SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

                           COMMISSION FILE NO. 1-5742

                             OCEAN POWER CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                Delaware                                 94-3350291
                --------                                 ----------
      (State or Other Jurisdiction             (I.R.S. Employer Identification
   of Incorporation or Organization)                        Number)

    5000 Robert J. Mathews Parkway,
      El Dorado Hills, California                           95672
      ---------------------------                           -----
(Address of Principal Executive Offices)                 (Zip Code)

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

          Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $0.01 Per Share
                     ---------------------------------------
                                (Title of Class)

         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the  preceding  12 months,  and (2) has been  subject to such
filing requirements for the past 90 days. Yes X No ___

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not 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-K or any
amendment to this Form 10-K. ___

         The  aggregate  market  value  of  the  voting  common  stock  held  by
non-affiliates of the Registrant on March 26, 2002, was $16,855,257 based on the
average bid and asked prices on such date of $0.94.

         The Registrant had 39,049,364  shares of common stock,  par value $0.01
per share, outstanding on March 26, 2002.




<PAGE>




                                     PART I


ITEM 1.  BUSINESS


GENERAL DESCRIPTION OF BUSINESS

         FORWARD-LOOKING  STATEMENTS AND ASSOCIATED  RISKS. THIS FILING CONTAINS
FORWARD-LOOKING STATEMENTS,  INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS:
(A) OUR  PROJECTED  SALES AND  PROFITABILITY,  (B) OUR  GROWTH  STRATEGIES,  (C)
ANTICIPATED TRENDS IN OUR INDUSTRY,  (D) OUR FUTURE FINANCING PLANS, AND (E) OUR
ANTICIPATED  NEEDS FOR WORKING CAPITAL.  IN ADDITION,  WHEN USED IN THIS FILING,
THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "IN ANTICIPATION OF," "EXPECTS,"
AND SIMILAR WORDS ARE INTENDED TO IDENTIFY CERTAIN  FORWARD-LOOKING  STATEMENTS.
THESE  FORWARD-LOOKING  STATEMENTS ARE BASED LARGELY ON OUR EXPECTATIONS AND ARE
SUBJECT  TO A NUMBER OF RISKS AND  UNCERTAINTIES,  MANY OF WHICH ARE  BEYOND OUR
CONTROL.  ACTUAL  RESULTS  COULD DIFFER  MATERIALLY  FROM THESE  FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS,  INCLUDING,  WITHOUT LIMITATION,  THE
RISKS OUTLINED UNDER  "CERTAIN  BUSINESS RISK FACTORS" AND MATTERS  DESCRIBED IN
THIS FILING GENERALLY.  IN LIGHT OF THESE RISKS AND UNCERTAINTIES,  THERE CAN BE
NO ASSURANCE THAT THE FORWARD-LOOKING  STATEMENTS  CONTAINED IN THIS FILING WILL
IN FACT OCCUR.  WE DO NOT  UNDERTAKE  ANY  OBLIGATION  TO  PUBLICLY  RELEASE THE
RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO
REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.


THE COMPANY

         We were formed  primarily as the result of the merger of PTC  Holdings,
Inc., a Delaware  corporation ("PTC HOLDINGS"),  into PTC Group,  Inc., an Idaho
corporation  ("PTC  GROUP").  Set  forth  below  is a  description  of  the  PTC
Holdings/PTC  Group merger and of certain other important  transactions to which
these entities have been parties.  As we discuss below,  our current  management
did not  join  PTC  Group  until  consummation  of  such  merger  in June  1999.
Therefore, the information provided below concerning the background of PTC Group
is based on information  that we have acquired  through the books and records of
PTC Group to which we have access,  and from  conversations with advisors to PTC
Group prior to 1999 with whom we are in contact.


CERTAIN BUSINESS DEVELOPMENTS

         THE  DISTRIBUTED  WATER AND POWER  BUSINESS.  Our  current  business of
developing  technology to produce  modular  distributed  water and power systems
began in early 1997 through three separate  companies  controlled by our current
management for such purpose.  It was intended that the following three companies
each  cover  a  certain  segment  of the  business:  Manufacturing  Technologies
Corporation ("MTC"), formed in 1997 as a Delaware corporation, would manufacture
modular  components for desalination and power generation;  Integrated Water and
Power  Corporation  ("IWP"),  formed in 1996 as a  Delaware  corporation,  would
develop  desalination  technologies;  and  Advanced  Power  Sources  Corporation
("APS"),  formed  in  1992  as  a  Delaware  corporation,  would  develop  power
generation technologies.

         MERGER OF PTC GROUP AND PTC HOLDINGS. In early 1997, Messrs. Maceda and
Campbell  entered into  discussions  with Dr. Rocco  Guarnaccia,  Ph.D., a Swiss
financier,  concerning  a plan to  finance  and  develop  the  water  and  power
businesses.  As a result of these discussions,  the parties agreed that MTC, IWP
and  APS  would  be  consolidated   into  a  single  holding  company,   H-Power
Technologies,  Inc.,  a  corporation  formed  in  1992 by Dr.  Guarnaccia,  as a
Delaware  corporation  (H-Power  changed its name in 1997 to PTC Holdings and to
avoid  confusion,  we refer to it throughout this section as PTC Holdings).  PTC
Holdings had had no operations or outstanding capital stock since its inception.
The financing  plans  contemplated  that PTC Holdings  would be combined with an
existing  corporation whose capital stock was widely held but which did not then
actively conduct business.  Pursuant to such plan, Dr. Guarnaccia identified and
entered into discussions with Intryst,  Inc., an Idaho corporation  ("INTRYST"),
as a potential entity for a business combination with PTC Holdings.  On November
10, 1997, Dr.  Guarnaccia,  who was the Chief Executive  Officer and Chairman of
the  Board  of  Directors  of PTC  Holdings,  became  Chairman  of the  Board of
Directors and Chief  Executive  Officer for Intryst for the purpose of effecting
the business  combination  between Intryst and PTC Holdings.  In anticipation of
consummating a transaction  with PTC Holdings,  Intryst  changed its name to PTC
Group. Dr. Guarnaccia was responsible for establishing the terms of the business
combination  on behalf of both PTC  Holdings  and PTC Group,  as Chairman of the
Board and Chief Executive  Officer for both entities and as such, the terms were
not established through an arms length process.

         Pursuant  to the  financing  plan  described  above,  in March 1998 (in
anticipation of the  reorganization  with PTC Group),  capital stock of the MTC,
IWP and APS,  representing  all of the issued and  outstanding  capital stock of
such entities, was issued to PTC Holdings, in exchange for the assumption by PTC
Holdings of an aggregate of $3.2  million of payables  and  indebtedness  of the


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three companies,  including  approximately  $625,000 of MTC indebtedness held by
Mr.  Maceda  and  approximately   $251,000  of  MTC  indebtedness  held  by  Dr.
Guarnaccia,  a portion of which came from PTC Group.  The  remaining  balance of
indebtedness assumed by PTC Holdings constituted payables and other indebtedness
owed to third parties. At the time of this acquisition,  the outstanding capital
stock of PTC  Holdings was held by Messrs.  Maceda,  Campbell and an employee of
PTC Holdings.  Prior to 1997,  none of PTC  Holdings,  MTC, IWP or APS owned any
assets or conducted any business.

         In  October  and  November  1998,  Dr.  Guarnaccia  resigned  from  his
positions  as Chief  Executive  Officer and  Director of PTC  Holdings and Chief
Executive Officer and Director of PTC Group, respectively.  In January 1999, PTC
Group and PTC Holdings announced a plan to merge, and on February 17, 1999 (with
further  clarifying  amendments  agreed to on May 4, 1999), the parties signed a
merger  agreement  pursuant to which PTC Holdings  would merge with and into PTC
Group.  Consummation of the merger was  conditioned  upon PTC Group raising $2.5
million  through a private  offering and securing  commitments for an additional
$2.5 million of funding. Although this condition was not fully satisfied on June
22,  1999,  the merger was  consummated  on June 22, 1999 when PTC  Holdings was
merged with and into PTC Group and each outstanding share of PTC Holdings common
stock was converted into 3.48 shares of PTC Group common stock,  $.001 par value
per share.  Upon  consummation  of the merger,  the former  shareholders  of PTC
Holdings held, in the aggregate,  approximately 80% of the outstanding equity of
PTC Group and the  former  shareholders  of PTC Group  held,  in the  aggregate,
approximately  20% of such  outstanding  equity.  PTC  Holdings  had  assets  of
approximately  $700,000 at June 22, 1999 made up of $55,000 of fixed  assets and
$640,000  of  notes  receivable  and  miscellaneous  other  items,  as  well  as
liabilities of  approximately  $4,440,000  made up of trade accounts  payable of
$350,000 and related  party notes payable of $4,250,000 as well as other accrued
expenses.

         RE-INCORPORATION\REVERSE  STOCK SPLIT.  In July 1999, PTC Group changed
its name to Ocean Power  Corporation and then changed its state of incorporation
from Idaho to Delaware  through the  formation  of Ocean  Power  Corporation,  a
Delaware  corporation,  as a separate entity for such purpose and the subsequent
merger of Ocean Power (Idaho) with and into Ocean Power (Delaware),  pursuant to
which each share of Ocean Power (Idaho)  common stock  converted into a share of
Ocean Power (Delaware) common stock.

         On August 20, 1999,  we  consummated a 1 for 10 reverse stock split and
changed  the  par  value  of our  stock.  Prior  to the  reverse  split,  we had
outstanding  314,705,960  shares of commons  stock,  $0.001 par value per share.
After the reverse split, we had outstanding  31,470,596  shares of common stock,
$0.01 par value per share.  Except as  otherwise  noted,  all share  amounts set
forth in this  Prospectus  are presented as if the reverse stock split had taken
place.

         BACKGROUND  OF PTC  GROUP.  As  described  above,  PTC  Group  was  the
predecessor entity of Ocean Power.  However, our current management did not join
PTC Group until consummation of the merger of PTC Holdings and PTC Group in June
1999, nor did PTC Group pursue our current business of developing  modular water
desalination and power generation  technology  until such time.  Therefore,  the
information  provided  below  concerning the background of PTC Group is based on
information  that we have acquired through the books and records of PTC Group to
which we have access, and from conversations with advisors to PTC Group prior to
1999 with whom we are in contact.

         PTC Group was  formed  in 1969 as an Idaho  corporation  under the name
Kaniksu American Mining Company, for the purpose of developing real property and
mineral resource  prospects.  We believe that Kaniksu was engaged in limited and
sporadic  mining  operations  from 1969 through 1987,  and then ceased  business
operations  sometime  between 1988 and 1995. In March 1996,  Kaniksu  (which had
changed  its name to  Kaniksu  Ventures)  acquired  Tessier  Resources  Ltd.,  a
Manitoba corporation, from VentureTech, Inc., an Idaho corporation, for (a) $3.0
million aggregate principal amount of debentures convertible into Kaniksu common
stock at $1.50 per share (without giving effect to the August 1999 reverse stock
split,  as discussed  above),  and (b) a commitment to issue to  shareholders of
VentureTech  as of a specified  date, an aggregate of 310,000  shares of Kaniksu
common  stock and  options to purchase  up to 620,000  shares of Kaniksu  common
stock at a purchase price of $2.25 per share (after giving effect to the reverse
stock split described below, the commitment is for the issuance of 31,000 shares
and options to purchase  62,000 shares of common stock at $22.50 per share).  We
believe that Tessier had assets of approximately  $186,000  primarily made up of
machinery and equipment,  and liabilities of  approximately  $241,000 made up of
notes  payable,  accounts  payable and amounts due to Kaniksu.  The options will
expire sixty days following their date of issuance.

         As of June 1999,  VentureTech  had  converted  the  entire  outstanding
balance of the  convertible  debenture  into 200,000  shares of PTC Group common
stock.  As a successor by merger to PTC Group,  we remain  obligated to issue to
eligible  shareholders  of VentureTech the shares and options  described  above,
which  issuance  will be made  pursuant to a  registration  statement  under the
Securities Act of 1933, as amended.



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<PAGE>

         We are a Delaware corporation with our principal address at 5000 Robert
J. Mathews Parkway, El Dorado Hills, California 95672.


THE BUSINESS

         Our plan is to become the first global  distributed  power and seawater
desalination  company with an emphasis on  developing  and  utilizing  renewable
energy sources. The historic trend worldwide has been to produce power at large,
central  plants  and to ship  it,  via  transmission  lines,  to the  consumers.
Usually,  water has been  similarly  collected at a central site (a lake,  well,
aquifer,  river,  reservoir,  or dam) and transported by canal,  pipe, truck, or
ship to the ultimate consumer,  which may be located many miles from the source.
By  contrast,  distributed  power and seawater  desalination  involves the local
production  and local  consumption  of both clean  water,  that is suitable  for
drinking,  bathing or other uses,  and useable  electric  power.  Our plan is to
continue  to  develop  or  acquire a  portfolio  of  advanced  technologies  (or
interests  in  such  technologies)   such  as  Stirling  engines,   fuel  cells,
chemical-free  water  treatment,  instrumentation,  solar  concentrators  and to
continue to combine these  technologies into integrated systems for the economic
and profitable generation of distributed power and water.

         Our plan is to have these distributed sources supply power and water to
local customers,  via regional joint venture partners.  We expect to earn income
from the sale of equipment,  engineering  service,  and spare parts to the joint
ventures and then to  participate  in the ongoing  profits from the sale of both
water and power. We expect to own 49% of the venture's equity interest, but will
retain ownership and control of the proprietary  technology comprising our H2OkW
SystemsTM.  Details  of  the  intended  joint  ventures  are  described  in  the
distributed water and distributed power sections.

         We recognize that the market for distributed  power and water is driven
by population  growth,  economic  growth,  institutional  reform,  deregulation,
concern  for  the  environment,   and  depletion  of  resources,  and  advancing
technologies.  We intend to  capitalize  on these  opportunities  by  developing
distributed  seawater  desalination,  distributed power generation and renewable
energy technologies.


DISTRIBUTED SEAWATER DESALINATION

         Our  plan is to  develop  and  produce  seawater  desalination  systems
initially  powered  by  existing  grid  power and other  power  sources  such as
Stirling engines, solar concentrators,  sea kinetic converters,  thermo chemical
converters,  wind turbines and,  eventually,  advanced  alkaline fuel cells.  We
believe  that these  systems will be able to produce  potable  water in targeted
geographic regions globally that conforms to applicable  government standards in
sufficient   quantities   to  satisfy  the  growing   demands  of  the  seawater
desalination  market and at less than prevailing costs. In general our objective
is to  become  the next  generation  alternative  source  of  potable  water and
electric power.

         Our desalination  systems (which we call our H2OkW Systems(TM)) will be
modular to the extent that various  subsystem  modules will be built remotely as
separate  components and installed on site. The total system will be a series of
transportable modules designed around standard shipping containers,  allowing it
to be  installed  quickly at or near the  anticipated  market for the water.  We
believe that this modular  design also allows for  incremental  expansion of the
facilities to satisfy growth in demand.

         Management believes the growth in demand,  commercial  privatization of
municipal  functions such as water production,  degradation of existing supplies
(by both contamination and stress from demand outpacing supply) and an increased
environmental  awareness  (such as the adoption of the Kyoto  Protocols  and the
development  of  international  water  standards),  have  resulted in  increased
demands on the water and power industries. In the past, the water and power have
been  satisfied  through the  construction  and  operation of large  centralized
plants. Ocean Power's design should allow autonomous, modular system design with
short  time from order to  commissioning,  lower  site  labor  costs,  and lower
operating and maintenance costs. Management believes this design should fit well
into the growing distributed utility market,  where the sources or generation of
power and water are distributed, rather than their output.

         Our plan is to commercialize the output (i.e.,  power and water) of our
H2OkW  Systems(TM)  through  joint  ventures  to which we expect to license  the
exclusive  right to install and  operate  our system in a  specified  geographic
region for seawater  desalination  and electric power  generation.  We intend to
select  joint  venture  partners  based  on the  strength  of  their  financial,
political and engineering  capabilities.  The joint ventures will be operated by
our third  party  joint  venture  partners,  which we expect will own 51% of the
venture's  equity  interests.  We expect to own a 49% interest in each venture's
equity and will  retain  ownership  and  control of the  proprietary  technology
comprising our H2OkW Systems(TM). The local joint venture partner is expected to
finance, operate and maintain the local systems. We intend to sell the necessary
equipment  to the  joint  venture  to  operate  the  system,  and to  receive  a


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percentage of the profits from the sale of water and power, by the joint venture
partner.


MARKET FOR DISTRIBUTED WATER

         Water is necessary for human survival,  and therefore the market demand
for water in any  particular  country  is a factor of its  population  and their
standard of living.  The U.S. Agency for  International  Development,  the World
Bank, the World Health  Organization,  and the standards from the United Nations
Earth  Summit set the daily  basic water  requirement  or BWR of clean water for
drinking or sanitation for each human at  approximately  20 to 40 liters per day
which can be measured as 0.02 cubic  meters to 0.04 cubic  meters or 5.2 gallons
to 10.65 gallons per day. Historically,  this potable water has been provided by
water  agencies,  governments,  or by community  organizations.  Adding  minimum
levels  of  water  for  cooking  and  bathing  raises  the  total  daily  BWR to
approximately  50 liters (0.05 cubic meters or 13.2  gallons) per day per human.
According to The World's  Water by Peter H. Gleick,  most of the  industrialized
world  consumes ten to fifteen times that amount per person per day (for example
New York City is  currently  consuming  640 liters or 169 gallons per person per
day,  according to Scientific  American,  February  2001).  Gleick  reports that
billions of people in other parts of the world do not have access to the minimum
amount of potable water.  Since the  consumption  of water to maintain  personal
comfort will vary, based on the availability and cost of water, future demand in
many  regions is  difficult  to  project.  Management  believes,  however,  that
increased demand for potable water will continue due to its life-giving quality,
increases in standards of living around the world and  degradation of historical
sources.  Further,  the growing  efforts to treat water as an economic  good are
yielding  approaches which favor  unsubsidized water with the real cost of water
being  charged to each user.  The markets,  which Ocean Power has chosen for its
initial joint ventures, were targeted because they have: a high current price of
water; a current and projected  shortage of water; an economic,  political,  and
legal accommodation of privatization; and minimum existing competition.

         The International  Desalination Association estimates that the seawater
desalination  industry globally has installed a total water production  capacity
of about 22,000,000  cubic meters per day over the past 30 years.  Over the past
10 years,  new plant  installation has added an average of about 1,000,000 cubic
meters of potable water per day each year. This represents about $1.5 billion in
equipment  sales  per  year,  or about $3  billion  in  total  capital  cost for
installed plants per year. In terms of capacity,  the vast majority of installed
systems continue to use distillation technology as opposed to reverse osmosis or
other  technologies.  However,  the number of  worldwide  suppliers  of seawater
distillation  systems has diminished from  approximately 20 in 1989 to less than
10  in  1999,  thus  reducing  the  number  of  potential   competitors  to  our
distillation technology.

         Traditionally,  the world markets for seawater  desalination  and power
systems of any significance have been government owned and highly  conservative.
These have traditionally been municipal utilities. We believe the current global
market  environment  provides  an  opportunity  for the  commercial  success  of
privately  owned water and power  systems.  Examples of private  water and power
utilities are now numerous and demonstrating  cost  effectiveness to governments
around the world. In France, the water systems have been operated by the private
sector for over 100 years.  In the United  Kingdom,  the water systems were 100%
privatized  about a decade ago. By focusing on privately owned systems,  the set
of  decision-makers  is  reduced to a few  individuals  with  authority  and the
motivation to make a profit.  This speeds the decision  making  process and will
hopefully  shorten  the sales  cycle.  Ocean  Power  intends  to enter  selected
regional markets,  initially in international markets. Currently in the US, only
about 15% of the population  gets its water from a private  utility or operator,
according to Reason Public Policy Institute,  Privatization  Center  statistics.
Ocean Power intends to  accommodate  markets within the United States as demand,
decreasing  supply,  increasing water standards and deregulation  create greater
opportunity for private water ventures.


OUR SOLUTION:  THE H2OKW SYSTEMS(TM)

         H2OkW  Systems(TM)  refers to Ocean  Power's  integrated  systems  that
remove salts and other  impurities  from  seawater  ("DESALINATION")  to produce
potable water.  These systems require  electrical  power that can be supplied by
existing electric grid suppliers or a variety of power  technologies  which will
reduce  the  cost of the  potable  water  produced,  such as  Stirling  engines,
concentrated solar photovoltaic concentrators, and eventually, advanced alkaline
fuel cells.  Our goal is to produce  drinking  water that conforms to applicable
government  standards in quantities  to satisfy the growing  demand for seawater
desalination in the global market.  Where needed,  these systems can be designed
to produce excess  electrical  power that can be sold, in addition to the water,
to local consumers.

         The  system  is a  series  of  transportable  modules  designed  around
standard shipping containers, allowing it to be installed quickly at or near the
anticipated market for the water and in flexible arrangements.  The systems will
integrate key subsystems  containing our  proprietary  technology  with standard
commercial  components.  Our  desalination  system is modular to the extent that


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<PAGE>

various  subsystem  modules  are  installed  rather  than built  on-site.  It is
expected  that  site  preparation  will be  completed  by local  contractors  in
accordance with our specifications for the number of modules required to service
the site.  This approach is expected to allow  operators of our system to create
any size  installation  greater than 1,000 cubic meters per day,  from  multiple
modules.

         The specific set of technologies  selected for a particular system will
be  dependent  on factors  unique to the  particular  location  for the  system.
Examples  of  these  factors  include  fuel  or  energy  availability,  seawater
chemistry, and applicable water quality requirements.

         Our H2OkW Systems(TM) generally consist of five subsystems:

         1.       Pretreatment Subsystem;

         2.       Desalination Subsystem;

         3.       Post Treatment Subsystem;

         4.       Pump and Support Equipment Subsystems; and

         5.       Power Subsystems.

         The following discussion describes each subsystem.


