537,000 has been  presented as an offset to  additional
          paid-in capital as stock offering costs.

          On October 1, 1999,  the  Company  canceled  502,500  shares of common
          stock which had been issued prior to the reverse merger.  Accordingly,
          the  Company  canceled  the  shares at a zero  valuation  because  the
          expense  recorded  as  part  of the  retained  deficit  of  Group  was
          eliminated as part of the reverse merger.

          On  September 9, 1999,  the Company  issued  100,000  shares of common
          stock valued at $1.00 per share for cash.

          On September 2, 1999, the Company issued 20,000 shares of common stock
          valued at $1.94 per share for consulting services rendered. The shares
          were issued at the trading price on the date of issue.

          On August 12, 1999,  the Company  issued  100,000 shares of its common
          stock valued at $2.50 per share for loan consideration of $250,000.

          On July,  26, 1999,  the Company  issued  10,000  shares of its common
          stock  valued at $5.00 per share for cash of $50,000 for the  exercise
          of options granted July 12, 1999.

                                      F-60
<PAGE>

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

NOTE 12 - STOCK ISSUANCES (Continued)

          On July,  15, 1999,  the Company  issued  15,000  shares of its common
          stock valued at $7.80 per share for consulting services of $117,000.

          On July,  15, 1999,  the Company  issued  10,000  shares of its common
          stock  valued  at $5.00  per share for  $50,000  for the  exercise  of
          options granted July 12, 1999.

          On June 22, 1999,  the Company  completed a  recapitalization  between
          Group  (acquired  entity)  and  Holdings,   (acquiring  entity).   The
          presentation of the  recapitalization is as follows: The equity of the
          acquiring entity (Holdings) is presented as the equity of the combined
          enterprise; however, the capital stock account of the acquiring entity
          (Holdings)  is adjusted  to reflect  the par value of the  outstanding
          stock of the legal acquirer  (Group) after giving effect to the number
          of shares issued in the reverse  merger.  Accordingly,  at the date of
          the recapitalization, the Company had 6,291,450 shares of common stock
          outstanding;  and  25,044,146  shares  as  detailed  below  have  been
          retroactively restated for the equivalent number of shares received in
          the merger by Holdings.

          Between  February  24,  1998 and June 17,  1999,  the  Company  issued
          1,236,791  shares of its common stock to employees and 725,962  shares
          of its common stock to consultants valued at $0.003 per share for cash
          of $5,637.

          Between  April 1, 1998 and June 17, 1999,  the Company  issued  31,320
          shares of its common stock to vendors,  215,760  shares to lenders and
          7,308  shares to a  landlord  valued  at $0.003  per share for cash of
          $731.

          On May 7, 1999,  the  Company  issued  2,610,000  shares of its common
          stock to an employee valued at $0.003 per share for past due salary of
          $7,500.

          On May 3, 1999,  the Company  issued 25,717 shares of its common stock
          to a consultant valued at $0.003 per share for past due fees of $74.

          On April 30,  1999,  the Company  issued  22,968  shares of its common
          stock to  consultants  valued at $0.003 per share for past due fees of
          $66.

          On April 27, 1999,  the Company issued 69,600 and 26,100 shares of its
          common stock to a landlord and a consultant,  respectively,  valued at
          $0.003 per share for past due rent of $200 and past due fees of $75.

          On March 22, 1999, the Company  issued 34,800,  496,248 and 18,480,172
          shares of its common  stock to a lender,  consultants  and  employees,
          respectively,  valued at $0.005  per share for  conversion  of debt of
          $50,000, past due fees of $1,426 and past due salaries of $53,104.

          On June 16, 1998,  the Company issued  1,061,400  shares of its common
          stock, to the Company's founders,  Joseph Maceda,  Robert Campbell and
          Rocco Guarnaccia, valued at $0.079 per share for conversion of debt of
          $83,881.

                                      F-61
<PAGE>

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

NOTE 12 - STOCK ISSUANCES (Continued)

          All share issuances at $0.003 were originally  valued at the par value
          of Holdings of $0.001 because par value  represented the fair value of
          Holdings common stock at the dates of issue but were revalued pursuant
          to the recapitalization (Note 1).

NOTE 13 - REGULATION 504D STOCK OFFERING

          During  December  1999,  the Company  issued  755,085 shares of common
          stock  pursuant  to a  Regulation  504D  stock  offering  for  cash of
          $600,000.  The shares  were issued at 60% of the closing bid price one
          day prior to issuance.  The shares were issued at prices  ranging from
          $0.70 per  share to $0.90 per share at the same time that the  closing
          bid prices were $1.17 to $1.50.

NOTE 14 - PRIVATE PLACEMENTS AND MEMORANDUMS

          During  January 2000,  the Company  authorized a private  placement of
          $100,000 of its  restricted  common stock.  The price of the shares is
          calculated  at 60% of the closing bid price one day prior to issuance.
          The Company  issued 47,619 shares  pursuant to this private  placement
          for $100,000, or $2.10 per share. The closing bid price was $3.50.

          On January  24,  2000,  the  Company  authorized  a private  placement
          memorandum of $5,000,000 of restricted  units, each unit consisting of
          1 share of restricted common stock and 1 attached  warrant.  The price
          of the unit is calculated at 80% of the 5-day average trading value of
          unrestricted  common  stock price  prior to purchase of the unit.  The
          attached warrant is exercisable at a price of 50% of the 5-day average
          trading value of unrestricted common stock at the date of the purchase
          of the unit. Each warrant has a term of 3 years.

          On January 31, 2000, the Company extended this offering to $6,000,000,
          expiring March 31, 2000.

          On March 26,  2000,  the  Company  removed  the time and amounts to be
          raised limits on the offering.

          The Company issued 1,930,792 shares pursuant to this private placement
          memorandum for  $6,915,731,  or a weighted  average price of $3.43 per
          share while the  weighted  average  closing bid price was $4.28 during
          the time period of the private placement.

          On August  29,  2000,  the  Company  authorized  a  private  placement
          memorandum of $3,000,000 of its common stock.  The price of the shares
          was fixed at $3.00 per share.  The  Company  issued  1,000,000  shares
          pursuant to this private placement for $3,000,000.

                                      F-62
<PAGE>

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

NOTE 15 - EQUITY LINE OF CREDIT

          On  November  29,  2001,  the Company  entered  into an Equity Line of
          Credit with Cornell Capital Partners, L.P. (Cornell) pursuant to which
          the  Company  may,  at its  discretion,  periodically  sell to Cornell
          shares  of  common  stock  for a total  purchase  price of up to $10.0
          million.  For each share of common  stock  purchased  under the Equity
          Line of Credit,  Cornell will pay 95% of the lowest  closing bid price
          on  which  our  common  stock  is  traded  for the 5 days  immediately
          following  the notice date.  Unless  waived by Cornell,  the amount of
          each  advance  is  subject  to a maximum  advance  amount  based on an
          average  daily volume of the Company's  common stock.  The Company may
          request an advance every three trading days. A consulting fee of 5% of
          each  advance  will be paid to Cornell  upon closing each of the sales
          under this agreement.  In addition,  the Company issued 260,270 shares
          of common  stock on February  28, 2002 as a  commitment  fee valued at
          $500,000,  or $1.92 per share.  The  non-refundable  commitment fee is
          included  in  accounts  payable at December  31,  2001,  and was fully
          expensed  as debt  offering  costs.  The  Company  has not  drawn  any
          advances  under this agreement at December 31, 2001. The Company filed
          an SB-2, which was declared effective on June 19, 2002.

          On June 28, 2002 and July 8, 2002,  the Company  issued 687,500 shares
          and  287,159  shares  respectively  for a total of  974,659  shares of
          common stock for an advance of $25,000 on the Equity Line of Credit at
          $0.02565 per share.

          On July 11,  2002 and July 15,  2002,  the  Company  issued  1,666,667
          shares and 438,597 shares respectively for a total of 2,105,264 shares
          of common stock for an advance of $50,000 on the Equity Line of Credit
          at $0.02375 per share.

          On July 15,  July 22 and July 29,  2002,  the Company  issued  228,070
          shares, 2,521,930 shares and 1,635,965 shares respectively for a total
          of  4,385,965  shares of common stock for an advance of $50,000 on the
          Equity Line of Credit at $0.0114 per share.

NOTE 16 - DISCONTINUED OPERATIONS

          On August 9, 2002, the Company's wholly-owned subsidiary SIGMA was put
          into bankruptcy  because if its inability to pay employee salaries and
          was declared a discontinued  operation.  All officers and directors of
          SIGMA  have  resigned  and  operations  have  completely   closed.  In
          accordance with FASB Statement No. 144, the Company has classified all
          prior  operations of SIGMA as discontinued  and has restated all prior
          income statements.  Additionally,  the Company declared  bankruptcy on
          December 1, 2002.  All activity  has ceased in the Company.  All prior
          operations  with the  exception  of the  interest  expense  have  been
          reclassified  as  discontinued  operations.  No income tax benefit has
          been attributed to the transactions.

                                      F-63
<PAGE>

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

NOTE 16 - DISCONTINUED OPERATIONS (Continued)

          A summary of the Discontinued Operations are as follows:

<TABLE>
<CAPTION>
                                                                             From
                                                For the                  Inception on
                                              Years Ended                  March 26,
                                              December 31,               1992 Through
                                    --------------------------------     December 31,
                                         2002              2001              2002
                                    --------------    --------------    --------------
<S>                                 <C>               <C>               <C>
REVENUES                            $            -    $            -    $            -
                                    --------------    --------------    --------------

EXPENSES

   General and administrative           15,342,482         8,150,521        41,229,049
   Impairment of intangible assets       7,433,043           212,191         7,645,234
   Research and development                 14,687         4,144,063         4,565,961
   Depreciation and amortization           429,707         1,862,614         2,292,321
                                    --------------    --------------    --------------

      Total Expenses                    23,219,919        14,369,389        55,732,565
                                    --------------    --------------    --------------

LOSS FROM OPERATIONS                   (23,219,919)      (14,369,389)      (55,732,565)
                                    --------------    --------------    --------------

OTHER INCOME (EXPENSE)

   Gain on settlement of debt            2,890,000           157,822         3,047,822
   Gain on write off of investment       2,870,376                 -         2,870,376
   Interest income                               -            75,425            30,783
   Interest expense                       (144,156)          (74,110)         (408,712)
                                    --------------    --------------    --------------

      Total Other Income (Expense)  $    5,616,220    $      159,137    $    5,540,269
                                    --------------    --------------    --------------

      NET LOSS                      $  (17,603,699)   $  (14,210,252)   $  (50,192,296)
                                    ==============    ==============    ==============
</TABLE>

                                      F-64
<PAGE>

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

NOTE 17 - BANKRUPTCY

          In the past six months,  the Company pursued various avenues to enable
          the business to continue in operation  and/or  maximize  asset values.
          These efforts included meetings with a number of entities to explore a
          strategic  investment in the Company and/or an acquisition of all or a
          portion of the Company's assets and businesses.  While several parties
          undertook due diligence, no entity made a viable proposal.

          In  September  2002,  the Company was  without  sufficient  capital to
          continue  to  operate  and had been  unable  to  identify  sources  of
          additional  financing.  The  Board of  Directors  of the  Company  was
          concerned that a sudden  cessation of operations would not provide the
          best means to maximize asset values.  Therefore, at an October 3, 2002
          meeting of the  Company's  Board of  Directors,  the Board  approved a
          resolution  to  commence   negotiations  with  the  Company's  secured
          creditors,  Algonquin Capital Management,  L.L.C. and Hibernia Capital
          Management,  L.L.C.,  to commence a voluntary  bankruptcy filing under
          chapter 11 of the Bankruptcy Code and immediately thereafter a sale of
          the Company's assets pursuant to section 363 of the Bankruptcy Code.