PRETREATMENT SUBSYSTEM

         After  seawater is transported to the shore via the Pumps and Equipment
Support subsystem described below, this subsystem  conditions the seawater being
drawn into the system so as to destroy  living  organisms  found in the seawater
and to control various  qualities of the seawater,  such as its tendency to form
various  soft  scales  (the  tendency  of  seawater to foam when there is a high
concentration  of organic  material  present).  In most commercial  desalination
systems,  these functions are accomplished by pumping seawater directly from the
ocean,  and  treating  the  seawater  with  significant  quantities  of  various
chemicals  which  then pass  back  into the  ocean as part of the  waste  stream
byproduct of the desalination process.

         We are developing a set of physical and electrochemical water treatment
equipment which is aimed at  accomplishing  the required  seawater  pretreatment
without the  production  of a chemical  waste stream and which is intended to be
more  economic  than the current  pretreatment  techniques.  Equipment  for this
subsystem is likely to be a combination  of  commercially  available  components
together with our proprietary equipment now in development.

         The  initial  component  of this  subsystem  is expected to be an ozone
generation  system  based on work done by the Kharkov  Institute  of Physics and
Technology, or KIPT, in the Ukraine. This is the only technology Ocean Power has
been able to identify that operates on ordinary air instead of pure oxygen. This
dramatically  reduces  the  cost of the  ozone  and  therefore  improves  system
economics.

         Since November 2000, we have been testing three ozone generators at our
facilities  in El Dorado  Hills,  California.  Results to date have verified the
basic  performance of the KIPT units. We are now in discussion with KIPT and the
US Department of Energy ("DOE") to develop the next phase of a commercialization
program for this  technology.  The DOE is in the  process of filing  appropriate
worldwide  patents  while Ocean Power has begun  developing  the vendor base for
components that can be purchased in the US. Additional  testing of a larger unit
(about 1%  concentration  at 100 mgs/hr) is planned for Spring  2002.  While the
smaller  units (less than 1%  concentration  at 100 mgs/hr)  have been tested we
will not put them into field tests with potential customers,  but rather we will
concentrate our efforts on additional  testing of the larger unit,  suitable for
use in our pretreatment subsystem.


DESALINATION SUBSYSTEM H20KW SYSTEMS(TM)

         The heart of any desalination  system is the subsystem that removes the
salts  and  other  impurities  from the  seawater.  We  expect  that  the  H20kW
Systems(TM) will be able to accomplish seawater desalination using two different
technologies:  seawater reverse osmosis and thermal distillation.  Each of these
processes will have the same standard  module  capacity of 1,000 cubic meters of
potable water per day.



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<PAGE>

         As part of the distillation technology development,  in January of 2000
Ocean  Power  completed  its water  quality  certification  of the  distillation
subsystem  intended for use in its H2OkW  Seawater  Desalination  system at Ghar
Lapsi in Malta.  Certified  tests  conducted by the  Laboratory  Division of the
Institute of Water  Technology of Malta together with analysis by Richard Morris
& Associates of Glasgow,  Scotland  yielded  water  quality  results that met or
exceeded those set by the World Health Organization, United States Environmental
Protection  Agency,  and European Union.  The system has remained in Malta for a
series of long-term  operation  tests,  maintenance  procedure  development  and
product improvements.

         Our initial  plan is to produce the H2OkW  Systems(TM)  using  seawater
reverse  osmosis  or  SWRO  technology  supplied  to  us by  Malta  Desalination
Services,  Ltd. For a discussion  of our  arrangements  with Malta  Desalination
Services,  Ltd., see our Strategic  Partnerships  section. We are also currently
developing a version of the H2OkW  Systems(TM)  that uses  thermal  distillation
technology instead of SWRO.

         SEAWATER REVERSE OSMOSIS  ("SWRO").  Water  desalination  systems using
SWRO technology are currently commercially available. In the SWRO process, water
from a pressurized  saline  (seawater)  solution is separated from the dissolved
salts by forcing the solution  through a  water-permeable  membrane.  The liquid
flowing  through the membrane  (known as permeate) is encouraged to flow through
the membrane by the pressure  differential  created between the pressurized feed
or supplied seawater and the clean water produced,  which is at near-atmospheric
pressure. The remaining feed water continues through the pressurized side of the
reactor as  concentrated  salt water known as brine.  No heating or phase change
(i.e.,  liquid to vapor to liquid) of feed water takes  place.  The major energy
requirement is for the initial pressurization of the feed water.

         On June 19, 2001 we entered into an agreement  with Malta  Desalination
Services,  Ltd., a  subsidiary  of Water  Services  Corporation  (see  Strategic
Partnership  section), a manufacturer of reverse osmosis desalination systems to
provide SWRO systems for the H2OkW  Systems(TM).

         THERMAL DISTILLATION TECHNOLOGY. In thermal distillation  desalination,
seawater is boiled to produce steam,  leaving salts and impurities behind.  This
steam is then cooled and condensed back to liquid in the form of potable water.

         We currently are developing  technology  that we believe will permit us
to produce a configuration of the H2OkW  Systems(TM)  that desalinates  seawater
using thermal  distillation  technology  instead of SWRO technology.  We believe
that  successful  implementation  of  this  technology  will  permit  the  H2OkW
Systems(TM)  to  cost-effectively  produce  potable  water that will  exceed the
existing water quality  standards  maintained by the World Health  Organization,
European Union and the U.S.  Environmental  Protection Agency and any additional
standards issued in the future.

         Our thermal distillation technology for seawater desalination employs a
process  known as vapor  compression  distillation.  This system boils water and
leaves behind  impurities  in a discharge  that is put back into the ocean while
producing  drinkable  water by capturing  the steam and  condensing it back into
potable  water.  This  process  is  potentially  more  economic  than MDS's SWRO
subsystem  because it should require less  operational  and  maintenance  costs,
produce  more  potable  water per unit per seawater  input,  and produce  higher
quality water.  All of these features  should lower the cost of the  desalinated
water  produced.  The process has been  commercially  available for more than 50
years,  but the high cost of equipment and materials  resistant to corrosion and
the  contaminants  found in heated  seawater  has  prevented  vapor  compression
distillation  from being  economic or  reliable  enough for  commercial  use for
seawater  desalination.  As a result,  Ocean Power is currently developing a new
configuration of the vapor compression  process,  which if successful we believe
will be more reliable and cost-effective than historic designs.

         The  components of our MVVC  subsystems  are currently  available to us
from  multiple  sources,  although none of these  commercial  items yet meet the
efficiency goals set for the H2OkW  Systems(TM).  We expect MVVC to be available
sometime in 2002 upon  completion  of on-going  systems  engineering  and vendor
selection.

         We have begun a  development  program  aimed at  developing an improved
version of vapor  compression  equipment,  which is referred to as Ejector Vapor
Compression  ("EVC").  We  believe  the  program  should  yield a  Vacuum  Vapor
Compression subsystem,  which meets our efficiency and equipment cost goals. The
first test system of this configuration is expected to be available late 2003. A
key  aspect of EVC for  seawater  desalination  is the use of a highly  reliable
ejector in place of a less  efficient  mechanical  compressor.  The ejector will
perform the same function as the mechanical  compressor using a jet of steam and
is the subject of an Ocean Power  patent  application  with the U.S.  Patent and
Trademark Office.

         The ejector  will be  combined  with  improved  plastic  heat  exchange
surfaces  that create one surface in the vacuum  vessel  holding the  evaporator
that is hydrophilic to seawater in a partial  vacuum.  A hydrophilic  surface is
one that causes water to spread  seawater  uniformly over the boiling surface of
the material due to physical and/or  electrochemical  forces.  By  accomplishing


                                       7
<PAGE>

this  condition,  the heat  transfer in the plastic  heat  exchanger  is greatly
increased and, therefore,  is more efficient because the total power consumption
of the desalination  system is reduced.  This is a specific  implementation of a
concept for which Ocean  Power has a patent  application  with the US patent and
Trademark Office.

         Like the  SWRO  desalination  subsystem  modules,  a  single  subsystem
utilizing  either the MVVC or EVC module is intended to be capable of  producing
1,000 cubic meters of product water per day.  Unlike the SWRO  technology,  both
the MVVC and EVC are expected to produce much higher  quality  product  water to
address  current and  developing  European  Union and U.S. EPA  standards.  SWRO
technology  acts as a simple  filter  that  allows  only a small  percentage  of
impurities through, while distillation involves a change of state from liquid to
steam. Just as in nature,  when water becomes vapor, the salts, metals and other
impurities are left behind.

         We are also developing another generation of the EVC referred to as the
Concrete Vessel ("CV") equipment.  This  configuration is expected to employ all
the components of the EVC subsystem except that it will allow the vacuum chamber
to be  constructed  on site  from  less  expensive  economic  materials  such as
concrete.  The CV  subsystems  are being  designed  to meet  water  requirements
starting at a minimum of 10,000 cubic meters of potable water per day. We expect
that this larger  capacity CV  subsystem  will be deployed in H2OkW  Systems(TM)
servicing potential domestic and global customers with large, single site, water
production  requirements.  For example,  a system  configured with this capacity
could  serve  as a  secondary  water  source  for a  coastal  community  with  a
population  of  100,000  or more  people,  and as a primary  water  source for a
coastal  community of 20,000 or more people.  The specific size of the community
that might be served by the CV subsystem  configuration of the H2OkW Systems(TM)
will  depend  upon local per capita  water  consumption  (which is a function of
numerous  cultural,  economic and  regulatory  parameters as well as the cost of
local water distribution and energy).  Both the EVC and CV configurations of the
equipment  are  expected to have greatly  improved  specific  power  consumption
(i.e.,  the amount of electrical power required to produce a unit of water) than
the MVVC equipment.


POST TREATMENT SUBSYSTEM

         This subsystem  includes sets of  commercially  available  equipment to
adjust  the pH (the  measure  of  acidity  or  alkalinity  of a  liquid)  of the
desalinated  water and accomplish  storage and residual  water quality  control.
This  subsystem  is not  always  required,  depending  on  the  pH of the  input
seawater, storage requirements and distribution infrastructure (plastic or metal
pipes) and will be configured to each specific  site. All components are readily
available today from multiple vendors and we do not intend to manufacture them.


PUMPS AND SUPPORT EQUIPMENT SUBSYSTEMS

         This   subsystem   accomplishes   the  lift  of  the  seawater  to  the
pretreatment  subsystem,  the delivery of the desalinated water and the disposal
of the brine.  This subsystem  also includes the monitor and control  equipment,
often  referred  to in the  industry  as SCADA  ("SUPERVISORY  CONTROL  AND DATA
ACQUISITION")  equipment  as well as power  conditioning  and  distribution  and
liquid distribution  components.  All the equipment comprising this subsystem is
currently  available to us from multiple  vendors and we do not currently intend
to manufacture any of these components.


POWER SUBSYSTEMS

         The  power  subsystem   produces  the  electrical   power  required  to
desalinate  seawater.  Power is the largest  potential cost  associated with the
operation of Ocean Power's proposed desalination systems, therefore we intend to
continue to  develop,  license and  acquire  technologies  that we believe  will
increase  energy  efficiencies  and thereby reduce the cost of the potable water
produced by the H2OkW Systems(TM).

         The  integration  of the  power  subsystem  with the rest of the  H2OkW
Systems(TM)  may  involve  more than  simple  power  connection.  The waste heat
produced  by  certain  power  subsystems,  such as  fuel  cells,  through  their
operation may be employed by the H2OkW  Systems(TM)  so as to achieve an overall
system  efficiency  increase,  as less heat generation is required to desalinate
water.

         Additionally,  when  desired by the local  customer,  the system can be
configured to produce more power than needed by the H2OkW Systems(TM).  Our plan
is to offer such excess  power for  commercial  sale  through our joint  venture
partners.

         The appropriate power source to power a specific H2OkW Systems(TM) will
be  selected  based upon  local fuel  availability,  local grid  conditions  and
environmental constraints.



                                       8
<PAGE>

         GRID POWER.  The H2OkW  Systems(TM)  can be designed to draw electrical
power from an existing power grid. For much of our target market,  this is not a
viable power source, due to a lack of availability, environmental regulation and
the cost of grid or non-distributed  power. However,  where there is a grid, the
H2OkW  Systems(TM)  can buy  power  from  local  suppliers  just  like any other
industrial customer.

         ON-SITE  COMMERCIAL  POWER  GENERATORS.  The H2OkW  Systems(TM)  can be
operated using electrical  power from a variety of commercially  available power
generation  equipment,  such  as  industrial  gas  turbines,  micro-turbines  or
conventional  diesel  engines.  These systems are  currently  available to Ocean
Power from a variety of suppliers. We expect these power sources will be interim
solutions until more advanced renewable power systems are available.

         ON-SITE  SMALL  POWER   GENERATION.   We  anticipate   that  our  H2OkW
Systems(TM)  will be able to operate  from  electrical  power  generated  by our
Stirling engine technology.  Stirling engines are currently being engineered for
volume manufacture by Ocean Power's Stirling subsidiary, Sigma Elektroteknisk AS
of Norway. When Stirling engines are employed as the primary power source of our
system,  both the electrical and thermal  outputs of the engines are expected to
increase  the  efficiency  of the  desalination  system.  Although  the  initial
Stirling  Systems from Sigma will be small and  designed to satisfy  residential
power  requirements,  subsequent  generations  will be joined  together  to form
larger systems of multiple  Stirling  engines  capable of supplying the needs of
our H2OkW Systems(TM).

         WIND POWER. Under certain  circumstances,  our H2OkW Systems(TM) can be
operated off of the electrical  power  produced by wind turbines.  Wind turbines
require very specific local wind  conditions  and,  therefore,  this  technology
would  generally  be  used as a  power  source  for  the  H2OkW  Systems(TM)  in
conjunction with one of the other candidate power system technologies  described
herein in a hybrid  configuration.  Today, this technology is available to Ocean
Power, as purchased items, through a variety of equipment suppliers.

         SOLAR POWER. Our H2OkW Systems(TM) can operate on electrical power from
solar  heated  Stirling  engines  or  from  concentrated   photovoltaic   ("PV")
technology.  A solar  Stirling  approach can be used in a hybrid  configuration,
where heat from the sun is used,  when  available,  and a fuel,  such as natural
gas, is used on cloudy days or at night.  Concentrated  photovoltaic systems can
be used in a similar manner.  Ocean Power plans on using concentrated PV in 2003
through  our  planned  partnership  with  Science   Applications   International
Corporation.  (SEE  Strategic  Partnerships'  section of our  Distributed  Power
general discussion.) This program will bring their  second-generation solar dish
to commercial  production.  As Stirling engines become  available,  they will be
added to this product line.

         ADVANCED  ALKALINE FUEL CELL.  We anticipate  that our H2OkW Systems TM
will use electrical power from proprietary alkaline fuel cell technology and its
related  electrochemical  fuel  processor,  which is currently  in  development.
Initially,  fuels will be natural  gas,  diesel or plant  material,  vegetation,
agricultural  waste or other biomass used as a fuel or energy source.  We expect
that the  demonstration  of these  systems  will  start in 2003 with  commercial
availability  planned for 2004.  Management  believes  that,  when developed and
commercially  available,  this  power  technology  offers the  potential  of the
lowest-cost product water from the H2OkW  Systems(TM).

         SEA KINETIC.  We are not currently  developing,  but are in discussions
with  suppliers of,  equipment that would convert the kinetic (or motion) energy
from the ocean into electrical power.  This power source,  much like wind power,
is most likely to be employed,  if at all, in a hybrid configuration with one of
the other power sources discussed here.

         MODULAR   SYSTEM   DESIGN.   Our   H2OkW   Systems(TM)   will   utilize
factory-tested modules with standardized interfaces,  dimensions and capacities.
The result will be ease of shipment,  assembly,  maintenance and repair. It also
will allow the plant  capacity  to be  quickly  increased  to support  growth in
demand.

         Our approach of creating larger installations from multiple small units
is not  the  traditional  approach  to  either  power  or  water  plant  design.
Traditional  companies  have  sought  economies  of scale from larger and larger
plants.  We will attempt to realize  economies  of scale by building  more units
rather than building additional, capital-intensive, large-scale facilities. This
has been the successful approach of the semiconductor  industry for memory chips
(computers do not have one large memory chip but use arrays of smaller  capacity
units) and heating  industry for home boilers.  The  advantages of this approach
are increased  reliability  and reduced unit cost through higher unit production
volumes.

         Whenever  possible,  the system and subsystem level  components will be
mass-produced using standard high-rate manufacturing processes. Although some of
the  manufacturing of our advanced  technologies  will eventually be done to our
specifications  by qualified  subcontractors,  the initial SWRO products consist
mostly  of  standard  components  that will be  purchased  and  delivered  using
conventional   supply-chain  management,   just-in-time  inventory  control  and
enterprise resource planning.  We, or our  subcontractors,  will integrate these
components and subsystems  into factory tested modules that will then be shipped


                                       9
<PAGE>

to plant  sites.  At this time  Ocean  Power is in the  process  of  identifying
qualified subcontractors to support its anticipated sales. The final integration
of the  complete  H2OkW  Systems(TM)  will be done on  site,  to  Ocean  Power's
specifications, and by our joint venture partners.

         To the best of our  knowledge,  we are the first  company to attempt to
reduce the end cost of desalinated  seawater and power by applying the high-rate
manufacturing  processes to the various  components and subsystems making up its
H2OkW Systems(TM). Since historically each water plant was individually designed
and built on site,  this has not  traditionally  been done for  either  water or
power plants.

         From basic technology through site preparation and assembly,  water and
power  cost  is the  factor  determining  all  design  decisions.  Mass-produced
standardized  distillation  and power  modules  will be  configured  to meet the
customers'  specific needs and timetables.  In all cases, the preference will be
to use the  lowest-cost,  preferably  indigenous,  energy  source and  renewable
energy sources will be a priority as long as they make economic sense.

         The current H2OkW  Systems(TM) and all the planned product  improvement
programs are designed to service a set of economic  goals,  that reduce the cost
of a cubic meter of potable  water  produced.  The  largest  cost  component  of
seawater  desalination is the power requirement.  Our cost of power figures,  or
kilowatts per hour,  referenced  below, are based upon our belief that following
our integration of grid power, then Stirling engines and finally fuel cells, the
kilowatt per hour cost will be $0.08, $0.05 and $0.02, respectively. Today using
Mechanical  Vacuum Vapor  Compression  technology and conventional  pretreatment
methods,  we can  produce a cubic  meter of  potable  water  from  seawater  for
approximately  $1.00 using electrical power at $0.08 per kilowatt hour. The same
system  using SWRO  reverse  osmosis  technology  can  produce a cubic  meter of
potable water for approximately $0.70 with same energy source. Upon introduction
of our EVC  technology,  the H2OkW  Systems(TM)  is  expected to produce a cubic
meter of higher  quality  potable  water for less than $0.70 and using  power at
$0.05 per  kilowatt  hour.  With the  completion  of the  development  of the CV
technology,  we  estimate  the cost of  potable  water to be less than $0.50 per
cubic meter, using power at $0.05 per kilowatt hour.

         Our goal,  by 2005 with the  expected  integration  of fuel cell  power
subsystems  and at medium potable water  production  rates (at least 30 each one
million  gallon per day  systems),  we expect water  production  costs less than
$0.25 with power costs at $0.02 per kilowatt hour.  These are our best estimates
of the economic  goals which we believe can be met at the various  stages of our
H2OkW  Systems(TM) technology development.


OUR BUSINESS STRATEGY

         We anticipate that production of potable water by desalinating seawater
with an H2OkW  Systems(TM)  will be done by regional  joint  ventures.  For each
target market for potable water,  we expect to form a joint venture with a third
party. We intend that these joint ventures will finance,  build,  own,  operate,
and where appropriate,  transfer,  the H2OkW Systems(TM) In addition,  we intend
that these  systems will sell the potable  water and excess power to their local
customers under long-term (e.g., 15-25 year) purchase contracts.

         We will  generally  seek to maintain a minority  ownership  position in
these joint ventures and to procure a share of the ongoing income from water and
power sales through negotiations on a case-by-case basis.  Generally,  we expect
to sell the H2OkW  Systems(TM)  equipment at a profit to the joint venture,  and
participate, on a percentage basis, in the ongoing profits of the operation. The
joint venture  partners will be selected for their  capabilities in the areas of
market  development,   finance,   civil  engineering,   project  management  and
experience   with  local  political   structures.   It  is  expected  that  site
construction  will  be  done  by  local  contractors,  in  accordance  with  our
specifications.

         We are currently  working to establish a joint  venture pilot  program.
The initial H2OkW Systems(TM) installations will allow Ocean Power and our joint
venture partners to demonstrate their ability to enter the market  successfully.
They will also allow us to accumulate  real world  operational  and  maintenance
experience.  These initial plants are designed to produce high-quality,  potable
water  with no excess  electrical  power.  Each  deployed  system  will  utilize
multiple  SWRO  desalination  modules.  Each of these modules will be capable of
producing  up to 1000  cubic  meters of  potable  water per day at  commercially
competitive  costs.  One million gallons of potable water production per day has
been selected by Ocean Power as a standard  potable water output volume for it's
pilot  desalination  plants.  Therefore,  four of these proposed modules will be
needed to construct an H2OkW Systems(TM) capable of producing 4,000 cubic meters
or one million  gallons per day (1mgd) of potable  water.  We believe  that this
size is an ideal  capacity for a small resort,  industrial  park or community in
regions where individual  water  consumption is no more than 100 gallons per day
per person.




                                       10
<PAGE>

GREECE

         On February 23, 2001,  we entered into a Joint Venture  Agreement  with
Apollo Water and Power International, Inc., a Nevada Corporation ("APOLLO"), for
the  development  of  private  water and power  systems  in Greece and the Greek
portion of the island of Cyprus utilizing the H2OkW  Systems(TM).