          The  Company  has a history  of being  financed  primarily  by raising
          capital  through  private  placements  of its stock  and/or loans from
          third  parties.  The  proceeds  from the  financing  have been used to
          develop  the  Company's  technologies,  pursue  acquisitions  and make
          strategic  alliances  and pay  operating  costs.  Over the past twelve
          months,  the Company has endeavored to stem severe cash flow shortages
          through,  among other things,  workforce and overhead reductions,  and
          the consolidation of its business  operations.  Due to persistent cash
          flow  shortages  the  Company  terminated  substantially  all  of  its
          employees. As a result of a confluence of events,  including a general
          contraction of available financing from capital markets and the recent
          bankruptcy  in  Norway  of Sigma  Elektroteknisk,  AS, a wholly  owned
          subsidiary,  a Special  Meeting of the Board of Directors  was held on
          November  27,  2002,  in which  the  Board  unanimously  consented  to
          authorize the Company to file a voluntary petition under Chapter 11 of
          the Bankruptcy Code.

          On December  1, 2002,  the Company  filed a voluntary  petition  under
          Chapter 11 of the  Bankruptcy  Code with the United States  Bankruptcy
          Court Southern  District of New York. On December 16, 2002, the United
          States Trustee  appointed a creditors'  committee  pursuant to section
          1102(a) of the Bankruptcy Code (the "Committee").

                                      F-65
<PAGE>

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

NOTE 17 - BANKRUPTCY (Continued)

          Simultaneously with filing the Chapter 11 petition,  the Company filed
          an emergency motion to authorize it to obtain loans and advances under
          a   Debtor-In-Possession   Loan  Agreement   with  Algonquin   Capital
          Management, L.L.C. in order to continue operations so that the Company
          could  attempt to  maximize  the value of its assets.  The  Bankruptcy
          Court entered an interim order  approving the financing on December 5,
          2002 and a final order was entered on December 20, 2002.  In addition,
          the  Company  filed a motion in the  bankruptcy  case to  approve  the
          proposed sale of substantially  all of its assets to Algonquin Capital
          Management, L.L.C. and Hibernia Capital Management, L.L.C., subject to
          higher  and better  offers.  By order  dated  February  6,  2003,  the
          Bankruptcy  Court  authorized  the asset sale agreement with Algonquin
          Capital  Management  L.L.C. and Hibernia Capital  Management L.L.C. as
          modified by the  Creditor  Settlement  Agreement  and  assumption  and
          assignment of certain executory  contracts,  licenses and intellectual
          property  rights  for a  credit  bid of  $2,000,000.  As  part  of the
          Creditor Settlement Agreement, Algonquin Capital Management L.L.C. and
          Hibernia Capital Management L.L.C. reconveyed to the bankruptcy estate
          a 60%  ownership in the Water Assets of the Company.  The Bill of Sale
          consummating  the  sale  was  signed  on  February  19,  2003.  During
          September  2003,  an  additional  $80,000  was paid to the  Company by
          PowerPlay Energy pursuant to the creditor settlement agreement.

          Having sold its assets and ceased operations, the Company was not in a
          financial  position  to  support  the  on-going  operations  needed to
          develop  the Water  Assets.  On May 20,  2003,  the  Bankruptcy  Court
          approved  the sale of the  Company's  interest in the Water  Assets to
          Oases Desalination International,  Ltd. in exchange for their covenant
          to commercialize those assets and make certain royalty payments. Since
          that time, and although they have made certain minimal payments, Oases
          has been in default.  Subsequently,  Oases Desalination International,
          Ltd. and ReEnergy  Group entered into an asset  purchase  agreement in
          which Oases  Desalination  International,  Ltd.  would sell all of its
          assets,  including the Water Assets, to ReEnergy Group.  Because Oases
          Desalination  International,  Ltd. is in default  with the Company and
          has not paid for the Water Assets,  Oases Desalination  International,
          Ltd. and Renergy Group sought the Company's  consent wherein  ReEnergy
          Group would directly purchase the Water Assets from the Company. After
          significant negotiations, the Creditors' Committee, Oases Desalination
          International,  Ltd.  and  ReEnergy  Group  entered  into the  Consent
          Agreement,  in order to,  among other  things,  provide the  Company's
          consent to transfer the Water Assets to ReEnergy  Group for a modified
          consideration  of $750,000 for the Water Assets.  On October 26, 2005,
          an  application  was filed with the  Bankruptcy  Court to approve this
          arrangement  and the  arrangement was approved by order dated November
          16,  2005.  The  Company  has  received  all  of  the  funds  in  this
          transaction  and is being held in an account  maintained by bankruptcy
          counsel for the Committee.

                                      F-66
<PAGE>

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

NOTE 17 - BANKRUPTCY (Continued)

          In  October of 2006,  the  Company  signed a term  sheet  with  Trinad
          Capital   Master  Fund  Ltd.  (the  Sponsor)  to  sponsor  a  plan  of
          reorganization.  Prior  to  confirmation  of the  Chapter  11  plan of
          reorganization,  the Sponsor  will  identify a merger  candidate to be
          merged into the Company. The Sponsor is currently in negotiations with
          NorthStar  Systems   International,   Inc.  as  the  potential  merger
          candidate.  Before the merger can take place,  the Company is required
          to bring all of its  financial,  tax and SEC filings  current from the
          last  filing date of June 30,  2002.  Pursuant to orders of the United
          States  Bankruptcy  Court for the Southern  District of New York,  the
          Company has engaged accountants,  auditors and SEC counsel to complete
          this task.  Under the terms of the  proposed  plan,  creditors  of the
          Company will  receive a pro rata cash payment and stock  consideration
          in the new merged entity.  The  aforementioned  consideration  will be
          distributed  to  creditors of the Company  under the proposed  plan of
          reorganization.

NOTE 18 - SUBSEQUENT EVENTS

          During  the  quarter  ending  March 31,  2003,  the  Company  received
          $116,818  from  the  issuance  of notes  and  advances  pursuant  to a
          debtor-in-possession financing facility, approved pursuant to an order
          by the United States Bankruptcy Court for the Southern District of New
          York. The applicable interest rate was 15%.