MEXICO

         We have entered into a non-binding Heads of Agreement with CIMA Capital
Corporation an international  financial services and infrastructure  development
firm in Mexico City, Buenos Aires and Sausalito,  California.  Their business is
developing  private  water and  power  infrastructure.  The  Heads of  Agreement
provides  for the  establishment  of a joint  venture and  execution  of a joint
venture agreement.  The agreement identifies the affiliate as CIMA Capital, LLC,
with  headquarters in Sausalito,  California.  The agreement also identifies the
operating  territory  to be Mexico.  The Heads of  Agreement  was executed on 30
March 2000. Management expects that a joint venture agreement similar to the one
signed by Apollo will be executed this year.


CARIBBEAN

         On February 23, 2001,  we entered into a Joint Venture  Agreement  with
Caribbean Water and Power, Inc. (Caribbean) for the development of private water
and  power  systems  in the  Caribbean  Sea  basin  region  utilizing  the H2OkW
SystemsTM.  The  agreement is identical to the Apollo joint  venture  agreement,
except  that  the  operating  territory  is  a  specific  list  of  twenty-eight
countries,  territories,  and islands  throughout  the  Caribbean  basin and the
venture entity is allowed to establish  sub-ventures  to perform  certain of the
venture's  anticipated  activities  such  as site  construction,  commissioning,
operations and maintenance.  As with the Apollo joint venture agreement,  we are
currently working to try and complete and execute the supporting  documents this
year.


STRATEGIC RELATIONSHIPS

         We have entered into, or, are currently  negotiating  the terms of, the
following strategic relationships with third parties relating to various aspects
of the H2OkW  Systems(TM).


WATER SERVICES CORPORATION AND MALTA DESALINATION SERVICES LTD.

         Ocean  Power  Corporation   entered  into  an  Exclusive   Distribution
Agreement with Malta Desalination  Services Ltd. (MDS), which grants Ocean Power
Corporation the exclusive  right to market,  sell and install  seawater  reverse
osmosis  desalination  (SWRO)  equipment  produced  by  MDS on a  global  basis,
excluding only the island of Malta itself.  During the term of the agreement the
Company will use MDS as its sole  supplier of SWRO  equipment to the extent that
the equipment is provided by MDS. The Malta Desalination  Services (MDS) Ltd. is
a  subsidiary  of The  Water  Services  Corporation.  The  initial  term  of the
agreement is 19 months.

         Ocean Power has been in  negotiations  with WSC to form a jointly owned
limited liability company for the production of the SWRO desalination  subsystem
of the H2OkW Systems(TM).  Initially,  MDS was to supply these subsystems to the
limited  liability  company.  The parties intend to continue these  negotiations
during the term of the exclusive distribution agreement,  with the understanding
that the  formation of a limited  liability  company by Ocean Power and WSC will
supersede the current Exclusive  Distribution  Agreement.  However,  there is no
assurance that any such limited liability company will be established.


AQUAMAX INTERNATIONAL HOLDINGS BV AND KEERAN CORPORATION


OUR LICENSE FROM AQUAMAX/KEERAN

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



                                       11
<PAGE>

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

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


OUR DISPUTE WITH AQUAMAX/KEERAN

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

         Nevertheless,  we commenced development  activities predicated on using
the technology  licensed from  Aquamax/Keeran  regardless of whether the amounts
owed  to  Aquamax/Keeran  and  the  value  of the  licenses  are  adjusted.  The
technologies licensed from Aquamax/Keeran are part of the long-range development
program for  distillation-based  systems and are not part of the SWRO systems to
be utilized in 2001.  As part of  monitoring  developments  in the  desalination
market and as mentioned in our  discussion  of the H20kW  System(TM),  there are
several  systems for  distillation  which we are  continuously in the process of
researching and evaluating.


ATTEMPTED RESOLUTION OF THE DISPUTE

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

         In July 2001, the aforementioned negotiations resulted in the execution
by  Aquamax/Keeran  and the  Company,  as well as Hadwaco Ltd. Oy and Hackman Oy
Abp, of  agreements  which would have,  if closing had  occurred as  stipulated,
resolved  the dispute  between the Company and  Aquamax/Keeran.  The  Agreements
provided that the Company would make to Aquamax/Keeran payments of $1,800,000 in
cash and 600,000 shares of common stock on or before September 28, 2001,  unless
extended  by  the  parties,   in  addition  to  the  $400,000  already  paid  to
Aquamax/Keeran, in exchange for ownership (as opposed to licenses as provided in
the September 2000 License  Agreement) of all the  Aquamax/Keeran  technology in
any way  connected to water  treatment.  The  agreements  also provided that the
Company would grant back to Aquamax/Keeran a royalty free, exclusive,  worldwide
license to exploit Newco's water desalination  technology for applications where
the volume of water  processed  is less than  1,000  cubic  meters per day.  The
license back of rights to Aquamax/Keeran  was to be exclusive for a term of five
years and  non-exclusive  thereafter.  The agreements  also included  release of
liability  provisions,  whereby all parties would release each other of and from
all claims and  liabilities,  including  the amount due in  connection  with the


                                       12
<PAGE>

Company's  obligation under the September 2000 License  Agreement as well as the
Company's claim for a price reduction due to the  non-exclusivity of the Hadwaco
license. Contemporaneously, the Company entered into agreements with Hadwaco Ltd
Oy and Hackman Oy Abp  (Hadwaco).  The  agreement of the parties was as follows:
The  Company was to form a new company  (Newco) in  Finland.  The Company  would
immediately  provide  Newco with  $1,500,000  to  purchase  from  Hadwaco a 100%
interest in its existing and ongoing water remediation  business,  including all
related  intellectual  property.  Newco's  purchase  price for  Hadwaco's  water
remediation  business was to be $1,500,000 plus a 19% interest in Newco's common
stock.  The  Company  was to  provide  senior  debt  funding  up to a  principle
aggregate  amount of  $7,500,000  over a period of three  years from the date of
closing of the Hadwaco purchase.

         On  September  7, 2001 the  Company  became  relisted on the NASDAQ OTC
Bulletin Board which enhanced its ability to raise funds; however, three working
days later,  on Tuesday,  September  11, 2001 an act of war was committed on the
United  States with the World Trade  Center  devastation  occurring.  That event
significantly   affected  and  delayed  the  Company's  efforts  to  obtain  the
investment money necessary to complete the transactions  described above for the
formation of Newco,  the purchase of the ongoing water  remediation  business of
Hadwaco and the  purchase of the  Aquamax/Keeran  technology  connected to water
treatment.  Because of the funding delays,  the Company was not able to fund the
closing of the  transactions  and the agreements for those  transactions are now
null and void,  including the agreements which included the release of liability
provisions  between  the  Company  and  Aquamax/Keeran.  As a  consequence,  the
September 2000 license agreement between the Company and Aquamax/Keeran  remains
in effect and the disputes between the parties as to their respective rights and
obligations  under the  license  agreement  remain  unresolved.  The Company has
recommenced  discussions  with  Aquamax/Keeran  in an attempt  to resolve  their
disputes  amicably and intends to arbitrate  resolution  of those  disputes if a
settlement cannot be reached.


OUR ACCOUNTING FOR THE AQUAMAX/KEERAN LICENSE

         In September 2000, $400,000 was expensed in connection with the dispute
with  Aquamax/Keeran  due to our belief at that time that the agreement would be
terminated  and the  $400,000  would  not be  recoverable.  At the time that the
Company's financial  statements for the year ended December 31, 2000 were filed,
it was no longer  likely that the  transaction  would be voided but the $400,000
expense was then left as an expense due to an error in preparing  such financial
statements.  In connection  with the process of preparing the Company's  amended
Form 10-KSB for December 31, 2000, we identified this  aforementioned  error and
consider that amount to be a reasonable approximation of impairment of the asset
that  results  from  having  received  one  patent  that  did  not  contain  the
exclusivity  feature that was  contemplated in the purchase price. In connection
with this  recharacterization  of the amount  expensed in  September  2000 as an
impairment rather than a contingent liability,  our conclusion in this regard is
based on a two-part assessment. The first part is a legal exposure analysis. Our
general  counsel  reviewed the  situation and  estimated  that  recovery  (i.e.,
estimated  reduction in purchase  price of the patent rights  acquired under the
Aquamax/Keeran license agreement) that we might expect by applying the standards
of  SFAS  5,  Accounting  for  Contingencies,   and  the  related  American  Bar
Association  Statement  of  Policy.  The  second  part of the  assessment  was a
proportionate  value  methodology.   While  no  appraisal  of  the  patents  was
conducted,  we allocated  the purchase  price of the group of patents  among the
various elements of technology  acquired  (including the exclusivity  feature of
the  Hadwaco  patent)  by  applying  our  judgment,  in  consultation  with  our
intellectual  property  attorney most  familiar  with the relative  value of the
patents.  Both  approaches  resulted in amounts that  approximated  the $400,000
expensed in September 2000.

         The full purchase  price has been recorded as a liability and offset by
the  $400,000  paid to date.  The full  amount  of the  liability  was  recorded
(without offset for potential  reduction in resolution of the Hadwaco sublicense
dispute) because management  believes that: (1) based on the oral opinion of the
Company's  General  Counsel,  the full amount of the  liability,  until  amended
through negotiation or legal process,  represents an enforceable  liability,  as
long as the Company retains the patent rights conveyed under the agreement;  (2)
the  liability  meets that  accounting  definition  of a liability  as stated in
Statement  of  Financial  Accounting  Concepts  No.  6,  Elements  of  Financial
Statements,  and (3) the  reduction of  liability  to  anticipate a reduction in
negotiations or legal process would result in recording a contingent  asset that
is prohibited by SFAS No. 5,  ACCOUNTING  FOR  CONTINGENCIES.  Accordingly,  and
since the Company  intends to keep the patent  rights,  the Company has recorded
the liability,  and related asset,  because under the terms of the agreement the
Company has no  discretion  to avoid future  payment of the  remaining  cash and
common stock payable. The amount of payment under the agreement withheld pending
resolution  of the dispute was not  indicative  of the  diminished  value of the
patent  rights  received as the  management  has  estimated  that  approximately
$400,000 of the purchase price  represents the value of the exclusivity  feature
of the 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
agreements with Hadwaco Ltd. Oy and Hackman Oy Abp were non-binding, the company
does not believe that it has liability  arising out of its failure to attempt to
resolve the dispute, other than the loss of amounts the Company agreed to pay in
connection with obtaining  extensions of the agreements.  In connection with its
dispute with  Aquamax/Keeran,  the Company still  believes it has the right to a


                                       13
<PAGE>

purchase price  reduction  because of the failure of  Aquamax/Keeran  to deliver
exclusive  rights to all of the patents and,  while no claim has been  asserted,
might be  subject to a damage  claim  related to the  Company's  withholding  of
payment on the  Aquamax/Keeran  license  agreement.  The  Company  has  recorded
expenses  of $984,800  related to the costs of the  terminated  agreements  with
Hadwaco/Hackman  and the  possible  costs  associated  with  the  Aquamax/Keeran
license agreement dispute.

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

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

         The  Company  has  accomplished  the  first  two  steps  of  its  vapor
compression   desalination   development   program:   (1)   acquisition  of  the
Aquamax/Keeran technology; and (2) obtaining patent rights on its own technology
that will be combined with the Aquamax/Keeran  technology  (provisional  patents
filed August 2000 and patent pending  patents filed August 2001).  The remaining
step is to complete a PPI which consists of 14 projects,  the combined effect of
which is projected to yield a more  economically  viable  seawater  desalination
system,  with lower energy and  operating  costs for both the  projected  vacuum
vapor compression  system and the existing seawater reverse osmosis  technology.
The  formal  PPI was  initially  designed  in 1997,  after  the  first  physical
assessment  of the  Aquamax  equipment  in Finland.  The program was  thereafter
continuously  developed and refined to reflect new information gathered from the
Aquamax  equipment we have acquired and have under testing in Malta,  as well as
data gathering about competitive technologies from our consultants,  and our won
monitoring of the market.  The planning,  scheduling and cost  estimating of the
formal  program was finalized in October of 2000. The PPI is expected to require
approximately  4  full-time  employees  and 18 to 20  months  to  complete  once
additional  funding of approximately  $5 million is arranged.  Neither the time,
manpower  requirements  or cost  necessary for the PPI have changed.  Two of the
projects  represent critical path projects on which the 18 to 20 month time line
will be dependent.  The two critical path projects are: "High  Efficiency  Steam
Ejector  Development"  Project,  the goal of which is to  replace  a  mechanical
compressor with a high efficiency  hypercritical  ejector (OPC has a U.S. patent
pending) and the "Evaporator-Condenser Efficiency Increase) Project, the goal of
which is to increase the overall efficiency of the vapor compression cycle by at
least 30% (OPC has a U.S.  patent).  Timely  completion of the two critical path
projects  will be  benchmarks  for  measuring  progress for  impairment  testing
purposes.   Management  believes  the  seawater   desalination  products  market
continues to be large, the competitive  environment is  substantially  unchanged
from that of September 2000 when the Aquamax/Keeran  patent rights were obtained
and continues to have the potential to generate  substantial  profits from which
the investment in the Aquamax/Keeran patents can be recovered.  The commencement
of the PPI has been delayed until funding is arranged. Losing our eligibility to
have our common  stock  traded on the NASDAQ OTC  Bulletin  Board  resulted in a
delay to our  arranging  funding  for the PPI for two  reasons:  first,  because
potential  investors  have elected not to invest until we are again  eligible to
trade on the OTC Bulletin  Board;  and second,  as a result of the  diversion of
management  resources to the task of amending the SEC filings and other  efforts
necessary  to  re-attain  eligibility  to trade on the OTC  Bulletin  Board.  On
September 7, 2001 the Company became  relisted on the NASDAQ OTC Bulletin Board.
The  following  Tuesday,  September  11, 2001 an act of war was committed on the
United States with the World Trade Center devastation, which further delayed the
funding  necessary  to pursue the PPI.  During the period  that the PPI has been
delayed by the unavailability of funding, the Company has assessed impairment of
the  carrying  value of its assets  employed  in the  desalination  business  by
monitoring  developments in the market for desalination products to determine if


                                       14
<PAGE>

technological,  competitive or market conditions  indicate that the value of the
assets  (including the amortized  cost of the licensed  patents and the value of
the research and development  activities that were expensed s incurred including
research  leading to Ocean Power's three  additional  patents and the "know how"
resulting from our testing of the unit in Malta) is less than the carrying value
of the related asset  consisting  principally of the cost of the  Aquamax/Keeran
patent net of accumulated  amortization and the previous impairment  adjustment.
Management's assessment of market conditions described above leads management to
conclude that there has been no impairment of the Aquamax/Keeran related license
agreement asset other than the $400,000 that was recorded in connection with the
dispute with Aquamax/Keeran over exclusivity of one of the patents, as described
below.

         The license  agreement  was signed by the  Company  and  Aquamax/Keeran
representatives  as of September 21, 2000, but because of questions raised as to
the identity and authority of the Aquamax/Keeran signatory, an exhibit was added
to the agreement solely to clarify the matter.  Revised  signature pages (signed
by the  original  Aquamax/Keeran  person  and  dated on the  original  September
signing  date) were  received  by us on October 2,  2000.  The  transaction  was
originally  recorded in October 2000 in belief  that,  until  properly  executed
signature pages were received,  it was not effective.  Based on our reassessment
of the  circumstances,  we have determined that the agreement  became binding on
September 21, 2001. Therefore,  the September 30, 2000 financial statements were
amended to reflect the  transaction  as occurring in  September.  The key points
leading to the change in the Company's  position as to the effective  date were:
(1)  although  the name and  title of the  representative  signing  on behalf of
Keeran  Corporation  was not  disclosed on the  signature  page or  accompanying
documents,  the  signature  was an original and the signer had actual  authority
from Keeran  Corporation to execute the agreement;  (2) original signature pages
for all parties were  exchanged in September  with the intent to be bound by the
agreement;  (3) the  re-execution  of the  signature  page on  behalf  of Keeran
Corporation was by the same person and was dated by him to the original  signing
dated, 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 is
included in the accrued  liability  is as of  September  21,  2000,  because the
effective  date  of the  agreement  is  the  date  the  rights  to the  patented
technology were transferred to the Company.


OUR LICENSE TO AQUAMAX/KEERAN

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


STM CORPORATION

         On April 10, 2000, Ocean Power and STM Corporation executed a licensing
agreement, under which STM granted to Ocean Power an exclusive,  worldwide right
and license to make,  have made in North  America and/ or Western  Europe,  use,
install,  and sell licensed  products within the field of seawater  desalination
for a term of 30  years.  The  licensed  products  are STM power  cells,  parts,
components of  sub-assemblies  thereof,  or a power module,  parts,  components,
complete,  partial  assemblies  thereof,  incorporating  products,  practices or
incorporating  STM technology for any  desalination  system sold by Ocean Power,
its affiliates or approved sub  licensees.  Ocean Power will also have the right
to purchase  from STM parts for the licensed  products if available for delivery
anywhere in the world.  Ocean  Power  plans to make use of our rights  under the
licensing  agreement to provide for an added power  source for our  desalination
systems in the event we are unable to manufacture  Stirling  engines  ourselves.
Ocean Power will make royalty payments,  which shall be the greater of a Minimum
Annual Royalty Payment or ten percent (10%) of the net selling price of licensed
product purchased until one million dollars ($1,000,000.00) has been paid in any
annual period and seven and one-half  percent  (7.5%) of the selling price above
one million dollars  ($1,000,000.00).  The Minimum Annual Royalty Payment begins
at five hundred thousand dollars  ($500,000.00) and increases  annually over the


                                       15
<PAGE>

initial five years of the agreement  term, to a maximum of three million dollars
($3,000,000.00)  in year five.  The  parties  will  negotiate  in good faith any
future Minimum Annual Royalty  Payments  beyond year five. The  Stirling-related
U.S.  patents licensed from STM have between one and eighteen years remaining to
their  respective  terms.  The Company did not make the first  required  royalty
payment  necessary  to maintain  exclusivity  and instead  elected to permit the
license to become  non-exclusive  because  the cost of  maintaining  exclusivity
could not be justified based on the business judgment of the Company.


COMPETITION

         Our target markets are coastal areas, islands,  and/or peninsulas,  and
are served by three  types of water  delivery  service  provider.  These are, 1)
entities that import water by ship or truck, 2) entities that deliver water from
aqueduct  or other  natural  sources  of  ground  water,  and 3)  entities  that
desalinate seawater.

         We believe that  competition from entities that transport water by ship
or truck will be minimal.  The cost of moving the  required  volumes of water by
truck,  boat or air have  proven to be  prohibitive.  This is only done in areas
that have no  lower-cost  alternative.  We expect  these  markets to  experience
significant  cost savings and improved  reliability by using our small,  modular
H2OkW Systems(TM).  Once such systems are installed,  these factors will lead to
the discontinuance of this type of importation service.

         Non-local  potable  water  sources  that pipe ground water to a coastal
area require  large  pumping  facilities  and  long-distance  piping  systems or
aqueducts that are capital  intensive and less reliable than  distributed  water
systems. This source of potable water is subject to greater risk of interruption
for  political or other  reasons  unrelated to the  operation of the system.  We
expect that this type of potable  delivery  will  continue but, as modular H2OkW
Systems(TM) are adopted, will become less vital to coastal communities.

         Traditionally  there has been very little competition for the supply of
water.  Local  monopolies  grew that satisfied  local  customer's  needs using a
variety of sources such as rivers,  wells and dams.  Population  growth,  rising
standards of living, overuse and contamination of these sources are major market
drivers. Add to this deregulation,  the growth of tourism and  industrialization
and more demand exists than supply.

         Initially we intend to focus on regions  throughout the world with weak
water  infrastructures  and very  high-cost  water  ($3-6 US  dollars  per cubic
meter).   Ocean  Power  believes  that  these   underserved   areas  will  offer
opportunities,  particularly in the private,  tourist driven market. Since these
plants will be locally sited, they will have no  transportation  costs and their
autonomous  operation will reduce the need for highly skilled labor.  We believe
that it will be easier to compete at these prices than in the US where water can
be as low as $0.40 per cubic  meter  (Metropolitan  Water  District  of Southern
California, May 2000).

         General  competition in these regions is anticipated to be intense from
a wide variety of suppliers of desalination systems,  especially reverse osmosis
technologies  because the barrier to entry to this system  technology is low. In
addition,  Ocean Power  experiences  competition  from a variety of sources with
respect to virtually all its proposed water system  components  and  subsystems,
although Ocean Power knows of no single  competitor  that currently  competes in
the integrated  approach  offered by its H2OkW  Systems(TM).  Competition in the
markets to be served by Ocean Power will be based upon several factors including
price, technology,  experience,  know-how,  project finance, ongoing reputation,
warranties, reliability, logistics support, and ability to access the market.

         With respect to Ocean Power's Sea Water Reverse Osmosis  configurations
of the H2OkW  Systems(TM),  there are a number of companies,  from large to very
small, that design,  build,  integrate,  install,  and operate such systems. Two
such public  companies in the United States are Osmonics Inc. and Ionics Inc. In
addition there are numerous smaller, privately held companies.

         These companies are  experienced in the field of seawater  desalination
and are  aggressively  pursuing  the  market.  Ocean  Power is a new  player and
although it believes  that its business  model and  technologies  will give it a
competitive edge, there is no guarantee that this will be the case.

         Ocean Power  believes  it will face  significant  competition  from far
larger   companies  with  long  histories  of  operating  water  processing  and
distribution systems and with greater experience securing water projects.  Among
the largest of these are  Compagnie  Generale des Eaux, a subsidiary of Vivendi,
and Suez-Lyonnaise des Eaux. These two companies are generally recognized as the
leading   competitors  in  the  international  water  business  market  and  are
significantly   larger  than  the  next  group  of  international   competitors.


                                       16
<PAGE>

Construction  companies may also bid on water plant  projects,  but usually on a
build-own-transfer basis and employing an array of technology suppliers.