          During the quarter  ending March 31, 2003,  the Company filed a motion
          in the bankruptcy  case to approve the proposed sale of  substantially
          all of its assets to Algonquin Capital Management, L.L.C. and Hibernia
          Capital  Management,  L.L.C.,  subject to higher and better offers. By
          order dated  February 6, 2003,  the  Bankruptcy  Court  authorized the
          asset sale agreement  with Algonquin  Capital  Management  L.L.C.  and
          Hibernia  Capital  Management  L.L.C.  as  modified  by  the  Creditor
          Settlement   Agreement  and   assumption  and  assignment  of  certain
          executory contracts,  licenses and intellectual  property rights for a
          credit  bid  of  $2,000,000.   As  part  of  the  Creditor  Settlement
          Agreement,  Algonquin  Capital  Management L.L.C. and Hibernia Capital
          Management L.L.C.  reconveyed to the bankruptcy estate a 60% ownership
          in the Water Assets of the Company.  The Bill of Sale consummating the
          sale was signed on February 19,  2003.  As a result of this asset sale
          the  Company  recognized  a gain on sale of  assets  in the  amount of
          $1,723,486.  The Company had no basis in the water assets prior to the
          original  sale  and  therefore  recognized  no gain on the  subsequent
          return of those assets.

          During the quarter ending June 30, 2003, the Company  received $20,000
          from   the   issuance   of   notes   and   advances   pursuant   to  a
          debtor-in-possession financing facility, approved pursuant to an order
          by the United States Bankruptcy Court for the Southern District of New
          York. The applicable interest rate was 15%.

          During the quarter  ending  September 30, 2003,  the Company  received
          $80,000 from  PowerPlay  Energy  pursuant to the  creditor  settlement
          agreement discussed in Note 17.

          During the quarter  ended  December  31,  2005,  the Company  sold its
          ownership  interest  in the water  assets  pursuant  to an order dated
          November 16, 2005, by the United

                                      F-67
<PAGE>

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

NOTE 18 - SUBSEQUENT EVENTS (Continued)

          States  Bankruptcy  Court for the  Southern  District of New York.  As
          consideration  for this ownership  interest the Company received total
          cash  proceeds of $750,000 paid in three  installments.  The first two
          installments  were  made  prior to  December  31,  2005,  and  totaled
          $100,000.  The remaining $650,000 was recorded as a receivable balance
          at December 31, 2005,  and was  subsequently  received  during January
          2006.

          During August 2007 the Company entered into a settlement  agreement in
          connection with the  debtor-in-possession  financing whereby the total
          balance of principal  and accrued  interest was settled for a one time
          payment  of  $380,000.  As a  result  of the  settlement  the  Company
          recognized a gain on settlement of debt of approximately $21,700.

                                      F-68
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

The Company currently has no directors or executive  officers.  Mr. Hopper,  age
59, has been a paid  consultant  from  February  2003 through the  present.  The
Company retained Mr. Hopper in an administrative  role, primarily to liaise with
the  Company's  professional  advisors and  otherwise  assist with the Company's
bankruptcy filings, in bringing the Company's audited financial statements up to
date, and in bringing all SEC filings up to date.

At December 31, 2002, the Company's directors were as follows:

Gloria Rose Ott            48       Chairman of the Board and Director
Joseph P. Maceda           50       President and Director
Robert L. Campbell         58       Vice-President and Director

The following is a brief description of the background of such former directors,
excerpted from the Company's 2001 Form 10-KSB:

GLORIA ROSE OTT

Ms. Ott joined Ocean Power as Chairman of the Board in October 1998. Ms. Ott was
founder and Chairman of Rapid Tech, Inc., from 1995 through 1999.  RapidTech,  a
privately held  corporation,  managed a Defense  Advanced  Research project that
employed agile manufacturing standards to the eventual mass-production of hybrid
vehicles,  teaming with Detroit  Center  Tools and the Taylor Dunn  Company.  In
1994,  Ms. Ott received a  Presidential  Appointment  and served on the Board of
Directors of the Overseas Private  Investment  Corporation  ("OPIC") until 1999.
OPIC sells  investment  services to assist U.S.  companies  in some 140 emerging
economies  around  the  world  with an active  portfolio  of $18.3  billion.  In
addition, from 1992-1998 Ms, Ott served as the President of Miraido Corporation,
building a $24 million  mixed-used  real  estate  project on a city block in San
Jose,  California.  Ms. Ott earned her Bachelor of Arts Degree at San  Francisco
State University and completed her graduate studies at Sonoma State University.

                                       10
<PAGE>

JOSEPH P. MACEDA

In January of 1997, Mr. Maceda founded Manufacturing Technologies Corporation to
pursue the modular seawater  desalination and power markets. This company became
a wholly owned  subsidiary  of PTC Holdings,  Inc, in March of 1998.  Mr. Maceda
also served as President. In June 1997, PTC Holdings merged with PTC Group, Inc.
(OTCBB Symbol: PWRE), and Mr. Maceda became President of the merged company. Mr.
Maceda has 22 years of experience in business development,  management, finance,
technology acquisition, and development in support of product commercialization.
Since Mr. Maceda founded Ocean Power in January 1997, he has devoted 100% of his
time to the  development of the business that has evolved into Ocean Power.  For
the seven and half years  prior,  Mr.  Maceda,  was the VP of  Development  of H
Power,  a  corporation  formed to develop fuel cell,  hydrogen  generation,  and
storage technologies for use in the battery  replacement,  stationary power, and
transportation   markets.   In  March  of  1987,  Mr.  Maceda  founded  Teledata
International,  Inc.,  which was  developing  wireless,  wide-area  networks for
remote  monitoring and control systems.  From June 1998 until he left H Power in
December,  1996,  Mr.  Maceda  raised money,  found  technologies  and developed
strategic  partnerships for marketing and  manufacturing  with companies such as
Singapore Technologies,  Rolls-Royce; Neste Oy; IBM; Duquesne; Sumitomo; British
Nuclear Fuels; the U.S. Department of Defense; the U.K. Ministry of Defense, and
others.