         Ocean Power will be a new competitor in the international  water market
and currently has no presence in the market.  Because of their longer  operating
histories and financial strength from on-going contracts, the larger competitors
may be able to obtain  project  finance  at lower cost and may be willing to bid
more aggressively to retain market share. In general,  other than the identified
companies,  the seawater  desalination  industry is highly fragmented,  with few
publicly owned.

         We are unable to predict with  certainty its relative  market  position
with respect to its future seawater  desalination systems and operations.  Ocean
Power does believe it possesses  technological  advantages  over most  potential
competitors  and has begun to develop a market  access  advantage  through local
management  experience in select regions by way of the developing regional joint
venture commitments.


DISTRIBUTED POWER GENERATION/RENEWABLE ENERGY TECHNOLOGIES

         Our  initial  efforts in the area of  distributed  power and  renewable
energy were planned to support and reduce the cost of our seawater  desalination
business.  Ocean Power has since established a plan to develop distributed power
and renewable energy sources business independent of our desalination  business.
Therefore  the  sale  of  generated  distributed  power  and  distributed  power
equipment is expected to follow two separate lines of business.

         In the first,  we expect to utilize  the excess  power  produced by its
various local  desalination  joint venture partners using H2OkW Systems(TM) with
power subsystems to generate potable water from seawater.

         The second  line of  business we expect to engage in is the micro power
market (i.e.,  locally produced distributed power). We intend to exploit certain
proprietary  power  technologies to create  stand-alone  micro power systems for
applications   beyond  seawater   desalination.   At  the  present  time,  these
proprietary technologies include, Stirling engines, solar concentrators and fuel
cells.


TECHNOLOGY SOURCES


STIRLING ENGINES

         A Stirling engine is an external  combustion engine in which an ambient
pressure  burner  (similar to a household  stove or hot water heater) is used to
heat a gas (such as helium) sealed in an engine.  As the gas is heated either by
burning gas,  concentrated  solar energy,  or other means, it expands,  exerting
pressure  on a piston.  Once the piston has moved the gas cools and is  rerouted
through a heat  recovery  unit back to the primary  heat  exchanger.  The piston
turns a crankshaft that is attached to an electrical  generator,  which produces
electricity.  The  primary  advantages  of the  Stirling  engines  are  that the
external  combustion  is  clean,   silent,  and  more  efficient  than  internal
combustion  engines  and  since  they have  half the  number of parts,  they are
potentially lower in cost with higher reliability.


SOLAR CONCENTRATORS

         Solar  concentrators work by collecting  sunlight from a large area and
concentrating  it into a small area of concentrator  solar cells,  which produce
voltage when exposed to radiant energy.

         Solar concentrators are made up of high-temperature  photovoltaic cells
that can absorb  more  solar  energy  than the one sun (or the amount  delivered
through normal sunlight) that  traditional  flat-plate  photovoltaic  collectors
absorb. These systems are placed at the focal point of a reflector array (called
a dish)  that can  concentrate  700-1500  suns (700 to 1500  times the amount of
energy found in normal sunlight) worth of energy on the cells. These systems run
at  substantially  higher  efficiency  than  flat  plate  PV (30%  vs.  12%) and
therefore take up less space and hold the promise of lower cost.


FUEL CELLS

         A fuel cell is an electrochemical  source of electrical power, composed
of  an  anode,  cathode,  and  electrolyte.  The  anode,  a  positively  charged
electrode,  and cathode,  a negatively  charged  electrode,  are porous to allow
gases to pass through them.  Between the two is an electrolyte,  a solution that
conducts electricity,  which allows the oxygen and hydrogen to combine, creating
electricity and producing heat and water as byproducts. Initially, fuels will be
natural gas, diesel, clean coal or plant material,  vegetation,  or agricultural
waste used as a fuel or energy source.




                                       17
<PAGE>

DESCRIPTION OF POWER MARKET

         Much of the world gets its  electricity  from large  centralized  power
plants,  which are  situated far from  consumers,  and are  inefficient,  due to
losses in electricity transmission over power lines. Micro power is the name for
distributed   local   generation  of  power,   for  local   consumption,   using
decentralized units in or near homes,  offices,  or industry.  Liberalization of
the  market  allowing  for the sale of  electricity  has  opened  the  market to
competition  from  micro  power.  About  half  of the  American  States,  India,
Argentina  and,  as of 1999,  the  European  Union have opened  their  wholesale
electricity markets.

         The market for  distributed  power,  like water is driven by population
growth,  economic growth,  institutional reform,  deregulation,  concern for the
environment,   depletion  of  existing  resources,   deterioration  of  existing
infrastructure and advancing technologies.

         Distributed  power involves the local production and local  consumption
of  useable  electric  power.  Our plan is to  develop,  acquire  or  license  a
portfolio of advanced  technologies (or interests in such  technologies) such as
Stirling engines, fuel cells, and solar concentrators and to continue to combine
these  technologies  into  integrated  systems for the economic  and  profitable
generation of distributed power.

         As these and other distributed  power  technologies are integrated with
existing power networks and technology, the result should be a reorganization of
the power  generation  and  distribution  network,  moving from a radial process
designed around  centralized  power generation to a distribution of power assets
closer to the end user or distributed power.

         Distributed micro power offers substantial  advantages over traditional
power stations in terms of efficiency, reliability,  environmental friendliness,
and increasingly,  price to all of these market segments.  Ever-higher  emission
standards have made it unattractive to build  coal-fired  plants.  (America gets
about half its electricity  from coal, The Economist,  August 2000.) Micro power
also adds  reliability,  uninterrupted  power,  providing an increased  level of
freedom from  blackouts or brownouts.  Added to micro power's  further  economic
benefits of negligible  transmission  losses,  micro power can take advantage of
its surplus  generated  heat,  which is usually wasted in the remote location of
centralized  power  stations.  This heat  energy  can be  applied to a number of
useful purposes, such as heating buildings.

         Micro combined heat and power  ("MICROCHP") is a new component of micro
power.  MicroCHP is the  simultaneous  production of  electricity,  domestic hot
water and heat in houses. Interest in MicroCHP has been driven by the opening of
the energy sector for  competition,  concern for the  environment,  depletion of
resources, advancing technology and the overwhelming of current electrical grids
by unanticipated demand growth as a result of the Internet explosion in both the
America and Europe.


BUSINESS STRATEGY

         We intend to  capitalize  on these market  opportunities  by developing
distributed  power  generation and renewable  energy  technologies.  The sale of
generated  distributed  power and  distributed  power  equipment  is expected to
follow two separate lines of business,  which are expected to produce additional
sources of revenue for Ocean Power.


EXCESS POWER FROM H2OKW SYSTEMS(TM) DESALINATION SYSTEM

         In the first,  Ocean Power expects to utilize the excess power produced
by its various local desalination joint venture partners using H2OkW Systems(TM)
with power  subsystems  to generate  potable  water from  seawater.  Ocean Power
expects to earn income from the sale of  equipment,  license fees for the use of
its intellectual  property, and a percentage of the profit from the ongoing sale
of water and power.


STAND ALONE DISTRIBUTED POWER SOURCES

         The second  line of business  Ocean  Power  expects to engage in is the
micro power market  (i.e.,  locally  produced  distributed  power).  Ocean Power
expects to exploit certain  proprietary power technologies to create stand-alone
micro power systems for power applications beyond seawater desalination.  At the
present time, these proprietary  technologies include,  Stirling engines,  solar
concentrators,  and fuel cells.  All of these are  potential  sources of locally
produced,  distributed power. The initial  commercial  products that Ocean Power
plans  to sell  into  these  markets  will be  based  on  Stirling  engines  and
concentrated solar photovoltaic systems.



                                       18
<PAGE>

         Ocean Power expects to generate revenues from power sold by its various
expected  electric  utility joint venture  partners using Ocean Power systems to
generate electricity locally.  Ocean Power expects to earn profits from the sale
of equipment, royalties from licensing its intellectual property and receiving a
portion of the profits from the ongoing sale of power from its systems.  Sale of
power by Ocean  Power's  joint  venture  partners  is expected to be pursuant to
long-term power supply  contracts with the local customers  (i.e.,  residential,
commercial or industrial power users).


OVERVIEW OF BUSINESS OPPORTUNITY

         The August 5th 2000 issue of The Economist places America's total power
market  alone  at $220  billion.  Distributed  micro  power  offers  substantial
advantages  over  traditional  centralized  power,  which  is  transmitted  long
distances  over  high-voltage   transmission  lines,  in  terms  of  efficiency,
reliability, environmental friendliness and, increasingly, price to all of these
market segments.  The demand for distributed  generation  capacity,  underscored
recently  by the  developments  in  California,  is  expected to generate a $200
billion annual market for distributed  generation  equipment,  according to Bear
Stearns,  Distributed Energy Services April 2000 report.  Ocean Power intends to
target  the  market  for  small,   inexpensive  generating   technologies.   The
aforementioned  issue of The  Economist  predicts  that the size of this  market
niche could be $60 billion annually within a decade.

         The  construction  and  operation of a central  power system is capital
intensive, requiring a significant infrastructure that cannot be easily expanded
or moved to respond  to  increases  in demand  for power.  These are some of the
factors that have become the bottleneck in the  California  power  pipeline.  In
India,  China and much of the rest of the world,  the situation is even worse in
that the lack of this infrastructure holds back economic growth.

         Ocean  Power  expects  the  distributed  power  businesses  to follow a
similar development plan to its distributed water business.  Ocean Power intends
to participate in joint ventures,  to try to assure optimum  ongoing  operations
and to participate in system expansions, upgrades and profits.

         We expect to enter the  distributed  micro power  market at two levels,
residential,  and  commercial/industrial   distributed  power  sources.  In  the
discussion  below, we have indicated when,  based upon current  information,  we
expect to enter each of our expected markets. Our ability to enter these markets
remain subject to numerous risks and uncertainties  (some of which are discussed
below) and there can be no assurance  that we will be  successful in our efforts
or that we will be successful  in the time frame that we currently  believe that
we can be.


RESIDENTIAL MARKET STRATEGY


MICROCHP

         Our MicroCHP strategy for residential market introduction and the later
volume  build-up  is  straightforward.  Initially,  sales  focus will be in four
target market countries:  United Kingdom, Germany, Holland and the United States
of America.

         Our   planned   objective   is  to  provide,   through  our   qualified
subcontractors,  the central  component  (the Stirling  energy  converter) to be
applied in micro combined heat power  systems-for use initially in older,  large
houses in the target markets that have natural gas boilers.

         There are four main reasons for the above focus:

         o     Older houses (~ pre 1975) constitute the bulk of the market, some
               80% of the housing stock.

         o     Replacement boilers represent 80% of the boiler market.

         o     Large houses are more  profitable  for  MicroCHP  (because of the
               larger energy demand)than smaller or medium size houses. MicroCHP
               systems will be introduced into the market via this segment.

         o     Natural gas is considered  to be the fossil  energy  carrier that
               for  environmental  reasons  will  dominate  in  the  foreseeable
               future.

         The houses that are  initially  most  suitable  for  MicroCHP are those
heated by gas. A MicroCHP system will be applied in such houses as a replacement
for the gas boiler when the boiler has reached the end of its service  life.  In
Germany,  the UK and the  Netherlands,  the three  European  countries  with the


                                       19
<PAGE>

largest  installed base of gas boilers and water heaters,  the initial potential
market  for  Sigma  based   MicroCHP   systems  is  estimated  by  Sigma  to  be
approximately 840,000 units per year.

         Sigma  (SEE  Recent  Acquisitions   Section)  is  the  developer  of  a
3kW-electrical/9kW-thermal  Stirling  Engine power plant for micro combined heat
and  power  (or  "MICROCHP")   applications  in  residences.   MicroCHP  is  the
simultaneous  production of  electricity,  domestic hot water and heat.  Sigma's
3kW-electrical/9kW-thermal  unit  produces  3  kilowatts  of  electricity  and 9
kilowatts of heat energy,  and is expected to be the first commercial unit to be
sold by our proposed utility joint ventures into the residential power market.

         It is only in the  last  few  decades  that  certain  power  generation
technologies,  such as fuel cells and Stirling Engines,  have finally matured to
the point  where  they can offer  competitive  efficiencies  in  smaller  sizes.
Various demonstration  projects around the world, such as the Sigma program with
Statoil (SEE Strategic  Partnerships  Section),  have shown this to be the case.
This was shown by Ocean Power's recent  analysis of information  provided by its
recent  acquisition  Sigma  Elektroteknisk  AS, a leading  developer of Stirling
Engines.  Market  research by our  subsidiary  conducted in the United  Kingdom,
Germany,  and the Netherlands shows that the potential for profit that an energy
provider,  using a Stirling power plant,  can realize from a single-family  home
customer, paying the same monthly utility bill, increases by a factor of 8 to 20
depending  on the size of the house.  This profit  potential  is offered by more
than a doubling of overall  energy  efficiency,  due to the  utilization  of the
waste heat from the Stirling engine as well as electricity.

         We are currently capable of producing limited quantities of systems for
residential market using a 3kW-electrical/9kW-thermal  Stirling Engine fueled by
natural  gas.  The initial  systems come  pre-packaged  for field and  endurance
testing by interested utilities.

         The goal of Ocean Power's development plan is to accomplish the sale of
distributed  power and  distributed  power  equipment  through  regional  energy
companies,  in power  challenged  markets.  The energy  companies  will install,
maintain   and  operate  the  units  for  their   residential   customer   base.
Manufacturing  subcontractors and system integrators will be used to provide the
finished systems and the Stirling engines necessary to drive them.

         Our   planned   objective   is  to  provide,   through  our   qualified
subcontractors,  the central  component  (the Stirling  energy  converter) to be
applied in micro combined heat power  systems-for use initially in older,  large
houses in the  target  markets  that have  natural  gas  boilers.  Local  energy
companies are expected to bring MicroCHP systems to their  residential  customer
base as boiler  replacements  that also supply power. We expect the revenue from
selling units to energy service  companies  should be followed by a share of the
increased revenue  potential offered by the use of these MicroCHP systems,  sold
through  regional energy companies that are willing to work with us on long-term
participation  basis.  The first  unit has  already  been  shipped to Statoil of
Norway.  Negotiations  are underway with potential  utility partners in Germany,
Holland, the UK and the US.


COMMERCIAL/INDUSTRIAL STRATEGY


STIRLING

         We expect our Sigma subsidiary to be the foundation for the development
of a full range of Stirling engine micro power products to meet the needs of the
commercial and industrial markets.

         Our objective is to provide, through our qualified subcontractors,  the
central component (the Stirling energy converter) to be applied in combined heat
power systems for use in commercial and industrial facilities.

         Stirling's engines can offer businesses substantial economic advantages
over traditional power stations in terms of:

         1.       Efficiency, and reliability;

         2.       Environmental friendliness;

         3.       Useful surplus generated heat; and

         4.       Lower price per kilowatt of electric power.



                                       20
<PAGE>

         In terms of  efficiency  and  reliability,  Ocean Power  believes  that
Stirling  engines will be able to produce both electricity and heat with greater
efficiency than  traditional  power stations because their smaller size and more
localized   distribution   should  enable  them  to  not  experience  losses  in
transmission and distribution such as are typically experienced by large central
generating plants currently in use.  Furthermore,  any performance  failure of a
Stirling  engine plant should  affect fewer  customers  than failures at central
generating  plants  due  to  the  Stirling's  smaller,   more  local  nature  of
distribution.  Therefore  the  use of  Stirling  engines  as a  component  of an
integrated  power grid would increase the reliability of the system at any given
time to a larger number of  customers.  The  environmental  benefits of Stirling
engines result from a lower ambient pressure combustion which generates fewer of
the components that contribute to air pollution than  traditional  large central
generating plants.

         Because  Stirling  engines  are small and can be located  closer to the
customer than large central plants, the heat produced by Stirling engine systems
should  be  capable  of being  sold to  customers  in  addition  to  electricity
produced.  Our Stirling engines are being designed to fit into the same space as
the existing  boilers in structures that are currently  heated by hot water. The
Stirling  engine will thus  provide  energy to heat water for both  domestic and
room heating purposes.

         This phase of development, which started in late 2000, contemplates the
use of a modular power system,  based on Stirling  engines capable of generating
approximately  25 kW of  electricity.  Our intent is to  establish  the baseline
technology  through our  development of the 3 kW Stirling  engine.  We will then
determine the optimal output of the commercial Stirling engine (approximately 25
kW); and decide then whether to engineer the  commercial  units through Sigma or
to outsource the  engineering  to a qualified  third party.  By use of a modular
power  system,  multiple  units could be  integrated in racks housed in standard
shipping  containers to create  modules with  capacities up to 900 kW. Test data
and studies from universities (Lund, Sweden), government agencies (Department of
Energy),  industry  (General Motors) and our licensees (STM) have indicated that
external   combustion   engines   have   shown   efficiency   and  air   quality
characteristics substantially better than conventional technologies and hold the
promise of substantially lower capital and operating costs.

         This  family  of  products  should  deliver  high  electrical  power at
efficiencies of 25-40%.  This efficiency  number refers to the amount of thermal
energy in the primary fuel  (natural  gas,  propane,  etc.) that is converted to
electrical energy available to the user. For a comparison, central station power
plants  (coal,  oil,  natural  gas and  nuclear)  range  from 30 to 45% prior to
transmission  losses (which  average  7-10%).  These units are expected to serve
commercial and industrial customers worldwide.

         Ocean Power  believes that all of the above  referenced  factors should
contribute to a lower overall cost of both electricity and heat.

         Development is underway on the next  generation  designs  featuring the
application of aerospace technology for the hot end of the units. Using the same
type of technology used in the manufacturing of thrusters for the Space Shuttle,
our engineering  team will integrate all of the fluid functions (fuel injection,
air mixing,  heat transfer,  cooling etc.) into one  component.  We believe that
this will result in even smaller and more efficient  Stirling  engines  (through
the  reduction  in the  amount  of dead  volume  in the  working  gas  circuit).
Provisional  patents  were  filed on  November  7th 2000,  for this  proprietary
enhancement of the Stirling engine by us.

         Our micro  power  strategy  for  industrial  and  commercial  market is
expected to be the same as the residential  market strategy and will utilize the
same  three  support  levels:  energy  service  companies,   original  equipment
manufacturers,  and engine  manufacturers  as described above in the residential
market section.

         In summary our planned  objective is to provide,  through our qualified
subcontractors,  the central  component  (the Stirling  energy  converter) to be
applied in combined  heat power  systems for use in  commercial  businesses  and
industrial facilities.  Local energy companies are expected to bring CHP systems
to their  commercial and  industrial  customer bases as power supplies that also
supply heat. The revenue from selling units to energy service  companies  should
be followed by a share of the increased  revenue potential offered by the use of
these CHP systems,  sold through  regional energy  companies that are willing to
work with us on long-term participation basis.


SOLAR CONCENTRATORS: PHOTOVOLTAIC AND STIRLING

         An additional  product line under  development  for the  commercial and
industrial  micro  power  market  produces  electrical  power from solar  heated
Stirling engines and or photovoltaic concentrators.

         We have  signed a  Technology  License  Consulting  Services  and Asset
Purchase Agreement with Science Applications  International Corporation ("SAIC")
to commercialize its solar dish technology with both Photovoltaic  Concentrators


                                       21
<PAGE>

and Stirling  Engines.  Since 1992, SAIC has been the prime contractor to the US
Department of Energy's National Renewable Energy Laboratory  ("NREL") program to
develop cost-effective solar systems.

         We are working  with SAIC to  commercialize  its solar dish  technology
with both photovoltaic arrays and Stirling engines.  Solar concentrators work by
collecting  sunlight from a large area and concentrating it into a small area of
photovoltaic  solar cells, which produce voltage when exposed to radiant energy.
Solar Concentrators are made up of high-temperature  photovoltaic cells that can
absorb  more  solar  energy  than the one sun  that  flat-plate  collectors  are
designed for.  These systems are placed at the focal point of a reflector  array
(called a dish) that can concentrate 700-1500 suns worth of energy on the cells.
These  systems  run  at   substantially   higher   efficiency  than  flat  plate
photovoltaic systems (30% vs. 12%) and therefore take up less space and hold the
promise of lower cost. Because of current funding  constraints,  we expect to be
able to enter the solar  concentrator  market  and take  orders  for  commercial
deliveries in the first half of 2003.


FUEL CELL

         Both Stirling engine and fuel cell  technologies hold similar potential
for improvements in the areas of efficiency,  noise,  emissions,  simplicity and
reliability.  Our current  projections  lead us to believe  that,  although  the
Stirling has a lower efficiency limit, it will be lower in cost and more readily
manufactured  for the  next  several  years.  We  believe  that the  ability  to
manufacture  a Stirling  engine in a  conventional  automotive  or other type of
engine  plant  without  massive  capital  expenditure  by us,  makes it an ideal
near-term micro power source.

         Since the  maximum  practical  efficiency  (or the ratio of the  energy
delivered by a machine to the energy  supplied for its  operation) of a Stirling
power  system  is around  fifty  percent  (electrical),  we are  working  on the
development of even higher efficiency power systems using fuel cells.

         Because of the  efficiency  limitations  of  Stirling  engines,  we are
currently  developing  proprietary  alkaline fuel cell  technologies for systems
above one kilowatt.  We are also developing  ambient  pressure,  proton exchange
membrane  ("PEM")  fuel  cells for  systems  under 1000  watts.  These low power
systems  will be  marketed by us through  HyPerTec  and also used as backups for
control and communication  electronics in all of its distributed power and water
systems.  Since the key  requirement of a fuel cell is fuel, we are also working
on an electrochemical fuel processor. Initially, fuels will be methanol, natural
gas and diesel. Later, plant material, vegetation and agricultural waste will be
used.  Based on the  current  development  plan,  we  expect  to offer the first
systems using these technologies as commercial power sources sometime in 2003.

         Our technology in this area falls into three categories,  alkaline fuel
cells (for systems above 1000 watts),  proton exchange  membrane fuel cells (PEM
for systems under 1000 watts) and hydrogen  generation.  So far we have kept our
technology as trade secrets. We are currently working on patents for those parts
that can be better  protected by this method.  Initial lab  demonstration of the
low-temperature  hydrogen  generator  started  in the  second  quarter  of 2001.
Limited  commercial  deliveries  of small PEM systems  should  start in Q3 2002.
Advanced  Alkaline  fuel  cells will  start  laboratory  tests in late 2002 with
projected  field testing  starting in 2002,  and  commercial  deliveries in late
2003.

         We anticipate that our H2OkW  Systems(TM) will use electrical power and
heat  from  its  proprietary  alkaline  fuel  cell  technology  and its  related
electrochemical fuel processor, which is currently in development. Demonstration
of these systems will start in late 2002 with  commercial  availability  planned
for late 2003, and remains a development program at this time.

         In June of 2000, we announced  that we had entered into a Memorandum of
Understanding with Hydrogen Performance  Technologies  ("HYPERTEC"),  a start-up
developer of small Proton Exchange Membrane ("PEM") Fuel Cell Systems, and that,
in connection with the arrangement, Ocean Power intends to invest $10 million in
the  development  of fuel cell  technology  and  manufacturing  support over the
following two years.  Subsequently,  the parties  concluded  that it would be in
their  interest  for Ocean Power to make  HyPerTec a majority  owned  subsidiary
rather than a strategic partner (as initially announced). On September 10, 2000,
we signed a non-binding  letter of intent to acquire a  controlling  interest in
HyPerTec,  pursuant  to which we were to receive a minimum  fifty one percent of
the shares of HyPerTec  common stock in exchange  for a limited  interest in our
advanced  fuel  cell   technologies   relating  to  advanced   ambient  pressure
electrodes,  catalyst formulations,  electrode  manufacturing  processes,  water
management  techniques,  hydrogen  generation  and storage.  This  agreement was
subject to the negotiation and execution of definitive contracts which we expect
to complete in the first half of 2002. Effective January 1, 2001, Blair Aiken, a
founder of  HyPerTec,  joined Ocean Power as Senior  Vice-President  of Business
Development.



                                       22
<PAGE>

         Although we have not yet reached a final agreement with HyPerTec, Ocean
Power has raised an initial $3  million in private  equity  investment  in Ocean
Power  to  build  lab  facilities,   develop  licenses,  initiate  manufacturing
development and develop product  specifications and marketing  relationships for
fuel cells.  Laboratory  facilities  have been  installed  at our facility in El
Dorado  Hills,  and testing of our hydrogen  generator has  commenced.  The next
phase of development is to complete license arrangements with outside technology
sources, and build prototypes of demonstration systems.

         The initial  markets will be for  communications  relays,  professional
video equipment and military power  supplies.  Due to funding  constraints,  the
initial  prototypes  should not start being delivered until the third quarter of
2002.  Limited  commercial  quantities are planned for shipment in the middle of
late 2003.


RECENT ACQUISITIONS

         On  August  10,  2000,   we   completed   the   acquisition   of  Sigma
Elektroteknisk AS, a Norwegian company ("Sigma") located in Holen,  Norway, with
the exchange of 100% of the shares of common stock of Sigma for 1,718,748 shares
of   our   restricted   Common   Stock.    Sigma   is   the   developer   of   a
3kW-electrical/9-kW-thermal  Stirling  Engine  power  plant  for  use in a power
generation system for the home. As discussed in the audited financial statements
of Sigma (Note 6), Sigma is a  development  stage  company  with no  significant
operating  results to date,  and Sigma's  auditors have included a going concern
opinion in their  report on Sigma's  audited  financial  statement  issued as of
December 31, 1999.  Its net operating loss carry forward as of December 31, 1999
was  $6,148,000.  Included in the assets of Sigma  acquired  were three  patents
directed to energy converters and/or motion transmitting mechanisms for use with
Stirling engines,  that Sigma had previously purchased from Silent Clean Power i
Lund AB, a Swedish Company for $1.3 million.


STRATEGIC RELATIONSHIPS


PERSONAL COMBUSTION POWER ("PCP") PROJECT

         Since  October  1997,   Sigma  has  taken  part  with  Statoil   Norway
("STATOIL")  and  the  Norwegian  Government   Development  Fund  ("SND")  in  a
multi-stage   testing   program  to  develop   and   commercialize   a  Stirling
engine-driven  micro Combined Heat and Power unit ("MCHP").  The program started
with a  market  study  begun in 1996.  In  October  1997,  the next  phase,  the
development  of the working  prototypes,  began upon  installation  of the Sigma
Stirling at Mongstad and will  continue  through this year.  On October 6, 2000,
Sigma shipped the first Stirling  engine test container for  installation at the
test site at Mongstad on the West Coast of Norway.  The Stirling test  container
holds a working prototype  3kW-electrical/9-kW thermal engine developed by Sigma
for micro combined heat and power. After installation at the test site, which is
operated by Statoil,  the planned verification test will be started with natural
gas as fuel.  This test program is important  because it is the first  endurance
test of a MCHP unit  under  actual  field  conditions.  Sigma,  Statoil  and the
Norwegian  Governmental  Development  Fund ("SND") are all  contributing to this
test program.

         Sigma was  responsible  for directing the  manufacture  of the Stirling
engine and  contributing  the necessary  technology.  Statoil has provided Sigma
with  research  advances  and it is primarily  responsible  for  conducting  the
testing of the engine by providing  both personnel and natural gas. The advances
made by Statoil  have been  converted  to shares of common stock in Ocean Power.
SND's  contributions for the PCP project have been provided in the form of loans
to Sigma for which  Sigma has  issued  notes to SND in the  aggregate  amount of
$734,349 as of December 31, 2000, bearing interest at a variable rate, which was
10.9% as of  December  31,  2001.  Amounts  owed to SND under such notes are not
convertible  into shares of Sigma capital stock,  but SND is entitled to certain
royalties  in the event  that  Sigma  realizes  between  $30 and 40  million  in
accumulated sales from the  commercialization  of the technology  developed from
the PCP project.  Negotiations  are underway with Statoil to extend this program
into the multi-phase  commercialization of this technology over the next several
years.


KOCKUMS, SWEDEN

         Kockums  has  some 30  years  experience  in  developing  and  building
Stirling engines. On November 14, 2000, Kockums signed a cooperative development
agreement  with Sigma and is supporting  the  development  of a  mass-producible
version  of the  Sigma  engine.  Their  support  is in the  form of  engineering
consulting.  This includes  computer  modeling to predict the  performance  of a
specific  design  for the  Stirling  engine  under  a wide  range  of  operating
conditions  prior to actual  construction  of the unit. At the same time,  Sigma
will be able to provide its services and  proprietary  technologies  to Kockums.
This will allow Sigma to better focus on the  commercialization of the 3 kW unit
by  obtaining  consulting  services  from  Kockums  in the  area of  design  and
engineering. We believe that as Sigma concentrates its efforts in supporting the
distributed  Heat &  Power  market  and  Kockums  builds  engines  for  military
applications, Sigma will benefit from sharing of know-how with Kockums.




                                       23
<PAGE>

RICARDO US

         A  global   power-train   engineering  and  consulting  firm  has  been
contracted to assist in the implementation of a high-rate manufacturing program.
Sigma has a preliminary design-engineering contract with Ricardo Inc. to support
the design and development of their current Stirling cycle engine.  Support from
Ricardo was sought to redesign  the lower end portion of the  Stirling  for cost
effective  high volume  production,  long-term  durability  and to meet specific
functional requirements of MCHP applications.

         The  overall  Ricardo  program  has  four  separate   contract  phases:
preliminary  design,   design,   prototype   development  and  production.   The
preliminary  design phase has been  completed.  On February 23, 2001, we entered
into a contract  with Ricardo for the design phase of the program.  Ricardo will
perform  a design  evaluation  for  Sigma's  3kW  Stirling  engine  for  meeting
durability and reliability  targets, and to develop the design for manufacturing
volumes for Sigma's 3kW Stirling engine. Due to our funding constraints, Ricardo
has suspended completion of its design evaluation work until funds are available
to pay for the work and has obtained a judgment  against Sigma for the sums owed
for  services  rendered  to date.  The  engine  is  intended  to  power  Sigma's
household-size micro combined heat and power units.


BAXI GROUP LTD.

         On March 6, 2001, Ocean Power's wholly owned subsidiary, SIGMA, entered
into a  collaboration  agreement with Baxi Group Ltd. (a manufacturer of heating
systems in Europe).  The  objective  of the  agreement  is for Sigma and Baxi to
collaborate  in  developing  and  marketing a prototype  combined heat and power
product  ("MICRO-CHP")  package  for  residential  use  in  the  United  Kingdom
consisting  of the Sigma Energy  Converter  (Sigma  Stirling  engine) in a metal
cabinet which also contains controls,  tanks and electrical  connections to both
heating and power  systems.  The prototype  Micro-CHP  package is intended to be
installed  in older and larger  houses as  replacements  for  boilers  that have
reached the end of their service life.

         It is contemplated that Sigma will continue its development of Stirling
engines  and Baxi will work on the  ancillary  parts to complete  the  Micro-CHP
package.  Baxi  will act as  systems  integrator.  The  agreement  calls for the
parties  to work  together  in  assigning  sufficient  priority  and  allocating
necessary  resources  (which have already been budgeted by Sigma) to the project
to develop the package in a mutually  agreeable  time frame,  which is currently
anticipated  to  be  by  mid-2002.  Information  and  data  resulting  from  the
collaboration  will be  equally  shared by both  parties,  however,  each  party
retains its own intellectual  property rights for its inventions.  The micro-CHP
package is  intended to be a possible  replacement  for Baxi's  boiler  products
which are owned and sold  throughout the United  Kingdom.  Baxi's  experience in
this  residential  market  is of  great  value  in  helping  address  issues  of
specification, performance, code compliance, operation and maintenance issues as
well as installation.

         Under the  agreement,  the parties  are free to work in  parallel  with
third  parties  on  other  micro-CHP  projects.  Pursuant  to the  terms  of the
collaboration agreement,  each party pays its own expenses. The agreement has no
fixed  termination  date,  but can be  terminated at any time by either party on
three months'  notice.  Subject to  satisfactory  results during the term of the
agreement, the parties would transform the agreement into a long-term commercial
agreement by July 2002. The terms of a long-term  commercial  agreement have not
been negotiated.  No assurance can be given that the long-term agreement will be
entered into.


EEM

         EEM of San Diego and Moscow develops commercial products, for real-time
monitoring  of air  and  water  quality,  based  on the  proprietary  technology
developed for air and water monitoring by the Soviet/Russian  space program. The
initial  microprocessor  based units will monitor  air-quality in the exhaust of
Ocean Power's Stirling systems. Subsequent systems will be designed to eliminate
the need for sending water samples to laboratories.

         The  attraction of these  monitoring  systems is the ability to monitor
both air quality and water  quality in  real-time  without  resorting  to taking
samples  that have to be sent to outside  labs for  analysis.  This has  several
advantages  such as: a) better  feedback for  autonomous  operation;  b) reduced
operating and maintenance costs; c) unique water safety capabilities.

         On June 8,  2000,  EEM  agreed to  negotiate  with us for an  exclusive
worldwide license for the use of their technologies in seawater desalination. On
November 15, 2000,  we entered into a Memorandum  of  Understanding  with EEM to
exploit a wider range of  applications  for EEM's  technologies  in the areas of
water and gas monitoring.  The first two test units were received by Ocean Power
on November 14, 2000, and our preliminary testing indicates that they perform as
designed with respect to ozone and hydrogen concentration detection.  Additional
sensors  for a  wide  range  of  other  gases  will  be  delivered  for  testing



                                       24
<PAGE>

verification. Also the water sensors for metals and salts are in development and
will be  delivered  to  Ocean  Power  for  testing  when  development  by EEM is
completed.

         Once these  sensors  have been  tested and  validated,  in a  certified
independent  laboratory,  a system designed to optimize the performance of Ocean
Power's  Stirling system will be built.  When  available,  it will be integrated
into the field test units for  endurance  testing.  Ocean  Power  believes  that
real-time   monitoring  will  offer   substantial   savings  through   increased
reliability and the ability to offer emission credits for sale in real-time.


EPRISOLUTIONS

         On February 20,  2001,  we entered into a  non-binding  agreement  with
EPRIsolutions  ("EPRI"),  a subsidiary of the Electric Power Institute,  whereby
EPRI will support our efforts in the market introduction in the United States of
the Sigma Stirling engine.  The agreement is conditioned upon the development on
a best efforts basis and execution of definitive agreements, which would require
EPRI  to  provide  the  following  services:  (1) to  conduct  initial  baseline
performance  testing of the  Stirling  engine and tests to assess its ability to
meet U.S.  electrical  interconnection  and power quality  requirements;  (2) to
obtain commitments from electric and gas utilities in the U.S. and Canada for 20
test units for U.S. field testing;  and (3) to facilitate the organization of an
electric and gas utilities users group who would have the option to be a U.S. or
Canadian  distributor  of our  Stirling  engine.  We expect that the  definitive
agreements would also require us to form a new subsidiary  corporation (in which
SAIC would  also hold a  minority  interest)  through  which the SIGMA  Stirling
engines would be sold in the United States and Canada.  We anticipate  that EPRI
and the  participating  electric  and gas  utilities  would  receive  an  equity
interest  in  the  new   corporation,   in  amounts  to  be  agreed  upon.  Each
participating  electric and gas company  would also be granted an option to be a
U.S. or Canadian distributor of the SIGMA Stirling engine.

         On  November 5, 2001 the  Company's  subsidiary,  Powerco US, Inc.  and
EPRIsolutions entered into an equipment lease and fixed price services agreement
for a term of 14 months,  commencing  November 21,  2001.  Powerco will lease to
EPRIsolutions  for the  term  of the  agreement  and  deliver  to its  EPRI-Peac
facility  in  Knoxville,  Tennessee  a Sigma  beta  Stirling  engine  generator.
EPRIsolutions  will conduct a  technology  assessment  and baseline  testing and
validation  of the  engine  as  part  of a  collaboration  between  Powerco  and
EPRIsolutions  to test and evaluate  market entry of Stirling  engines and pilot
marketing  introduction  of beta systems to North America energy  companies.  In
exchange for the lease of the  equipment  support,  services will be provided by
Powerco and shipping costs for the engine,  EPRIsolutions  will pay to Powerco a
firm fixed price of $79,000.  At the end of the test period,  EPRIsolutions will
prepare  and deliver to Powerco a final  report on the  results of its  baseline
tests of the engine unit. Additionally,  EPRIsolutions will receive an option to
purchase  stock in Powerco for a value  equal to $75,000 at the market  value of
the  stock at the time of  exercise,  exercisable  after the  conclusion  of the
testing period provided in the agreement.


BATTELLE MEMORIAL INSTITUTE, PACIFIC NORTHWEST DIVISION

         On October 12, 2000, we entered into a Memorandum of Understanding with
Battelle Memorial Institute,  Pacific Northwest Division ("BATTELLE"),  pursuant
to which Ocean Power would test and evaluate the  commercial  viability of ozone
generator technology that was developed by Battelle and the Kharkov Institute of
Physics and Technology ("KIPT") of the Ukraine with funds provided by the United
States Department of Energy  Initiatives for Proliferation  Prevention  Program,
and provide  Battelle with written  evaluations and data.  Battelle has proposed
for our  continued  participation  in the project to develop a proposal  for the
Department  of  Energy's  approval  of further  study of this  technology  for a
specific field of use. We intend to continue our participation in the project.


ORGANIC POWER

         On March 14,  2001,  we entered  into a  non-binding  letter of intent,
terminable at any time by either party, with Organic Power, a Norwegian company,
to  negotiate  for an  exclusive  license to use  Organic  Power's  gasification
technology in the areas of distributed power and seawater  desalination in those
geographical  regions currently covered by our joint venture agreements or heads
of agreement -- Greece and Greek Cyprus,  Mexico,  and  twenty-eight  countries,
territories and islands in the Caribbean  region.  The non-binding  Agreement to
negotiate  this  license was to  automatically  terminate  on June 30, 2001 if a
definitive  license agreement was not executed by the parties.  The parties have
extended  the deadline for  reaching a  definitive  license  agreement  and have
expanded the  negotiations  to include a potential  exclusive  license to market
Organic Power's SK 1000 gasification units for thermal conversion of solid waste
to energy in other  markets  as well.  The  parties  expect  to  complete  their
negotiations within the second quarter of 2002.




                                       25
<PAGE>

SCIENCE APPLICATIONS INTERNATIONAL CORPORATION

         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 of 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 the SAIC solar 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. Ocean Power has formed a new business entity,  Powerco, US, Inc.
a Delaware  Corporation  and is currently  negotiating  with SAIC the terms of a
shareholder  agreement.  SAIC will own 5% of the  corporation  and Arizona Power
will own 0.5%.

         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. The
Company is  required to deliver to SAIC a report of its  activities  relating to
the preceding calendar quarter within 30 days after the end of each 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 is to consult and develop a program to create
a viable  near-term solar dish  concentrator  power system for electrical  power
production. This program consists of four tasks: Task 1 relates to advanced dish
development,  Task 2 consists of  marketing  and  business  development,  Task 3
consists of  receiver  development  and Task 4 consists  of product  testing and
specification.  The estimated  costs of these four tasks combined is $7,700,000.
The Company is required to 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 to  thereafter
replenish the level of working capital by making payments to keep the balance of
working  capital at  $200,000.  The Company is required to maintain the $200,000
working capital balance until SAIC has been paid  $6,800,000.  Thereafter,  SAIC
has the right to draw  down on the  working  capital  until  the  $7,700,000  is
expended.  At December  31,  2001,  the  Company  accrued  $101,699  relating to
expenses  incurred by SAIC. Due to the lack of available  funds, the Company has
not made the required $200,000 working capital deposit.


ELEKTRYON, INC.

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

         On January 29, 2002,  Ocean Power signed an Asset  Purchase  Term Sheet
with Elektryon,  to acquire certain of its assets  including rights to the 100kW
Powr/Mastr  product line. The Powr/Mstr product is a packaged generator designed
to  operate on natural  gas as a backup or peak power  supplier.  The Term Sheet
confirms  that Ocean Power has an  exclusive  license to the  Powr/Mstr  product
outside the US and a non-exclusive license within the US, but waives the initial
$150,000 license fee. This license will cover the period necessary to complete a
definitive  Asset  Purchase  Agreement,  obtain a  fairness  opinion  from Ocean
Power's  investment  banker and obtain  satisfaction of all other  conditions of
sale.

         The price for the  purchase  will be paid in common  stock only against
three  milestones;  (1)  $7,000,000  in Ocean Power  common stock (at the 20-day
average  price at the time of closing or $2.00 per share,  whichever  is higher)
upon final transfer of all assets to Ocean Power; (2) $8,000,000 in common stock
(at the  20-day  average  price  at the time of  closing  or  $4.00  per  share,


                                       26
<PAGE>

whichever is higher) when the  Powr/Mastr  achieves  10,000 hours of  continuous
failure-free  operation or when the Company  achieves  $6,250,000 worth of sales
over a three month period with a minimum  gross margin of 30%,  whichever  comes
first;  and (3)  $10,000,000 of common stock (at the 20-day average price at the
time of closing  or $6.00 per  share,  whichever  is  higher)  when the  Company
achieves the final  milestone.  The purchase is subject to the  satisfaction  of
other conditions set forth in the term sheet, including approval by the Board of
Directors of the  respective  companies,  a fairness  opinion from Ocean Power's
investment  banker and court  approval  of the  purchase as part of a Chapter 11
plan of reorganization by Elektryon.  Ocean Power filed a Current Report on Form
8-K on February 6, 2002 with the  Securities and Exchange  Commission  reporting
this event.


COMPETITION

         In the general sense,  competition to Ocean Power's  distributed  power
generation  systems  comes  from  existing  distribution  systems  many of which
adequately supply their customers at affordable prices. Therefore, we are aiming
at markets without adequate power  available,  no existing  infrastructure  or a
need for the increased reliability offered by distributed systems.

         In all of our markets, we intend to team with a major power provider to
provide project financing, operation, installation, maintenance and training. It
will be these power  providers  that will have to decide which  technology  best
serves their markets.

         Distributed  generation,  by its nature, offers substantial barriers to
competition from traditional power technologies. Once the distance from the user
is beyond the distance  that heat can be  cost-effectively  moved,  you can only
sell  electricity.  Large power  generators  operate at about 30-40%  electrical
efficiencies. An addition 7-10% loss in transmission worsens the picture and the
operating and maintenance cost make it worse still (more plant to maintain). The
major  competitors  we see will have to be able to field small  systems that can
cost-effectively   sell   combined   heat  and  power  to  achieve  the  overall
efficiencies in the 80-90% range that will match a Stirling system. For example;
current  PC-25,  200 kW fuel cells from ONSI,  operating  on natural  gas,  have
demonstrated  efficiencies above 85% in installations where the end user can use
the heat produced as well as the power.

         Potential  competitors   developing,   commercializing,   producing  or
marketing  systems for  distributed,  combined heat and power are working in the
following four areas:

         1. Gas  Engines  (IC Otto):  Honda,  Japan;  Marathon,  USA;  Wartsila,
Finland; Onan, USA.

         2. Micro-turbines: Capstone, USA; Allied Signal, USA; Siemens, Germany.

         3.  Stirling  Engines:  Schweizerische   Industrie-Gesellschaft  (SIG),
Switzerland;  WhisperTech,  New Zealand;  Solo,  Germany;  STM,  USA;  STC, USA;
Sunpower, USA.

         4. Fuel Cell (Proton  Exchange  Membrane ("PEM") or Solid Oxide ("SO"):
Dais-Analytic,  USA; Plug Power, USA; Vaillant,  USA; Ballard,  Canada; H Power,
USA.