ROBERT L. CAMPBELL

Mr.  Campbell  has 24 years  experience  in the high  technology  sectors of the
defense  electronics  industry,  is a  pioneer  in  the  conversion  of  defense
technologies  to  peaceful  applications,  and has 10  years  experience  in the
seawater  desalination  industry.  Prior to founding  Integrated  Water & Power,
during 1997, Mr. Campbell was founding  President and Chief Executive Officer of
Advanced Distillation  Technology  ("ADTECH",  founded 1991). He was responsible
for the identification and negotiation of Kaiser Aerospace & Electronics,  Saudi
Industries for Desalination  Membranes and Systems,  and Singapore  Technologies
Automotive as key investors and partners. He was responsible for ADTech's system
design and the location and selection of all key technologies and personnel.  In
1983, Mr.  Campbell  founded,  operated and developed  Advanced  Counter Measure
Systems ("ACMS") a privately held corporation which supplied advanced technology
electronic  systems to all U.S.  military services and several federal agencies.
During 1987 and 1988 Mr. Campbell arranged and concluded the significant sale of
equity in ACMS to TRW,  Inc., of Delaware and EDO  Corporation  of New York. Mr.
Campbell  worked at  Watkins-Johnson  Co. from 1966 to 1983 and progressed  from
Member to the Technical  Staff in Device R&D to Staff  Scientist in  Electronics
Warfare  Systems,  to Founding  Department  Manager of the  Electronics  Warfare
Systems group.  From 1967 to 1970 while in military  service (U.S. Army Security
Agency and Strategic  Communications Command) he designed and deployed extensive
test  networks used to explore  Electromagnetic  Pulse effects in support of the
Safeguard Anti-Ballistic Missile System development.  Mr. Campbell is a graduate
of St.  Mary's  College of Moraga,  California  (B.S.  Physics,  1966),  pursued
graduate  studies at the  University  of  Arizona  (Systems  Engineering  1968),
participated   in  the  Honors   Program  at  Stanford   University   (Microwave
Engineering, 1975) and holds a California State Teaching Credential (lifetime).

At December 31, 2002, the Company's only executive  officer was Michael  Hopper.
Mr. Hopper joined the Company's  predecessor in January 1997.  From July 1999 to
February  2003,  Mr. Hopper served as  Secretary/Treasurer  and Chief  Financial
Officer of the Company. Joseph P. Maceda resigned as President of the Company on
December 1, 2002.

                                       11
<PAGE>

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section  16(a) of the  Securities  Act of 1934  requires  all Company  executive
officers and directors and persons who own more than ten percent of a registered
class of the Company's equity securities to file reports of their ownership with
the SEC. Executive officers, directors and greater than ten percent shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a)  reports  they  file.  Specific  due  dates for  these  reports  have been
established  and the Company is required  to report any  delinquent  filings and
failures to file such reports.

The  Company is unaware of the  failure of any of its  greater  than ten percent
beneficial  owners to comply with any filing  requirements  under  Section 16(a)
during the year ended December 31, 2002.

Because the Company does not currently  have any material  business  operations,
the Company does not have a separate  audit  committee,  and it does not have an
audit committee  financial  expert.  At such time as when the Company acquires a
business or develops material business  operations,  it intends to form an audit
committee and appoint an independent audit committee financial expert.

The  Sarbanes-Oxley  Act and related rules  adopted by the SEC require  publicly
traded  companies  to disclose  whether  they have adopted a code of ethics that
applies to a company's principal executive officer,  principal financial officer
and principal  accounting officer or controller,  or person's performing similar
functions.  The rules also define what constitutes a code of ethics. Because the
Company does not currently have any material  business  operations,  the Company
has not yet adopted a code of ethics that meets the SEC's rules.

Item 10. Executive Compensation.

The Company  currently  has no executive  officers.  At December  31, 2002,  the
Company's only executive officer was Mr. Hopper. Mr. Hopper joined the Company's
predecessor in January 1997.  From July 1999 to February 2003, Mr. Hopper served
as  Secretary/Treasurer  and Chief Financial  Officer of the Company.  Joseph P.
Maceda resigned as President of the Company on December 1, 2002.

Summary

The following table sets forth information for the periods indicated  concerning
the  aggregate  compensation  paid by the  Company and its  subsidiaries  to the
Messrs. Maceda and Hopper (the "Named Executives").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                            Annual Compensation                      Long-Term Compensation
                       ------------------------------    ----------------------------------------------
                                                                             Securities
Name and Principal                                       Restricted Stock    Underlying     All Other
      Position         Year    Base Salary     Bonus         Award(s)          Options     Compensation
-------------------    ----    -----------    -------    ----------------    ----------    ------------
<S>                    <C>     <C>            <C>        <C>                 <C>           <C>
 Joseph M. Maceda,     2002    $208,555(1)                                    1,100,000
     President
                       2001    $197,907(2)

                       2000    $191,400(2)

  Michael Hopper,      2002    $208,000(3)                                     500,000
Secretary/Treasurer
                       2001    $208,000(4)

                       2000    $136,714(4)    $37,500                          598,680
</TABLE>

(1) $22,500 was the amount  actually  paid to Joseph M. Maceda in the year ended
December 31, 2002.

(2) The amounts set forth above  represent the salary  payable by Ocean Power to
Mr.  Maceda.  While the amount of salary due to Mr. Maceda under his  employment
agreement for 1999 was not paid, no note was ever issued,  and the obligation of
Ocean  Power to pay such  amount  remained an  uncertified  obligation  of Ocean
Power.  In 2000 and 2001,  Ocean  Power  paid Mr.  Maceda  $87,500  and  $2,632,
respectively, of the amount owing for his 1999 salary. In 2000, Ocean Power paid
Mr. Maceda $182,000 of his salary in cash and the remaining approximately $9,400
was paid in 2001. In 2001, Ocean Power

                                       12
<PAGE>

paid Mr.  Maceda  $175,000  of his  salary in cash and  assumed  an  uncertified
obligation  to pay Mr.  Maceda the  remaining  $22,907 due under his  employment
agreement.