         Within  these four  technology  areas,  development  has  advanced  the
farthest  within  the area of gas  engines.  This is due to the fact  that  such
engines are based on well  established  commercial  technologies  offering  long
practical  experience and low cost, which of course greatly  facilitates further
development.  They also have been used for larger CHP installation for some time
now.  Micro-turbines  have made significant  strides over the last several years
but their most optimistic cost  projections  (~$500/kW  according to Bear Sterns
Distributed  Generation Survey of 2000) don't approach those of Stirling engines
regarding efficiency, cost, noise or emissions. Fuel cells have so far been used
commercially  only  to  a  very  limited  extent,   and  only  in  medium  scale
applications (~ 200 kWe).  Their  application for micro-CHP has been intensively
investigated  only in the last 3 to 4 years,  with  practical  demonstration  of
systems for the first time in 1998/99.

         The main  competitive  feature of the  Stirling  technology  versus the
other three technologies is cost:

         o     Gas engines require  damping,  catalytic  converters and filters,
               additional heat exchangers, and more extensive maintenance, which
               makes the product of the OEMs (i.e.,  the micro-CHP  system) more
               expensive.

         o     Micro  turbines  are  noisier,  less  efficient  and have  higher
               emissions than Stirling engines.



                                       27
<PAGE>

         o     Fuel cells - in analogy to gas engines - require fuel  reformers,
               compressors,  moisturizers,  desulphurisation devices,  inverters
               which again makes the product of the OEMs more  expensive at this
               time.


PATENTS AND OTHER INTELLECTUAL  PROPERTY  PROTECTION FOR OUR PROPRIETARY METHODS
AND TECHNOLOGIES

         We consider the protection of our proprietary  methods and technologies
for desalination  and power generation  services and products to be important to
the success of our business. We rely on a combination of patents,  trade secrets
and licenses to  establish  and protect our  proprietary  rights to our methods,
technologies and products.

         We currently own issued patents in the United States, Sweden,  Germany,
as well as one issued  European  patent,  all of which were  acquired when Ocean
Power  acquired  Sigma  Elektroteknisk  A.S.  These  patents are all directed to
design and  performance  improvements  and  enhancements  to  Stirling  engines,
including but not limited to efficient motion transmission,  heat storage, power
control and energy conversion.

         We also  own four  United  States  patent  applications.  These  patent
applications   are  directed  to:  (i)  water   pretreatment   for  desalination
applications,  (ii) components and processes related to the evaporation stage of
a distillation system and (iii) certain improvements involving platelets, to the
fabrication of manifolds for a Stirling engine. The patents resulting from those
applications  will expire  twenty years after the filing of the  non-provisional
applications.

         Through a license agreement with STM, Inc./General  Stirling, we had an
exclusive  license (to practice the  technology  in question for any  commercial
purposes  related  to the  removal of salt from sea  water)  under  thirty-eight
issued United States patents and over fifty issued non-U.S.  patents,  including
German,  Australian,  European  Community and Patent  Cooperation Treaty ("PCT")
patents.  The  Company  elected  to permit the  license to become  non-exclusive
because  the cost of  maintaining  exclusivity  could  not be  justified  from a
business  judgment  perspective.  These  patents are all  directed to design and
performance  improvements  and  enhancements to Stirling engine  technology,  in
areas including,  but not limited to, power and speed control,  heat management,
solar energy management and fluid distribution.

         Through Ocean Power's  license  agreement  with  Aquamax/Keeran,  Ocean
Power has (i) an  exclusive,  worldwide  license  (within  the field of seawater
desalination) under more than sixty patents and patent  applications,  including
issued  patents in a variety  of  foreign  countries  and  international  patent
applications   and  (ii)  an  exclusive   worldwide   sub-license   (within  the
aforementioned field of use) for a variety of rights licensed to Aquamax/Keeran.
All of the  patents  covered  by  the  license  agreement  are  directed  to the
fabrication and operation of distillation  equipment,  including but not limited
to   structural   improvements,   manufacturing   techniques   and   performance
enhancements   which  increase   efficiency  and  reduce  cost  of  manufacture.
Aquamax/Keeran's  worldwide  license under the Hadwaco  patent  application  and
their sub-license of this technology to us is subject to arbitration  between us
and Aquamax/Keeran.  For a discussion of this dispute,  see the disclosure above
in  Strategic  Relationships  -- Aquamax  International  Holdings  BV and Keeran
Corporation.

         Our  business  plan  depends  to a  significant  degree  upon  securing
proprietary  rights in the methods,  technologies,  component parts and products
that enable us to meet our market  goals.  It is critical to our success that we
secure and protect the  intellectual  property  associated  with those  methods,
products  and  technologies.  We are in the  process of  exploring  several  new
inventions  (both  methods  and  devices)  and  will  continue  to  file  patent
applications in the U.S. and abroad as these inventions take final form. Patents
provide some degree of protection for our intellectual  property.  However,  the
assertion of patent protection involves complex legal and factual determinations
and is therefore uncertain.  In addition, the laws affecting the scope of patent
coverage  and the  periods of  enforceability  of patent  protection  are always
evolving.

         Patent  applications  are granted or  rejected  after  comparison  with
inventions  and practices  already  known in the same field,  referred to as the
prior art. The prior art in fields related to desalination  and power generation
is changing  rapidly.  Thus,  with regard to our currently  pending  provisional
applications,  and  applications  to be filed  in the  future,  there  can be no
assurance  that  patents will issue from any of these  patent  applications.  In
addition,  issued  patents  licensed  to us  could be  successfully  challenged,
invalidated  or  circumvented  so that our  patent  rights  would  not  serve as
effective competitive barriers.

         Ocean Power applied to the U.S. Patent and Trademark Office to register
the mark H2OkW  Systems as a trademark  for use in the sale of goods and service
relating to water  desalination and  purification  systems used to produce water
and  energy.  This  application,  based  on  Ocean  Power's  intent  to use  the
trademark, was granted in 2001.

         Ocean  Power  also  owns  the  mark  "[SIGMA]  Inside"  which  has been
registered as a trademark in Norway for use by Ocean Power's  subsidiary,  Sigma
Elektroteknisk,  A.S. The patents owned by Ocean Power,  or to which Ocean Power
has  licensed  rights,  have  expiration  dates  ranging  from 2002 to 2018.  In


                                       28
<PAGE>

addition  to  patent  and  trademark  protection,  we also  plan to make  use of
copyright  protection,  in the United States and abroad, to protect  proprietary
software, technical manuals and other writings that we may develop in connection
with our business methods and processes.  We will also continue to use trademark
registration  to protect the good will  associated with the Ocean Power name and
with  specific  branded  products  which we expect to produce and sell.  We also
maintain  our trade  secrets and  invention  disclosures  in  accordance  with a
rigorous  set of policies  and  procedures  developed  in  conjunction  with our
outside intellectual property law firm.


GOVERNMENT REGULATION


POWER

         As Ocean  Power  deploys  its power  systems  it will be  subject  to a
variety of regulatory standards. The first tier of regulation is governmental on
the macro  scale.  These  include such  standards  as World Health  Organization
standards,  national electrical codes and combustion safety standards.  The next
tier will be more local regulations  covering such issues as air quality,  noise
and fire  safety.  The  final  layers  of  regulation  are  voluntary  standards
governing  both  safety,  reliability  and  compatibility  in areas such as grid
compatibility,   independent  laboratory  certification  (such  as  Underwriters
Laboratory in the US),  insurability,  manufacturing  process control (ISO 9000)
and environmental  issues related to manufacturing  (ISO 14000).  ISO 14000 is a
series  of  standards  on  environmental  management  tools  and  systems  being
developed by the ISO.

         The  Company's  approach  to these  issues is  straightforward.  In the
downstream  direction,  all joint venture partners or utility  customers will be
required to handle all permitting  issues for their  territories.  This includes
fire, air quality and construction codes.

         All  systems  will  be  designed  and  built  to  applicable   regional
standards,  such as the National  Electrical  Code,  in the United  States.  All
vendors and subcontractors  will be required to manufacture to both ISO 9000 and
ISO 14000 international standards.

         Components  and  subsystems  will be used that have already  passed all
relevant governmental and industry standards. When new components are developed,
where needed, they will be put through the appropriate  certification  processes
by  such  independent  entities  as  Underwriters  Laboratory  or  Gas  Research
Institute.

         In all  instances,  new  certifications  will be done to the  strictest
standard  extent.  For example,  all air quality  certification  will be done in
California  under the supervision of the California Air Resources  Board.  Their
stamp of approval is accepted in most of the rest of the world where Ocean Power
plans to do business.


WATER

         In general,  most  countries  in which we plan to install  desalination
systems have local drinking water quality standards and  environmental  laws and
regulations. At present, three sets of water quality standards set the standards
for  most  of the  countries  which  comprise  the  market  of the  Ocean  Power
Corporation  for  seawater  desalination  systems.  These are the  World  Health
Organization,  the European Union and the United States Environmental Protection
Agency.  In general,  compliance  with the most  stringent of these  regulations
combined will assure compliance with other nations regulations for water quality
and environmental law.

         We have established the following requirements for Water Quality of the
World Health  Organization,  the  European  Community,  the U. S.  Environmental
Protection  Agency and of the Company  itself.  Our standards are more stringent
than the above governmental agencies.

<TABLE>
<CAPTION>
                                      WATER QUALITY
                         (A SUMMARY OF DRINKING WATER STANDARDS)
                 (VALUES IN MILLIGRAMS PER LITER, EXCEPT FOR PH LEVELS)
--------------------------------------------------------------------------------------------
CONSTITUENTS POWER          WHO(2)            EC(3)            EPA(4)            OCEAN
--------------------------------------------------------------------------------------------
<S>                     <C>              <C>               <C>              <C>

TOTAL DISSOLVED
  Solids (TDS)          Less than or     Less than or      Less than or     Less than or
                        equal to 100     equal to 200      equal to 500     equal to 50
  pH (Units)            --               --                6.5-8.5          5.5-8.5


                                           29
<PAGE>

                                      WATER QUALITY
                         (A SUMMARY OF DRINKING WATER STANDARDS)
                 (VALUES IN MILLIGRAMS PER LITER, EXCEPT FOR PH LEVELS)
--------------------------------------------------------------------------------------------
CONSTITUENTS POWER          WHO(2)            EC(3)            EPA(4)            OCEAN
--------------------------------------------------------------------------------------------
  Sodium                Less than 200    Less than 20      No standard      Less than 20
  Chloride              Less than 250    Less than 25      Less than 250    Less than 25
  Brome                 --               --                --               Less than 25
  Heavy Metals          --               Less than 30      Less than 1      Less than or
                                                                            equal to EPA
                                                                            (0.5-1.0)

TURBIDITY
  Natural Turbidity
    Unit's Odor         --               --                --               3
  Threshold Taste       --               --                --               01 or 02(1)
  Caliform              No standard      No standard       Less than 1      0
                                                           colony/100ml
  Giardin Lambilla      No standard      No standard       0                0
  Le Gionella           --               0                 0                0

-------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)      International  Association  on Water  Pollution  Research  and  Control
         Flavor Wheel for Drinking Water,  WATER QUALITY BULLETIN,  Vol. 13, No.
         2-3, 1988.


(2)      WHO is the  World  Health  Organization;  standards  are  derived  from
         "GUIDELINES FOR DRINKING WATER," Second Edition, Volume 1, World Health
         Organization, Geneva, 1993.


(3)      EC is the European  Community;  standards derived from "WATER FRAMEWORK
         DIRECTIVES,"  23 October 2000, as being  implemented  by several Member
         Nations, and the EU Council Directives 80/778/EEC and 98/83/EC.


(4)      EPA is the United States  Environmental  Protection  Agency,  "NATIONAL
         PRIMARY DRINKING WATER REGULATIONS," August 5, 1999.



         Ocean Power  recognizes that compliance with these laws and regulations
is  mandatory  and  penalties  usually  exist in the  event  of  non-compliance.
Further,  it is  anticipated  by Ocean  Power  that  changes  to these  laws and
regulations may require improvements to desalination systems,  which may require
additional  capital and increase  operating costs in order to remain  compliant.
Such changes,  together with the level of enforcement,  could  adversely  impact
financial performance of Ocean Power during the period of change.

         INTERNATIONAL  STANDARDS:  World wide, certain international  standards
are being employed for both water and environmental  regulation.  Among the most
pervasive are ISO 14000  standards for  environmental  performance and the World
Health Organization guidelines for drinking water quality, as published in 1993.

         EUROPEAN STANDARDS:  Until the recent  consolidation of standards under
the European  Union,  each country had its own extensive  water quality laws and
regulations.  With the  consolidation,  EU 2000 has become the emission standard
and developing framework directive that is to be accepted by all EU members.

         UNITED STATES:  The dominant  regulations  within the United States are
the EPA,  Office  of  Water,  National  Primary  and  Secondary  Drinking  Water
Regulations.  Individual  states,  such as  California,  have  built  upon these
standards  and added  further  specific  standards,  for water.  California  has
numerous other laws, which will regulate the technical operation,  location, and
performance of Ocean Power's desalination systems. Among such standards are, the
California  Coastal  Commission  regulations and the State Water Resources Board
for Water Quality Control of Ocean Waters.  Other US  environmental  laws, which
might impact Ocean Power's water operations, are the Clean Air Act, the Resource
Conservation  and Recovery  Act, the Emergency  Planning and Community  Right to
Know  Act,  and  the  Comprehensive  Environmental  Response,  Compensation  and
Liability Act. Caribbean Area: Through various treaties and agreements,  such as
the Caribbean Basin Initiative, the Caribbean Basin has adopted US EPA standards
for water and environmental protection.

         GREECE AND CYPRUS:  Because of its  membership  in the European  Union,
this region is adopting the European Community Framework Directive.



                                       30
<PAGE>

         MEXICO:  As a result  of the  NAFTA  treaty  and  ongoing  negotiations
between  the  US and  Mexico  regarding  environmental  standards,  Ocean  Power
believes that  compliance  with US EPA standards  and  regulations  will satisfy
current and developing standards in Mexico.


EMPLOYEES

         As of the date  hereof,  Ocean Power  employs 40  full-time  employees,
including  the  President,  the  Vice-President,   the  Secretary/Treasurer,   2
executive  assistants  to the  President  and  Vice-President,  2 Chemists,  the
Manufacturing  Manager,  the Design  Engineer and an  administrative  assistant.
Ocean Power hires  independent  contractors  on an as-needed  basis only.  Ocean
Power has no collective  bargaining  agreements with its employees.  Ocean Power
believes that our employee relationships are satisfactory.  In the long-term, we
will  add  staff  through  acquisitions  and  will  attempt  to hire  additional
employees as needed based on our growth rate.


CERTAIN BUSINESS RISK FACTORS

         We are  subject to  various  risks  which may have a  material  adverse
effect on our business,  financial condition and results of operations,  and may
result in a decline in our stock price. Certain risks are discussed below:


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

         We have  historically  lost money.  In the year ended December 31, 2001
and year ended  December 31, 2000,  we sustained  net losses from  operations of
$17.5 million and $9.1 million, respectively. Future losses are likely to occur.
Accordingly,  we may experience  significant liquidity and cash flow problems if
we are not able to raise additional  capital as needed and on acceptable  terms.
No assurances can be given that we will be successful in reaching or maintaining
profitable operations.


WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS

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


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

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


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

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




                                       31
<PAGE>

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

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

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

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

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

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

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


WE COULD FAIL TO RETAIN OR ATTRACT KEY PERSONNEL

         Our future  success  depends,  in  significant  part,  on the continued
service of Joseph P.  Maceda,  our  President,  Robert L.  Campbell,  one of our
Vice-Presidents,  J. Michael Hopper, our  Secretary/Treasurer  and certain other
key executive  officers,  managers and sales and technical personnel who possess
extensive expertise in various aspects of the desalination industry,  fuel cells
and the power generation industry,  including Philip Johnson, our Vice-President
of  International  Operations,  and Svein Hestevik,  Chief Executive  Officer of
Sigma  Elektroteknisk.  We  cannot  assure  you that we would be able to find an
appropriate  replacement for any of our key personnel.  Any loss or interruption
of our key personnel's  services could  adversely  affect our ability to develop
our  business  plan.  It could also result in our failure to create and maintain
relationships with strategic partners that are critical to our success.  We have
entered into employment agreements with Messrs. Maceda,  Campbell and Hopper and
certain other officers and managers.  We do not presently  maintain key-man life
insurance policies on any of these officers.

         In  addition,  our  business  plan  relies  heavily on  attracting  and
retaining industry  specialists with extensive technical and industry experience
and existing  relationships with many industry  participants.  Our business plan
also relies heavily on attracting and retaining qualified technical employees so
we can fully  develop and enhance  our  technology.  The markets for many of our
experienced  employees are extremely  competitive.  We cannot assure you that we
will be  successful  in our efforts to recruit and retain the  personnel we will
need, and our failure to do so could adversely affect our business.


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

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

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


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

         We regard  certain  aspects of our  products,  processes,  services and
technology  as  proprietary.  We have taken steps to protect them with  patents,
copyrights,  trademarks,  restrictions on disclosure and other methods.  Despite
these precautions,  we cannot be certain that third parties will not infringe or


                                       32
<PAGE>

misappropriate   our   proprietary   rights  or  that  third  parties  will  not
independently   develop  similar   products,   services  and   technology.   Any
infringement,   misappropriation  or  independent  development  could  harm  our
business and future financial results.

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

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

         We may  have to  resort  to  litigation  to  enforce  our  intellectual
property rights, protect our trade secrets,  determine the validity and scope of
the  proprietary   rights  of  others,   or  defend  ourselves  from  claims  of
infringement,  invalidity or  unenforceability.  Litigation may be expensive and
divert  resources  even if we win.  This could  adversely  affect our  business,
financial condition and operating results.


RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT

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


NO ASSURANCE OF TECHNOLOGICAL SUCCESS

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

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


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

         Both  the  distribution  of water  industry  and the  power  generation
industry  are  subject  to  governmental  regulation.  However,  because  of the
uncertainties  surrounding  the  applicability  of these rules to our current or
future business activities,  we cannot be sure that we have been and will remain
in compliance  with all applicable laws and  regulations.  Our failure to comply
with all applicable  laws and regulations may result in the revocation or denial
of required  licenses and approvals,  government or private legal action,  civil


                                       33
<PAGE>

and criminal  liability and  indemnification  liability to third parties,  among
other  consequences.  Such consequences  could have a material adverse effect on
us.

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


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

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

         o     our unproven and evolving business model;

         o     the potential development of comparable services by competitors;

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

         o     our ability to manage our growth.


INCREASING  COMPETITION  COULD  ADVERSELY  AFFECT OUR MARKET SHARE AND FINANCIAL
PERFORMANCE

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

         o     develop and expand their offerings more quickly;

         o     adapt more swiftly to new or emerging technologies;

         o     take  advantage  of  acquisitions  and other  opportunities  more
               effectively;

         o     devote more resources to sales and marketing; and

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


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

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


WE MAY BE UNABLE TO ENTER INTO OR MAINTAIN STRATEGIC ALLIANCES

         We have entered into certain strategic  alliances to allow us to expand
our  offerings  in  different  areas of the world and to  otherwise  further our
business objectives,  including strategic alliances with Statoil Norway, and the
Norwegian Government Development Fund, Kockums of Sweden, Ricardo, US, EEM, EPRI
Solutions,  Battelle Memorial  Institute,  Pacific Northwest  Division,  Organic


                                       34
<PAGE>

Power of  Norway,  Malta  Desalination  Services  Corporation,  Fort  Ord  Reuse
Authority,  Science  Applications  International  Corporation,   Arizona  Public
Service and Elektryon.  We intend to enter into other such  relationships in the
future to  continue  to  increase  the size of the  market to which we offer our
goods and services. It is possible that neither our current nor future alliances
will  generate the number of new  customers or the  increased  business  that we
intend.


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

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


WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH

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


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

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


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

         Joe  Maceda,   Robert  Campbell  and  Gloria  Rose  Ott  currently  own
approximately  29%, 18%, and 7% of our common stock. In addition,  our executive
officers and directors,  in the aggregate,  own  approximately 57% of our common
stock. Accordingly,  our directors and executive officers,  whether acting alone
or together,  will have significant  influence in determining the outcome of any
corporate  transaction  or  other  matter  submitted  to  our  stockholders  for
approval, including mergers, acquisitions, consolidations and the sale of all or
substantially all of our assets, and also the power to prevent or cause a change
in control.  The interests of these stockholders,  may differ from the interests
of the other stockholders.


WE MAY BE EXPOSED TO INTERNATIONAL BUSINESS AND CURRENCY FLUCTUATION

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




                                       35
<PAGE>

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

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


A JUDGMENT HAS BEEN AWARDED  AGAINST OUR SUBSIDIARY IN CONNECTION WITH A LAWSUIT
FILED BY RICARDO INC.

         On  October  5,  2001,   Ricardo  Inc.  filed  a  lawsuit  against  our
subsidiary,  Sigma  Elektroteknisk  AS in the  Forliksklage  Court  (Minor Civil
Court) of Norway.  The lawsuit sought a judgment for costs incurred and services
rendered by Ricardo Inc. pursuant to a contract with Sigma related to the design
and procurement of prototype parts for the Sigma MCHP Stirling engine lower end.
A judgment was awarded in December  2001 without  opposition in the total amount
of  $1,458,248.  We have  accrued  $1,458,248,  which is  included  in  accounts
payable.  We  are  currently  negotiating  with  Ricardo  Inc.  the  terms  of a
forbearance  agreement,  which will extend the date when payment will be due. We
cannot predict whether we will be successful with this negotiation.


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

         On November 29, 2001,  we entered into an Equity Line of Credit with an
investor. Pursuant to the Equity Line of Credit, we may, at our discretion, sell
to the investor shares of common stock for a total purchase price of up to $10.0
million.  The sale of shares  pursuant  to the Equity Line of Credit will have a
dilutive impact on our stockholders. As a result, our net income per share could
decrease  in future  periods,  and the market  price of our common  stock  could
decline.  In  addition,  the lower our stock  price is the more shares of common
stock we will  have to issue  under the  Equity  Line of Credit to draw down the
full amount. If our stock price is lower, then our existing  stockholders  would
experience  greater  dilution.  On February  13, 2002,  we filed a  registration
statement  on Form SB-2  registering  13,720,270  shares of our common  stock on
behalf of certain selling shareholders.