(3) $46,000  was the amount  actually  paid to Michael  Hopper in the year ended
December 31, 2002.

(4) The amounts set forth above  represent the salary  payable by Ocean Power to
Mr.  Hopper.  While  the full  amount  of  salary  due to Mr.  Hopper  under his
employment  agreement  for 1999 was not paid,  no note was ever issued,  and the
obligation of Ocean Power to pay $85,120  remained an uncertified  obligation of
Ocean Power.  In 2000 and 2001,  Ocean Power paid Mr. Hopper $82,000 and $3,120,
respectively, of the amount owing for his 1999 salary. In 2000, Ocean Power paid
Mr. Hopper $130,000 of his salary in cash and the remaining approximately $6,714
was paid in 2001. In 2001, Ocean Power paid Mr. Hopper $204,000 of his salary in
cash and  assumed an  uncertified  obligation  to pay Mr.  Hopper the  remaining
$4,000 due under his employment agreement.

Options

The following  table sets forth  information  concerning  options granted to the
Named Executives in the year ended December 31, 2002.

                        OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                             Percent of Total
                                     Number of Securities  Options Granted To   Exercise or
                                      Underlying Options   Employees In Fiscal   Base Price    Expiration
    Name and Principal Position             Granted               Year           ($/Share)        Date
-----------------------------------  --------------------  -------------------  -----------  ---------------
<S>                                  <C>                   <C>                  <C>          <C>
    Joseph M. Maceda, President            1,100,000              52.6%             1.00     January 8, 2012

Michael Hopper, Secretary/Treasurer          500,000              23.9%             1.00     January 8, 2012
</TABLE>

The Named Executives did not exercise any options in the year ended December 31,
2002.  The following  table  provides  information  with respect to  unexercised
options held by the Named Executives as of December 31, 2002.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                             YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                       Number of Securities Underlying       Value of Unexercised In-the-Money
                           Unexercised Options at                   Options at Year End
                               Year-End (Number)                       (Dollars) (1)

Name                   Exercisable (1)    Unexercisable      Exercisable         Unexercisable
<S>                    <C>                <C>                <C>                 <C>
Joseph M. Maceda          1,100,000        $       0          $       0           $       0

Michael Hopper            1,098,680                0                  0                   0
</TABLE>

      (1)   Value  of   unexercised   in-the-money   options  is  determined  by
            multiplying  the  number  of  shares  subject  to the  option by the
            difference  between  the  closing  price of the Common  Stock on the
            OTCBB at the end of 2002 and the option exercise price.

                                       13
<PAGE>

Employment Contracts

The Company maintained  employment  contracts with the Named Executives prior to
their  resignation.  Following are excerpts from the Company's  2001 Form 10-KSB
describing such contracts (which expired on January 1, 2003 and are no longer in
effect).

JOSEPH P. MACEDA

Ocean Power has assumed an employment  agreement originally entered into between
Joseph Maceda and PTC Holdings,  dated June 1, 1998.  Under this agreement,  Mr.
Maceda  serves as a director and  president of Ocean Power as well as in certain
executive  capacities for certain of the Companies  subsidiaries.  The agreement
term is five years,  from January 1, 1998 to January 1, 2003.  The agreement may
be terminated early by Ocean Power for cause, or for Mr. Maceda's death or total
disability.  Under the agreement, Mr. Maceda receives $182,000 in annual salary,
adjusted  each January 1 during the term  according to the Consumer  Price Index
for the  preceding  year.  In addition,  Mr. Maceda is eligible for annual merit
bonuses and salary  increases,  as  determined  by the board of  directors on an
annual  basis.  The  agreement  also  originally  entitled Mr. Maceda to receive
options to acquire  Ocean Power  common  stock,  in amounts to be set forth in a
separate  memorandum,  which has never been  agreed to. In  addition to standard
health and life insurance benefits, under the agreement,  Ocean Power provides a
car  allowance  in the  amount of $1,000  per month,  plus  insurance,  fuel and
maintenance.  The agreement also entitles Mr.  Maceda's spouse or another family
member to accompany Mr. Maceda on business  related travel for up to 4 weeks per
year at Ocean Power's  expense,  including  accommodations,  air fare, meals and
travel expenses.  During the term of the agreement, Mr. Maceda may not engage or
participate in any business which is a competitor of Ocean Power, except that he
may (i) invest his personal assets in businesses  which may be competitive  with
Ocean  Power but do not  require his  services  in their  operation  or affairs,
except solely as an investor;  (ii) purchase and  beneficially own less than 10%
of the securities of competitors,  if such securities are  regularly-traded;  or
(iii) with prior written  notice and approval of the board of directors of Ocean
Power,  participate in conferences,  teach or publish  written works.  Under the
agreement,  Ocean Power owns all  intellectual  property  created by Mr.  Maceda
relating to Ocean Power's business,  and Mr. Maceda must disclose to Ocean Power
any action he takes to protect any intellectual  property for 12 months past the
termination  of the  agreement.  The agreement  also contains  provisions  which
impose  duties on Mr.  Maceda to keep and protect the  confidentiality  of Ocean
Power's trade secrets and proprietary information. As a condition of employment,
Mr.   Maceda  was   required   under  the   agreement   to  execute  a  separate
confidentiality and invention agreement,  which sets forth in greater detail Mr.
Maceda's duties regarding the confidentiality of proprietary information and the
assignment to, and Company  ownership of,  intellectual  property created by Mr.
Maceda during the term and 6 months thereafter.