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

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


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

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


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

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


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

         Our common stock is traded on the Over-the-Counter  Bulletin Board. Our
common stock is thinly traded  compared to larger more widely known companies in
our industry.  Thinly traded common stock can be more volatile than common stock


                                       36
<PAGE>

trading in an active  public  market.  We cannot  predict the extent to which an
active  public  market for the common stock will  develop or be sustained  after
this offering.


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

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

OUR FORWARD-LOOKING STATEMENTS ARE SPECULATIVE AND MAY PROVE TO BE WRONG

         We have made forward-looking  statements in this Form 10-KSB, including
in the  section  entitled  "Management's  Discussion  and  Analysis  or  Plan of
Operations,"  that are based on our  management's  belief and assumptions and on
information  currently available to our management.  Forward-looking  statements
include  all   information   concerning  our  possible  or  assumed  results  of
operations,  business  strategies,  financing  plans,  competitive  position and
potential  growth  opportunities.  Forward-looking  statements  also include all
statements  that re not  historical  facts and can be  identified  by the use of
forward-looking   terminology,   such  as  the  words   "believes,"   "expects,"
"anticipates,"   "intends,"   "plans,"   "estimates"  or  similar   expressions.
Forward-looking statements involve risks, uncertainties and assumptions.  Actual
results may differ  materially  from those  expressed  in these  forward-looking
statements. You should not put undue reliance on any forward-looking statements.






















                                       37
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY

         The main office of the Company is  currently  located at 5000 Robert J.
Mathews Parkway,  El Dorado Hills,  California  95762. It leases a 28,800 square
feet building which is currently configured as office, engineering and warehouse
space.  In April 2001,  the Company  negotiated  an  extension to the lease that
commenced  on May 1, 2001 and will expire on April 30, 2006.  In  addition,  the
extension  contains an option to purchase the building from May 1, 2003 to April
30, 2006 for $2,350,000. As adequate financing becomes available to the Company,
laboratory,   test  facilities,   and  system   integration   facilities  and  a
manufacturing  facility for  proprietary  components will be built. In addition,
the Company leases a limited amount of office space in New York City.

         It is the Company's  policy to generally avoid  investments in illiquid
assets such as real estate and manufacturing equipment. It will contract for the
manufacture  of  its  product.  Services  for  such  manufacturing  are  readily
available.  With  regards to excess  funds and  retained  earnings,  the Company
generally  will invest such funds in money market funds or treasury  funds.  The
Company typically funds ongoing  operations from cash flow, and generally should
not have significant funds available for long-term investment.


ITEM 3.  LEGAL PROCEEDINGS

         On  October  5,  2001,   Ricardo  Inc.  filed  a  lawsuit  against  our
subsidiary,  Sigma  Elektroteknisk  AS in the  Forliksklage  Court  (Minor Civil
Court) of Norway.  The lawsuit sought a judgment for costs incurred and services
rendered by Ricardo Inc. pursuant to a contract with Sigma related to the design
and procurement of prototype parts for the Sigma MCHP Stirling engine lower end.
A judgment was awarded in December  2001 without  opposition in the total amount
of  $1,458,248.  We have  accrued  $1,458,248,  which is  included  in  accounts
payable.  Ocean  Power is  currently  negotiating  with  Ricardo  the terms of a
forbearance agreement, which will extend the date when payment will be due.

         The  Aquamax/Keeran  dispute  described  above in the  "Description  of
Business  -  Our  Dispute  with  Aquamax/Keeran"   section  is  the  subject  of
negotiation by the Company.  Neither party has filed an  arbitration  proceeding
pursuant  to the terms of the  September,  2000  license  agreement  because the
negotiations for settlement of all claims are ongoing.


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

         None.























                                       38
<PAGE>

                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "PWRE."

         The following table sets forth the range of high and low bid quotations
for each calendar quarter for our common stock for 1999, 2000 and 2001.(1)

                                               BID PRICE PER SHARE
                                         --------------------------------
                                             HIGH                LOW
                                         ----------------  --------------

     January 1999 - March 1999               $1.625              $0.490
     April 1999 - June 1999                 $0.8125              $0.460
     June 1999 - September 1999              $2.875              $0.210
     October 1999 - December 1999          $2.53125             $1.0625

     January 2000 - March 2000              $13.125              $1.375
     April 2000 - June 2000                  $7.375              $3.000
     June 2000 - September 2000              $5.750              $3.580
     October 2000 - December 2000            $4.960              $2.750

     January 2001 - March 2001               $4.250              $2.450
     April 2001 - June 2001                  $4.050              $2.400
     June 2001 - September 2001              $3.850              $1.900
     October 2001 - December 2001            $2.850              $0.770


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

(1)      These  quotations  reflect  high and low bid prices  from the  Over-the
         Counter Bulletin Board and the "Pink Sheets."


         The above prices were obtained from the  Over-the-Counter  Bulletin and
the "Pink Sheets." The quotations represent  inter-company  quotations,  without
retail mark-up, markdown or commission, and may not necessarily represent actual
transactions.

         As of March 26, 2002, we believe there were  approximately  225 holders
of record of our common stock.


DIVIDENDS

         We have not  declared  or paid  dividends  on our common  stock  during
fiscal  1999,  2000 or 2001 and do not plan to declare or pay  dividends  on our
common stock during fiscal 2002.  Our dividend  practices are  determined by our
Board of  Directors  and may be  changed  from  time to time.  We will  base any
issuance of dividends upon our earnings (if any), financial  condition,  capital
requirements,  acquisition strategies, and other factors considered important by
our Board of Directors. Delaware law and our Certificate of Incorporation do not
require our Board of Directors  to declare  dividends  on our common  stock.  We
expect to retain any earnings  generated by our operations  for the  development
and expansion of our business and do not anticipate  paying any dividends to our
stockholders for the foreseeable future.


RECENT SALES OF UNREGISTERED SECURITIES

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



                                       39
<PAGE>

         The  term  Ocean  Power  as used  in this  section  means  Ocean  Power
Corporation, a Delaware corporation,  together with its predecessor corporation,
Ocean Power Corporation, an Idaho corporation, formerly known as PTC Group, Inc.
For financial  reporting  purposes the June 22, 1999 merger  between Ocean Power
and PTC Holdings,  Inc.  (Holdings),  in which Holdings was merged with and into
Ocean Power, is treated as a  recapitalization  of Holdings making disclosure of
Ocean  Power's  stockholder  equity  (i.e.,  that of PTC  Group,  Inc.)  in such
financial statements  inappropriate for pre-merger periods. Because of this, the
statements of stockholders equity set forth in the financial statements of Ocean
Power included in this Form 10-KSB present sales of securities by Holdings which
occurred  prior to June 22, 1999,  and sales of  securities by Ocean Power which
occurred following the merger.  Therefore,  all issuances of securities by Ocean
Power prior to June 22, 1999 will not be consistent with Ocean Power's financial
statements as filed with this Form 10-KSB,  but those issuances of securities by
Ocean  Power  after  June  22,  1999  will be  consistent  with  such  financial
statements.  To assist in reconciling the financial statement  presentation with
this Item, we have also included issuances by Holdings for pre-merger periods in
a separate subsection.

         The  transaction  terms  presented below are adjusted to give effect to
the number of shares and price following the merger between PTC Group,  Inc. and
PTC Holdings, Inc. and the August 22, 1999 10 to 1 reverse stock split.

         No commissions were paid in connection with the transactions  described
below unless specifically noted.

         1) Conversion of Debenture and Exercise of Warrants

         From  January 5 to August 20,  1998,  Ocean Power  issued an  aggregate
amount  of  569,700  shares  of  common  stock  upon  partial  conversion  of  a
convertible debenture issued on February 5, 1996. At the direction of the holder
of the  convertible  debenture,  the shares of common stock were issued to seven
persons.

         2) Issuance of Shares to  Officer/Director to Effect Planned Merger and
Subsequent Cancellation of Such Shares

         On April 9, 1998,  Ocean Power issued 1 million  shares of common stock
to Rocco Guarnaccia,  former Chief Executive Officer and Director of Ocean Power
and Holdings in consideration of his services in connection with the anticipated
merger between Ocean Power and Holdings.  The issuance was made on the condition
that  Ocean  Power  could  cancel  the  shares at any time in the event that the
merger was not completed.  On March 8, 1999,  Ocean Power  cancelled  500,000 of
such  shares  due to lack of  consideration  because  the  merger  had not  been
completed as contemplated;  on October 1, 1999, for the same reason, Ocean Power
cancelled the remaining 500,000 shares of Company common stock previously issued
to  Rocco  Guarnaccia.   Mr.  Guarnaccia  agreed  to  the  cancellation  of  the
aforementioned shares, and has returned the certificates for such.

         3) Issuance to New Directors

         On May 6 and May 18, 1998,  Ocean Power issued 10,000 shares to each of
J De Groote and G. Ott in  consideration  for joining the Board of  Directors of
Ocean Power.

         4) Payment for Services

         On May 21, 1998,  Ocean Power issued  10,000  shares of common stock to
Liberty  Capital,  Ltd.  for  unspecified  services.  Because  of the  change in
management  of Ocean Power  following  the merger of Ocean Power and Holdings in
June 1999,  as  described  above,  Ocean Power has no  knowledge  what  services
Liberty Capital, Ltd. performed on behalf of Ocean Power.

         5) Issuance of Shares for Private Placement

         On September 20, 1997,  Ocean Power  authorized a private  placement of
Ocean  Power's  common  stock at a price of $2.00  per  share  with one  warrant
attached for each issued share.  Such warrants were to be  exercisable  at $2.00
per share and would expire four years after their date of issuance.  On December
28, 1997, Ocean Power issued to Brighton Financial Ltd. and Paradon Limited, two
unaffiliated  third parties,  an aggregate of 489,221 shares of common stock and
489,221  warrants with an exercise  price of $2.00 per share for aggregate  cash
proceeds of $978,445  previously  received by Ocean Power prior to the  issuance
date.



                                       40
<PAGE>

         On June 19, 1998, Ocean Power issued 226,662 shares of common stock and
226,662  warrants to Bensonal Ltd., an unaffiliated  third party,  for aggregate
cash  proceeds of  $453,323  which had been  received by Ocean Power  during the
period from  January 1998 to the issuance  date.  On June 29, 1998,  Ocean Power
issued 10,778 shares of common stock and 10,778  warrants to Paradon Limited for
aggregate cash proceeds of $21,555 previously received by Ocean Power during the
period from January 1998 to the issuance  date. On August 10, 1998,  Ocean Power
issued an  aggregate of 365,500  shares of common stock and 365,500  warrants to
Texco  Investments Ltd. and Bensonal Ltd., two unaffiliated  third parties,  for
aggregate cash proceeds in the amount of $731,000  previously  received by Ocean
Power prior to August 10,  1998.  On November 4, 1998,  by mutual  agreement  of
Ocean Power and each  recipient,  all warrants  received as described above were
cancelled and were deemed unexercisable.

         6) Unauthorized Issuance

         On July 16, 1998, at the direction of a former  officer of Ocean Power,
2,500 shares of common stock were improperly issued to two persons.  Ocean Power
received no consideration  for such shares.  The issuance,  dated July 17, 1998,
was  unauthorized  and  improper,  and the  recipients  of the shares,  who were
unaware of the impropriety of such issuance, agreed to their cancellation. Ocean
Power cancelled such shares on October 1, 1999.

         7) Issuance to Employees of  Affiliate  of Russian  Company  Developing
Technology with Holdings

         On August 2, 1998, in anticipation  of the merger with Holdings,  Ocean
Power  issued 4,000  shares of common  stock to Jeffrey  Mamber and  Christopher
Faranetta,  two  unaffiliated  third parties who were employees of Energia U.S.,
which was the  United  States  affiliate  of a Russian  corporation  with  which
Holdings was cooperating on fuel cell development in Russia. At that time, Ocean
Power was contemplating a merger with Holdings which was eventually  consummated
on June 22, 1999.

         8) Issuance of Convertible Debenture,  Conversion Into Common Stock and
Exercise of Warrants

         On November 4, 1998,  Ocean Power  issued a  convertible  debenture  to
Freedom  Financial  for  aggregate  cash  proceeds  in the  amount  of  $800,000
previously received by Ocean Power during the period from January to November 4,
1998.  The issuance of this  debenture  together with its later  conversion  are
described below:

         A. CONVERTIBLE  DEBENTURE  ISSUANCE.  The debenture accrued interest at
10% per annum.  The debenture  was  convertible  into Company  common stock at a
price of $1.50 per share. Additionally, for each share received upon conversion,
the holder received one warrant allowing for the purchase of one share of common
stock at a price of $1.50 per share.  The warrants expire five years after their
issuance.  On  January  5,  1999,  Ocean  Power  increased  the  amount  of  the
convertible  debenture for additional  cash proceeds in the amount of $1,186,095
previously  received by Ocean Power  during the period from January to May 1999.
Except for the  increase in  aggregate  principal  amount,  the increase did not
change the material terms of the debenture, as described above.

         B. ISSUANCE OF COMMON STOCK AND WARRANTS UPON  CONVERSION OF DEBENTURE.
On December 31,  1998,  Ocean Power  issued  533,333  shares of common stock and
533,333  warrants  upon  conversion  of  $800,000  in  principal  amount  of the
debenture.  On March 30, 1999,  Ocean Power issued 70,000 shares of common stock
and 70,000  warrants  upon  conversion  of $105,000 in  principal  amount of the
debenture.  On May 17, 1999,  Ocean Power issued an aggregate  720,730 shares of
common stock and 720,730  warrants upon  conversion of the remaining  $1,081,095
due on the debenture. The above described issuances in the aggregate resulted in
the full conversion of the debenture into common stock and warrants.

         C. EXERCISE OF WARRANTS.  Pursuant to the exercise of warrants  granted
in connection with the above described convertible debenture, Ocean Power issued
common stock as follows:  on December 31, 1998, Ocean Power issued 13,502 shares
of common stock for aggregate cash proceeds in the amount of $20,253 received by
Ocean Power prior to December  31, 1998;  and on December 31, 1999,  Ocean Power
issued an aggregate  of 592,744  shares of Company  common  stock for  aggregate
proceeds of $889,117  received by Ocean Power prior to December 31, 1999.  There
are currently 717,817 warrants outstanding.

         9)  Issuance  of Shares  for  Conversion  of  Debentures  from  Tessier
Acquisition

         Pursuant to the exercise in full of convertible debentures in aggregate
principal amount of $3,000,000 held by VentureTech,  Inc. in  consideration  for
Ocean  Power's  acquisition  of Tessier  Resources  Ltd.  (and its wholly  owned
subsidiary Pulverizer Systems) from VentureTech, on January 27, 1999 and June 8,
1999,  Ocean Power issued to  VentureTech  50,000 shares of Ocean Power's common
stock  and  150,000  shares,  respectively,  for a per share  exercise  price of
$15.00.



                                       41
<PAGE>

         10) Issuance to Keeran Corp.

         On June 7, 1999, Ocean Power issued 400,000 shares of common stock at a
deemed  value  per  share of  $7.40  to  Keeran  Corporation  NV, a  Netherlands
corporation,  in  anticipation  of a pending  purchase of  equipment.  The total
consideration  to be  paid  was to be  equipment  with a fair  market  value  of
$2,960,000.  Although the shares were issued, the transaction ultimately was not
completed,  and no equipment was received.  Ocean Power has since entered into a
licensing agreement for Keeran's technology. However, the licensing agreement is
currently the subject of a dispute. See The Business - Strategic Relationships.

         11) Merger of Ocean Power and PTC Holdings, Inc.

         On June 22, 1999, Ocean Power issued an aggregate of 25,044,146  shares
of its common stock to the 34 shareholders of Holdings in  consideration  of the
cancellation of the outstanding shares of Holdings common stock in the merger of
Ocean  Power  and  Holdings.  See  Description  of  Business--Certain   Business
Developments--Merger of PTC Group and PTC Holdings.

         12) Issuances to D. Weckstein & Co., Inc.

         In June 1999,  Ocean Power entered into a consulting  agreement with D.
Weckstein & Co., Inc.  ("Weckstein")  for financial  consulting  and  investment
banking services for a period of two years. In addition to the services provided
to Ocean Power under the consulting agreement,  Weckstein,  in its capacity as a
broker  dealer,  makes a market in Ocean Power's  common  stock.  Weckstein is a
broker dealer and a member of the National  Association  of Securities  Dealers.
Under this agreement, Weckstein assists Ocean Power by utilizing its contacts in
the  water  and  power   industries   to  identify  for  Ocean  Power   business
opportunities  in keeping with Ocean Power's  business  plan. The agreement also
calls for cash  payments  in  connection  with  certain  financial  transactions
consummated  as  a  result  of   introduction  by  Weckstein  such  as  mergers,
acquisitions,  joint  ventures,  debt or lease  placements and similar or other,
on-balance  or  off-balance  sheet  corporate  finance  transactions.  Weckstein
received a finder's fee for the Xcel transactions described below.

         A.  Pursuant to the terms of the  agreement,  on June 23,  1999,  Ocean
Power issued to Weckstein  options to purchase  30,000  shares of Ocean  Power's
common  stock at a price of $5.00 per share for a period of three years from the
date of the agreement.

         B. On December 7, 1999, Ocean Power and Weckstein amended the June 1999
consulting agreement.  Ocean Power cancelled the options granted to Weckstein on
June 23,  1999 and issued to  Weckstein  options to purchase  125,000  shares of
common  stock at an  exercise  price of $1.00  per  share.  The  options  had an
expiration date of December 7, 2003. The closing sales price for these shares on
the date of the amendment was $1.16 per share.

         C. On February 18, 2000,  Ocean Power again amended its agreement  with
Weckstein.  Ocean Power  cancelled the options  granted to Weckstein in December
1999 and issued to Weckstein options to purchase 100,000 shares of Ocean Power's
common  stock at an  exercise  price of $6.00  per  share.  The  options  had an
expiration  date of February 18, 2003.  The closing sales price for these shares
on the date of the amendment was $6.25 per share.

         D. On April 19, 2000,  Ocean Power further  amended its agreement  with
Weckstein.  Ocean Power  cancelled the options  granted to Weckstein in February
2000 and issued  Weckstein  options to purchase 110,000 shares of Company common
stock at an  exercise  price of $3.00 per share.  These  options  will expire on
February 18, 2003.  The closing  sales price for these shares on the date of the
amendment was $3.25 per share.

         E. On August 8, 2000, Ocean Power granted Weckstein  additional options
to purchase 100,000 shares of Ocean Power's common stock at an exercise price of
$3.50 per share,  which options will expire August 8, 2003.  Ocean Power granted
these options in  consideration  for  Weckstein's  agreement to provide  certain
additional  services,  including  introductions to European  utility  companies,
South American  desalination market opportunities,  institutional  investors and
private placement opportunities. The closing sales price for these shares on the
date of the amendment was $3.58 per share.

         13) Issuances To Xcel Associates, Inc.

         A. ISSUANCE OF STOCK FOR CONSULTING  SERVICES.  On July 12, 1999, Ocean
Power entered into an agreement with Xcel Associates, Inc. ("XCEL"), pursuant to
which Xcel would  perform  business  management  and  marketing  services.  Such
services  were to include  marketing  and  promotion  for sales of Ocean Power's
securities.  In  addition,  Xcel drafted and  publicly  disseminated  a research


                                       42
<PAGE>

report  on  Ocean  Power's  business  operations  and  market.  Pursuant  to the
agreement, on July 15, 1999, Ocean Power issued 15,000 shares of common stock to
Xcel and on September 2, 1999 issued 20,000 shares of common stock to Xcel.  The
parties  agreed that Ocean  Power  would not be  required  to pay the  remaining
balance  of 15,000  shares  for the third  installment  under the July 12,  1999
agreement, by mutual agreement of the parties.

         B. ISSUANCE OF OPTIONS FOR  CONSULTING  SERVICES AND ISSUANCE OF COMMON
STOCK FOR EXERCISE OF OPTIONS.  In consideration for certain business consulting
services,  pursuant to the above described agreement, Ocean Power issued to Xcel
options to purchase  100,000  shares of Ocean Power's common stock at a purchase
price of $5.00 per share.  The closing sales price of Ocean Power's common stock
on July 12, 1999, the date of the issuance of options, was $7.80.

         Ocean  Power  issued to Xcel 10,000  shares of common  stock on each of
July 15 and 26, 1999 for the  exercise of some of the above  described  options.
Aggregate  cash  proceeds to Ocean Power from the  exercise of such  options was
$100,000.

         C.  ISSUANCE OF  ADDITIONAL  OPTIONS AND COMMON  STOCK FOR  EXERCISE OF
OPTIONS. On September 9, 1999, Ocean Power granted additional options to Xcel to
purchase  100,000  shares of common stock at a price of $1.00 per share.  On the
same day,  September 9, 1999, Xcel exercised such options and Ocean Power issued
50,000 shares, at the direction of Xcel, to each of Xcel and Carl Tortora. Ocean
Power received aggregate cash proceeds of $100,000 from this transaction.

         D. ISSUANCE OF STOCK FOR $250,000 LOAN. On August 9, 1999,  Ocean Power
executed a promissory  note in favor of Xcel in return for a loan of $250,000 to
Ocean Power. On August 12, 1999, Ocean Power issued to two persons identified by
Xcel an aggregate amount of 100,000 shares of common stock as consideration  for
the loan by Xcel to Ocean  Power of  $250,000.  The last trade  price of Company
common stock on such date was $2.50 per share.

         E.  ISSUANCE OF STOCK FOR DEFAULT ON INTEREST  PAYMENTS.  On January 4,
2000,  pursuant to the default  provisions  of a  promissory  note,  Ocean Power
issued the preset number of 25,000 shares to Edward Meyer, Jr. and 25,000 shares
to Edward Whelan,  at the direction of Xcel. Ocean Power has since satisfied the
debt in full.