MICHAEL HOPPER

Ocean  Power and J.  Michael  Hopper  are  parties  to an  employment  agreement
pursuant to which Mr. Hopper  serves as an officer of Ocean Power,  currently as
Secretary/Treasurer.  The agreement term is five years,  from January 1, 1998 to
January 1, 2003. The agreement may be terminated early by Ocean Power for cause,
or for Mr. Hopper's death or total disability.  Under the agreement,  Mr. Hopper
receives  $130,000 in annual  salary,  adjusted  each  January 1 during the term
according to the Consumer Price Index for the preceding  year. In addition,  Mr.
Hopper is eligible for annual merit bonuses and salary increases,  as determined
by the board of directors on an annual basis.  The  agreement  also entitles Mr.
Hopper to receive  options to acquire Company common stock, in amounts to be set
forth in a separate  memorandum.  No such  memorandum has been completed but the
Board of Directors did separately issue options to purchase Company common stock
to Mr.  Hopper.  Mr. Hopper is entitled to receive  standard  health and related
benefits  as well as a car  allowance  in the  amount  of $500 per  month,  plus
insurance,  fuel and maintenance.  During the term of the agreement,  Mr. Hopper
may not engage or  participate  in any business  which is a competitor  to Ocean
Power, except that he may (i) invest his personal assets in businesses which may
be  competitive  with  Ocean  Power but do not  require  his  services  in their
operation  or  affairs,   except  solely  as  an  investor;  (ii)  purchase  and
beneficially  own  less  than  10% of the  securities  of  competitors,  if such
securities are regularly-traded; or (iii) with prior written notice and approval
of the board of directors of Ocean Power,  participate in conferences,  teach or
publish written works.  Under the agreement,  Ocean Power owns all  intellectual
property  created by Mr.  Hopper  relating to Ocean  Power's  business,  and Mr.
Hopper  must  disclose  to Ocean  Power  any  action  he takes  to  protect  any
intellectual  property for 12 months past the termination of the agreement.  The
agreement also contains provisions which impose duties on Mr. Hopper to keep and
protect the  confidentiality  of Ocean  Power's  trade  secrets and  proprietary
information.  As a condition of  employment,  Mr. Hopper was required  under the
agreement to execute a separate  confidentiality and invention agreement,  which
sets forth in greater detail Mr. Hopper's duties  regarding the  confidentiality
of proprietary  information  and the  assignment  to, and Company  ownership of,
intellectual  property  created  by Mr.  Hopper  during  the  term  and 6 months
thereafter.

                                       14
<PAGE>

Compensation of Directors

As of December 31,  2002,  the Company had no standard  arrangement  pursuant to
which its directors were compensated for services provided as a director.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth  information as of December 31, 2002 with respect
to the beneficial  ownership of Common Stock by all persons known by the Company
to beneficially  own more than 5% of its  outstanding  common stock (each, a "5%
Owner").  Except as noted  below,  each  shareholder  exercises  sole voting and
investment power with respect to the shares beneficially owned.

<TABLE>
<CAPTION>
                                                                     Number of Shares        Percent of
5% Owner:                                  Title of Class           Beneficially Owned        Class (1)
<S>                                        <C>                      <C>                      <C>
Joseph P. Maceda                               Common                       11,716,579(2)       20.5%
939 Union Street
Brooklyn, NY 11215

Robert L. Campbell                             Common                        7,205,341(3)       12.8%
15009 Rio Circle
Rancho Murieta, CA 95683

Algonquin Capital Management                   Common                        5,087,000(4)        8.6%
440 Main Street
Ridgefield, CT 06877

Elektryon                                      Common                        3,500,000           6.2%
Lenard Schwartzer, Attorney at Law
3800 Howard Hughes Parkway, #110
Las Vegas, NV 89109

Gloria Rose Ott                                Common                        2,870,000(5)        5.1%
20250 Edgewood Farm Lane
Purcellville, VA 20132
</TABLE>

(1)   Applicable percentage of ownership is based on 56,182,746 shares of common
      stock  outstanding  as of December  31,  2002,  together  with  applicable
      options  for each  shareholder.  Beneficial  ownership  is  determined  in
      accordance  with the  rules of the SEC and  generally  includes  voting or
      investment  power  with  respect  to  securities.  Shares of common  stock
      subject to options that are currently exercisable or exercisable within 60
      days from  December  31, 2002 are deemed to be  beneficially  owned by the
      person holding such options for the purpose of computing the percentage of
      ownership  of such  person,  but are not  treated as  outstanding  for the
      purpose  of  computing  the  percentage  ownership  of any  other  person.
      Further,  shareholdings  are  based  on the  information  included  in the
      Company's  Annual  Report on Form 10-KSB for the year ended  December  31,
      2001 and/or a shareholder  listing  obtained  from the Company's  transfer
      agent.

(2)   Includes  options  to  purchase  1,100,000  shares of  common  stock at an
      exercise price of $1.00 per share.

(3)   Includes options to purchase 225,000 shares of common stock at an exercise
      price of $1.00 per share.

(4)   Includes 4,876,000 shares of our common stock which are held by Algonquin.
      Such amount includes  3,188,000 shares which are issuable upon exercise of
      warrants for an exercise price of $1.50 per share. Algonquin's controlling
      member is Michael  Lockwood,  who may be deemed to share with the  company
      (i) the power to vote or direct the vote of all of the shares and (ii) the
      power to dispose or direct disposition of all of the shares. Of the number
      of shares of our  common  stock  listed  above,  211,  000 are held by the
      Lockwood Children's Longterm Trust (the "Trust"),  which holds such shares
      for the beneficiary children of Mr. Lockwood. Such amount includes 100,000
      shares which are issuable upon exercise of warrants for an exercise  price
      of $1.50 per  share.  Mr.  Lockwood  is a trustee  of the Trust and may be
      deemed to share with the Trust (i) the power to vote or direct the vote of
      all of the shares and (ii) the power to dispose or direct  disposition  of
      all of the shares.  The principal  business address of Mr. Lockwood is the
      same as that set forth for Algonquin above.

(5)   Includes options to purchase 250,000 shares of common stock at an exercise
      price of $1.00 per share.

                                       15
<PAGE>

Item 12. Certain Relationships and Related Transactions.

None.

Item 13. Exhibits.

The exhibits filed herewith are set forth in the Index to Exhibits (on the first
page of the separate  exhibit  section,  which follows the financial  section of
this report) and are incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

The Company's  prior  auditors,  H.J. & Associates,  LLC,  resigned on April 30,
2003. Fees paid to H.J. & Associates, LLC during 2002 and 2001 are as follows:

                                                       2002          2001

Audit Fees                                          $   28,224    $   77,731

Audit Related Fees                                           0             0

Tax Fees                                                 2,458         1,651

All Other Fees                                               0             0

The Company's current independent auditors, Pritchett, Siler & Hardy, P.C., were
engaged on November 28, 2006. The Company  expects to use the auditors solely or
primarily for the auditing of the Company's  consolidated  financial  statements
and the  quarterly  reviews of interim  financial  statements  (the  "Reviews"),
including  advice on audit and  accounting  matters  that  arose  during or as a
result of the audit or the  Reviews  and for  services  in  connection  with SEC
filings.  The provision of any additional  services by the independent  auditors
must be  approved by the  Bankruptcy  Court.  On  November 8, 2006,  the Company
engaged H.J. & Associates, LLC as the Company's accountants, including to assist
in the  preparation  of the Company's  financial  statements  and to prepare the
Company's federal and state income tax returns.

                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized

Ocean Power Corporation

By: /s/ MICHAEL HOPPER                                Dated: January 31, 2008
    ----------------------------------------
    Michael Hopper, Authorized Signatory

                                       16
<PAGE>

                                INDEX TO EXHIBITS

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

2.01      Chapter 11 Plan of  Reorganization,  In re:  Ocean Power  Corporation,
          Case No. 02-15989 (REG), dated January 14, 2008. **

2.02      Disclosure  Statement to Accompany Plan of Reorganization  Pursuant to
          Section 1125 of the Bankruptcy  Code, In re: Ocean Power  Corporation,
          Case No. 02-15989 (REG), dated January 14, 2008. **

2.03      Executed Term Sheet between the Company and Trinad Capital Master Fund
          Ltd., dated October 2006, and the Amendment  thereto,  dated September
          18, 2007. **

3.01      Certificate of Incorporation of the Company dated July 21,1999,  filed
          as Exhibit  3.01 to the  Company's  Form 10-KSB for the yearly  period
          ended December 31, 2001 and incorporated herein by reference.

3.02      Bylaws of the  Company,  filed as Exhibit 3.02 to the  Company's  Form
          10-KSB for the yearly period ended December 31, 2001 and  incorporated
          herein by reference.

3.03      Articles of  Incorporation of Kaniksu American Mining Company (Idaho),
          predecessor  of Company,  filed as Exhibit 3.03 to the Company's  Form
          10-KSB for the yearly period ended December 31, 2001 and  incorporated
          herein by reference.

3.04      Company (Idaho)  Certificate of Amendment of Kaniksu  American Mining,
          dated August 28, 1995 for name change to Kaniksu Ventures, Inc., filed
          as Exhibit  3.04 to the  Company's  Form 10-KSB for the yearly  period
          ended December 31, 2001 and incorporated herein by reference.

3.05      Certificate of Amendment for Kaniksu  Ventures,  Inc.,  dated April 2,
          1997 for name change to Intryst,  Inc.,  filed as Exhibit  3.05 to the
          Company's  Form 10-KSB for the yearly  period ended  December 31, 2001
          and incorporated herein by reference.

3.06      Articles of Amendment  of Intryst,  Inc. for name change to PTC Group,
          Inc.,  dated December 24, 1997, filed as Exhibit 3.06 to the Company's
          Form  10-KSB  for the  yearly  period  ended  December  31,  2001  and
          incorporated herein by reference.

3.07      Articles  of  Amendment  of PTC Group,  Inc.  for name change to Ocean
          Power  Corporation,  dated July 14, 1999, filed as Exhibit 3.07 to the
          Company's  Form 10-KSB for the yearly  period ended  December 31, 2001
          and incorporated herein by reference.

3.08      Articles of Merger of Ocean Power  Corporation  Idaho With Ocean Power
          Corporation  Delaware,  dated July 28, 1999,  filed as Exhibit 3.08 to
          the  Company's  Form 10-KSB for the yearly  period ended  December 31,
          2001 and incorporated herein by reference.

3.09      Certificate of Merger of Foreign and Domestic Corporation,  dated July
          28, 1999,  filed as Exhibit 3.09 to the Company's  Form 10-KSB for the
          yearly  period  ended  December  31, 2001 and  incorporated  herein by
          reference.

10.01     Employment  Agreement of Joseph P. Maceda,  filed as Exhibit  10.02 to
          the  Company's  Form 10-KSB for the yearly  period ended  December 31,
          2001 and incorporated herein by reference.

10.02     Employment  Agreement of Michael Hopper, filed as Exhibit 10.03 to the
          Company's  Form 10-KSB for the yearly  period ended  December 31, 2001
          and incorporated herein by reference.

21.01     Subsidiaries  of the Company,  filed as Exhibit 21.01 to the Company's
          Form  10-KSB  for the  yearly  period  ended  December  31,  2001  and
          incorporated herein by reference.

31.01     Certification  pursuant to 15 U.S.C.  78m(a) or 78o(d) (Section 302 of
          the Sarbanes Oxley Act of 2002).**

32.01     Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002.**

**        Filed herewith.
<PAGE>

                                   UNDERTAKING

The Company will furnish to any shareholder a copy of any of the exhibits listed
above upon written request and upon payment of a specified reasonable fee, which
fee  shall be equal to the  Company's  reasonable  expenses  in  furnishing  the
exhibit to the shareholder.  Requests for exhibits and information regarding the
applicable  fee shall be direct  to:  Halperin  Battaglia  Raicht,  LLP,  at the
address of the principal executive offices set forth on the cover of this Report
on Form 10-KSB.