         In connection with the total financing of $450,000  provided by Xcel to
Ocean Power as described in A through E above,  Ocean Power paid D.  Weckstein &
Co. $31,500 in fees.

         14)  Issuance  of  Convertible  Debentures  to Freedom  Funding,  Regis
Investment and Venture Investment Group

         A. On November  16,  1999,  Ocean Power  issued to three  persons  four
convertible  debentures,  each with the following terms:  the debentures  accrue
interest at 12% per annum and were  convertible  into Company  common stock at a
price of $1.50 per share;  for each share received upon  conversion,  the holder
would receive two warrants each allowing for the purchase of one share of common
stock per warrant at a price of $0.75 per share. Such warrants expire five years
after  their  issuance.  The  market  price for Ocean  Power's  common  stock on
November 16, 1999 was $1.50 per share.  Such convertible  debentures were issued
as follows:

<TABLE>
                       CONVERSION           NUMBER OF       PRICE PER       EXPIRATION
  DATE OF ISSUANCE     SECURITIES            SHARES          SHARE             DATE           RECIPIENT
  ----------------     ----------           ---------    ---------------  ---------------     ---------
<S>                    <C>                   <C>               <C>            <C>          <C>
11/16/99               Common                233,333           $1.50          08/01/04     Freedom Funding
                       Warrants              466,667            $.75

                       Common                 66,667           $1.50          08/01/04     Freedom Funding
                       Warrants              133,333            $.75

                       Common                 66,667           $1.50          11/01/04     Regis Investments
                       Warrants              133,333            $.75

                       Common                 66,667           $1.50          08/01/04     Venture Investment Group
                       Warrants              133,333            $.75
</TABLE>

         B. On March 16, 2000, Ocean Power issued an aggregate of 200,000 shares
of  common  stock  to  Regis  Investments  pursuant  to  the  conversion  of the
convertible debenture and the simultaneous exercise of the accompanying warrants


                                       43
<PAGE>

held by Regis  Investments.  Aggregate  cash  proceeds  to Ocean  Power  for the
exercise of the warrants, at an exercise price of $.75 per share, was $200,000.

         15)  Securities  Issued in  Connection  with the  Proposed  Company/PTC
Holdings Merger

         On November 29,  1999,  Ocean Power  issued  400,000  shares of Company
common stock to four persons in  consideration  for services,  including  finder
activities,  performed in connection with the proposed  reorganization  of Ocean
Power and Holdings that was never  consummated.  Under this agreement,  the four
persons below were to be compensated for certain financial services performed on
behalf of Ocean  Power by the  receipt of a total of 4 million  shares of common
stock  (reduced to 400,000 by the August 22, 1999 reverse  stock  split).  Ocean
Power regarded the agreement as an outstanding obligation,  and issued shares of
common stock as follows:  Frankie Fu,  20,000  shares;  Freedom  Funding,  Inc.,
100,000 shares;  Venture Investment Group,  80,000 shares; and Rocco Guarnaccia,
PhD, 200,000.

         16) Offering Pursuant To Rule 504 To Colorado Residents

         In December of 1999,  Ocean Power  issued a total of 755,085  shares of
common  stock to 4 persons for total cash  proceeds to Ocean Power of  $600,000.
The sale was to Colorado residents only. The share price was equal to 60% of the
closing bid price one day prior to each sale.

<TABLE>
                              NUMBER OF
   DATE OF ISSUANCE             SHARES      PRICE PER SHARE                 RECIPIENT                 TOTAL PROCEEDS
   ----------------             ------      ---------------                 ---------                 --------------
<S>                            <C>                <C>                    <C>                              <C>
         12/08/99               71,839            $.700                  S. Marshman                       $50,000
         12/09/99              175,070            $.710                  Orienstar Financial              $125,000
         12/09/99               49,020            $.710                  M. Sodden                         $35,000
         12/10/99              111,111            $.900                  S. Marshman                      $100,000
         12/10/99               33,333            $.900                  Waterford Enterpr.                $30,000
         12/16/99              193,939            $.825                  Orienstar Financial              $160,000
         12/21/99              120,773            $.828                  S. Marshman                      $100,000
                                                                         TOTAL:                           $600,000
</TABLE>

         In connection with this offering,  in November 1999 Ocean Power entered
into a one-time 30-day consulting agreement with Intercontinental  Capital Corp.
("INTERCONTINENTAL  CAPITAL")  to assist  Ocean  Power in  obtaining  financing.
Pursuant to the  agreement,  Intercontinental  Capital  acted as a finder in the
above  described  offering.   In  consideration   therefor,   Ocean  Power  paid
Intercontinental  Capital  $42,000 in cash for  services  and $6,000 in cash for
expenses,  and on January 5, 2000 issued an aggregate of 60,000 shares of common
stock,  at  the  direction  of  Intercontinental   Capital,  to  CJB  Consultant
Corporation and Gold Capital Group, Inc.

         Ocean Power claims the exemption  provided by Section 504 of Regulation
D as well as the private  offering  exemption of Section 4(2) of the  Securities
Act of 1933, among others. Each of the investors represented themselves to Ocean
Power as accredited investors.

         17) Issuance to Clement J. Wohlreich

         By  agreement  dated  January  1,  2000,  Ocean  Power  contracted  for
financial,   marketing  and  management   services  with  Clement  J.  Wohlreich
("WOHLREICH").  Wohlreich has been a member of various  national stock exchanges
from 1967 through  1987. In 1987, he formed his own OTC trading firm and is self
employed.  He is also the  manager  of the San  Francisco  office of  Electronic
Trading Group who have 20 offices in the US and overseas.

         Pursuant to the contract,  on July 25, 2000 Ocean Power issued warrants
and common stock to Wohlreich as  consideration  for  services.  Pursuant to the
contract,  Ocean Power issued to Wohlreich  100,000 shares of common stock. Also
pursuant to the contract,  Ocean Power issued to Wohlreich  warrants to purchase
100,000  shares of common  stock at an  exercise  price of $1.50 per share.  The
warrants  will expire three years past their  issuance  date.  The closing sales
price for these shares was $1.375 on the date of the agreement.

         18) Conversion of Debt

         On January 4, 2000,  Ocean  Power  issued  97,580  shares of its common
stock to Robert Bylin, an unaffiliated third party, for the cancellation of debt
in the amount of $100,000, owed by Ocean Power for rent of office space.



                                       44
<PAGE>

         19) Private Offering to Foreign Resident

         On January 26, 2000, Ocean Power issued 47,619 shares of Company common
stock at a price of $2.10 per  share to A.J.B.  de Jong  Luneau,  a  Netherlands
resident,  for cash  proceeds to Ocean Power in a total amount of $100,000.  The
per share price was  calculated  as 60% of the  closing  sales price for Company
common stock on January 26, 2000.

         20) Issuance of Warrants to Donner Corp. International

         In January 2000,  Ocean Power entered into a consulting  agreement with
Donner Corp.  International  ("Donner") for marketing and promotion services for
sales of  securities.  The agreement  calls for Ocean Power to pay a retainer of
$2,500,  and $10,000 for services in connection  with  assisting  Ocean Power in
implementing its business objectives. In addition,  pursuant to the contract, on
February 1, 2000,  Ocean Power granted Donner warrants to purchase 10,000 shares
of Company common stock at an exercise price equal to 80% of the lowest five-day
average closing sales price from January 2-31,  2000, which was $2.17 per share.
The warrants  expire three years past their  issuance  date.  These warrants are
currently outstanding.

         21) Issuance of Options to EBM, Inc.

         On January 1, 2000, Ocean Power entered into consulting  agreement with
EBM, Inc. ("EBM") for a one-year term to disseminate  information on Ocean Power
to analysts,  brokers and  investors and for marketing and promotion of sales of
Ocean Power's securities. EBM specializes in start-up and early stage companies.
EBM has provided  `new  business  consulting'  services  for over 15 years.  The
principal  of EBM  has  provided  his  clients  with  assistance  in  developing
marketing  plans,  securing early stage  financing,  locating key personal,  and
writing business plans.

         Pursuant to the terms of the  agreement,  on February 22,  2000,  Ocean
Power granted EBM options to purchase  100,000 shares of Company common stock at
an exercise price of $1.50 per share, which options shall expire four years past
their  issuance date. The closing price for Ocean Power's common stock was $6.25
on the  date of the  signing  of the  agreement.  These  options  are  currently
outstanding.

         22) Conversion of Debt

         Pursuant to an agreement dated March 3, 2000, on March 27, 2000,  Ocean
Power issued 20,266 shares of its common stock to Cameron Holdings, Inc. for the
cancellation  of debt in an aggregate  amount of  $121,392.  The debt was from a
loan of  $100,000  with 10%  interest  per annum  made by  Cameron  Holdings  to
Integrated  Water and Power,  Inc.  ("IWP") on February 3, 1998, with a maturity
date of July 15, 1998.  Holdings assumed the debt upon its acquisition of IWP on
March 6, 1998,  and Ocean Power  assumed the debt from  Holdings upon its merger
with  Holdings  completed  on June 22, 1999.  The closing  sales price for Ocean
Power's common stock on March 27, 2000 was $7.19.

         23) Conversion of Debt

         On March 27, 2000,  Ocean Power issued  24,010  shares of Ocean Power's
common  stock to Frederic  Seamon  III, an  unaffiliated  third  party,  for the
conversion  of debt in the  amount of  $100,000.  Ocean  Power owed the debt for
consulting  services  performed  on behalf of Ocean  Power by such  unaffiliated
third party in connection with Ocean Power's work in Russia.

         24) Conversion of Debt

         On March 27, 2000,  Ocean Power  issued  2,210 shares of Ocean  Power's
common stock to Terence Foley, an unaffiliated third party, for the cancellation
of debt in the  amount of  $10,420.  Ocean  Power  owed the debt for  consulting
services  performed on behalf of Ocean Power by such unaffiliated third party in
connection with the development of fuel cell technology.

         25) Issuance Per Merger With Sigma Elektroteknisk

         On August 10, 2000,  Ocean Power issued to the 21 shareholders of SIGMA
Elektroteknisk SA, a Norwegian company ("SIGMA"),  1,718,748 shares of common in
exchange  for  3,663,327  shares  of  SIGMA  common  stock,  being  all  of  the
outstanding  SIGMA  shares.  This  exchange  was  effected  pursuant  to a Share
Purchase Agreement between Ocean Power and SIGMA dated July 25, 2000. All of the
recipients  of  Company  shares  were  foreign  residents.  There  were no prior


                                       45
<PAGE>

material  relationships  between or among any of the  Shareholders  of SIGMA and
Ocean Power or any of their officers, directors, associates or affiliates.

         26) Private Placement For $6,915,731

         From  January 25,  2000 to August 14,  2000,  Ocean Power  issued to 49
persons  1,930,792 units consisting of one share of common stock and one warrant
to purchase one share of Company  common stock for  aggregate  cash  proceeds to
Ocean Power of  $6,915,731.  The purchase  price of the units was eighty percent
(80%) of the five (5) day  average  of the  closing  sales  price  for the stock
immediately prior to each sale (the "PURCHASE PRICE"). Each warrant entitles the
purchase of one share of Company  common stock at a price equal to fifty percent
(50%) of the Purchase  Price.  The warrants  expire three years from the time of
the unit purchase.

         On March 9, 2000,  Ocean Power issued 62,792  shares of Company  common
stock to the Carl A.P. Fricke Trust at a price of $1.99 per share for total cash
proceeds  to Ocean  Power of  $125,109,  pursuant  to the  exercise  of warrants
received  in the  units  purchased  on the  same  day as part of  Ocean  Power's
$6,919,000 private placement.

         A commission of  $26,289.00  was paid to Edward W. Thomas in connection
with the offering.  Each of the investors represented  themselves to Ocean Power
as accredited investors.

         27) Issuance of Options to Company Officer

         On May 26, 2000, Ocean Power issued to J. Michael Hopper, an officer of
Ocean Power, options to purchase 598,680 shares of Ocean Power's common stock at
an exercise  price of $1.50.  The options  are  exercisable  for the life of his
current employment agreement with Ocean Power. Therefore, the expiration date of
the  options  will be subject to  acceleration  or  extension  in the event of a
change to the term of Mr. Hopper's  employment  agreement with Ocean Power.  Mr.
Hopper's  employment  agreement as currently in effect will terminate on January
1, 2003.

         28) Private Placement For $3,000,000

         On  August  29,  2000,  Ocean  Power  issued  to 22  persons a total of
1,000,000  units  consisting  of one share of common  stock and one  warrant  to
purchase one share of common stock, at a unit price of $3.00 for cash in a total
amount of $3,000,000. Each warrant entitles the purchase of one share of Company
common stock at a price of $1.50 per share and expires on August 29,  2003.  The
market value of the shares on August 29 was $5.00.

         No commissions were paid. Each of the investors represented  themselves
to Ocean Power as accredited investors.

         29) Issuance of Warrants for Loan

         On March 5, 2001,  Ocean Power issued to 2 persons warrants to purchase
an aggregate of 1,200,000  shares of Ocean Power's common stock in consideration
for 2 loans in an aggregate  amount of $3 million to Ocean  Power.  Each warrant
entitles the purchase of one share of Ocean Power's  common stock at an exercise
price of $1.50  per share and  expires  on March 4,  2004.  Ocean  Power  issued
1,000,000  warrants to Algonquin Capital Management and 200,000 warrants to John
V. Doyle.

         30) Conversion of Debt

         On April 2, 2001,  the Company  issued  50,000  shares of the company's
common stock to Wilke,  Fuery,  Hoffelt,  Gould & Birney,  LLP, (an unaffiliated
third party) for the cancellation of debt in the amount of $75,000, and the cash
payment of $500 (the par value of the stock  issued).  The company owed the debt
for legal  services  provided on behalf of the company.  The market price of the
company's common stock on January 3, 2000 was $1.57 per share.

         31) Conversion of Debt

         On June 8, 2001,  the Company  issued 119, 152 shares of the  company's
common stock to Statoil ASA., (an unaffiliated third party) for the cancellation
of debt in the amount of $381,286.  SIGMA,  the Company's  subsidiary,  owed the
debt to Statoil for research advances.  The market price of the company's common
stock on June 8, 2001 was $3.70 per share.



                                       46
<PAGE>

         Except as otherwise noted,  the securities  described in this Item 2(3)
were issued pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act of 1933 and Regulation S.

         32) Issuance of Gene Martineau

         On June 1, 2001, the Company  entered into a Consulting  Agreement with
Gene Martineau for a 2 year term to receive services related to interfacing with
institutional investors and brokerage firms.

         Pursuant to the  contract,  on June 29, 2001 the company  issued common
stock and warrants to Gene Martineau as consideration for services.  The company
issued  120,000  shares of its common stock on June 29, 2001.  Also, the company
granted  120,000  warrants  with an  exercise  price of $1.50  per share for two
years. The market price of the company's common stock on June 29, 2001 was $2.80
per share.

         33) Issuance of Convertible Note and Warrants for Loan

         On April 2, 2001,  Ocean Power  issued to 2  unaffiliated  entities (i)
notes which may under certain  circumstances be converted,  in whole or in part,
to common  stock of Ocean Power and (ii)  warrants to purchase an  aggregate  of
200,000 shares of Ocean Power's common stock in consideration  for 2 loans in an
aggregate  amount of $600,000 to Ocean Power.  Ocean Power issued one promissory
note in the  principal  amount of  $360,000 to VESTA LIV with 10%  interest  per
annum;  in the event Ocean Power  elects to pre-pay  any  interest or  principal
outstanding on the note, VESTA LIV may convert any or all of such prepaid amount
into  shares of Ocean  Power's  common  stock at a  purchase  price of $4.00 per
share.  Ocean  Power  issued  one  promissory  note in the  principal  amount of
$240,000 to VESTA  FORSIKRING  with 10% interest  per annum;  in the event Ocean
Power elects to pre-pay  interest or principal  outstanding  on the note,  VESTA
FORSIKRING  may convert any or all of such  prepaid  amount into shares of Ocean
Power's common stock at a purchase price of $4.00 per share.  Ocean Power issued
120,000  warrants  to VESTA LIV and 80,000  warrants to VESTA  FORSIKRING.  Each
warrant  entitles the purchase of one share of Ocean Power's  common stock at an
exercise price of $1.50 per share and expires on April 1, 2003.

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

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

         35) Issuance of Promissory Note to William Barron

         On July 24,  2001,  the  Company  issued a one-year  promissory  not to
William  Barron for  $50,000.  The note  accrues  interest  at a rate of 10% per
annum.  If the Company elects to pre-pay the note, then the lender has the right
to convert both the principal  and interest  into the Company's  common stock at
$3.00 per  share.  As  additional  consideration,  the  Company  granted  16,667
warrants with an exercise price of $1.50 per share,  with an expiration  date of
July 23, 2002. The market price for the Company's  common stock on July 24, 2001
was $2.25.

         36) Issuance of Promissory Note to Carl Fricke

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

         37) Issuance of Promissory Note to Summit Petroleum Corporation

         On August 7, 2001,  the Company  issued a one-year  promissory  note to
Summit Petroleum  Corporation for $150,000.  The note accrues interest at a rate
of 10% per annum. If the Company elects to pre-pay the note, then the lender has
the right to convert both the principal or interest  into the  Company's  common
stock at $3.00 per share.  As  additional  consideration,  the  Company  granted


                                       47
<PAGE>

50,000  warrants with an exercise  price of $1.50 per share,  with an expiration
date of August 6,  2002.  The market  price for the  Company's  common  stock on
August 7, 2001 was $2.35.

         38)  Issuance  of  Promissory  Note to  Edward  Freidberg  trustee  for
Freidberg Law Corporation Pension Plan

         On August 8, 2001,  the  Company  issued a one-year  promissory  not to
Edward  Freidberg  trustee  for  Freidberg  Law  Corporation  Pension  Plan  for
$100,000.  The note accrues  interest at a rate of 10% per annum. If the Company
elects to pre-pay  the note,  then the lender has the right to convert  both the
principal and interest into the  Company's  common stock at $3.00 per share.  As
additional  consideration,  the Company granted 33,334 warrants with an exercise
price of $1.50 per share,  with an  expiration  date of August 6,  2002.  Joseph
Maceda,  the president of the Company,  also pledged 75,000 shares as collateral
for the loan to the Company.  The market price for the Company's common stock on
August 8, 2001 was $2.40.

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

         On  August  20,  2001,  the  Company  issued  a  five-year  convertible
debenture for $200,000. The note accrues interest at a rate of 12% per annum and
both the principal and interest are convertible  into the Company's common stock
at $1.50 per share.  As additional  consideration,  the Company  granted 266,667
warrants with an exercise price of $1.25 per share,  with an expiration  date of
August 19, 2006.  The market price for the Company's  common stock on August 20,
2001 was $2.30.

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              CONVERSION
        DATE OF ISSUANCE    NOTE AMOUNT       SECURITIES        NUMBER OF SHARES  PRICE PER SHARE   EXPIRATION DATE
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        8/20/01             $200,000          Common            133,333           $1.50             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          266,667           $1.25             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         40) Issuance of Convertible Debenture to Freedom Funding Inc.

         On  August  20,  2001,  the  Company  issued  a  five-year  convertible
debenture  for $42,000 to Freedom  Funding,  Inc. This is the amount of interest
that was due on the $350,000 convertible  debenture of November 16, 1999 for the
year 2000.  The note  accrues  interest  at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's common stock at $1.50
per share. As additional consideration, the Company granted 56,000 warrants with
an  exercise  price of $1.25 per share,  with an  expiration  date of August 19,
2006.  The market  price for the  company's  common stock on August 20, 2001 was
$2.30.

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
        DATE OF ISSUANCE    NOTE AMOUNT       CONVERSION        NUMBER OF SHARES  PRICE PER SHARE   EXPIRATION DATE
                                              SECURITIES
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        8/20/01             $42,000           Common            28,000            $1.50             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          56,000            $1.25             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         41) Issuance of Convertible Debenture to Freedom Funding Inc.

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

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
        DATE OF ISSUANCE    NOTE AMOUNT       CONVERSION        NUMBER OF SHARES  PRICE PER SHARE   EXPIRATION DATE
                                              SECURITIES
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        8/20/01             $12,000           Common            8,000             $1.50             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          16,000            $1.25             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

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

         On  August  20,  2001,  the  Company  issued  a  five-year  convertible
debenture for $12,000 to Venture  Investment  Group, Inc. The amount of interest
that was due on the $100,000 convertible  debenture of November 16, 1999 for the
year 2000.  The note  accrues  interest  at a rate of 12% per annum and both the
principal and interest are convertible  into the Company's common stock at $1.50
per share. As additional consideration, the Company granted 16,000 warrants with


                                       48
<PAGE>

an  exercise  price of $1.25 per share,  with an  expiration  date of August 19,
2006.  The market  price for the  Company's  common stock on August 20, 2001 was
$2.30.

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
        DATE OF ISSUANCE    NOTE AMOUNT       CONVERSION        NUMBER OF SHARES  PRICE PER SHARE   EXPIRATION DATE
                                              SECURITIES
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        8/20/01             $12,000           Common            8,000             $1.50             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          16,000            $1.25             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         43) Issuance of Convertible Debenture to Regis Investment Co. Ltd.

         On  August  20,  2001,  the  Company  issued  a  five-year  convertible
debenture of $5,000 to Regis  Investment Co. Ltd. This is the amount of interest
that was due on the $100,000 convertible  debenture of November 16, 1999 for the
five months prior to the  conversion of the debenture in the year 2000. The note
accrues  interest at a rate of 12% per annum and both the principal and interest
are  convertible  into  the  Company's  common  stock  at $1.50  per  share.  As
additional  consideration,  the Company granted 6,667 warrants with and exercise
price of $1.25 per share, with an expiration date of August 19, 2006. The market
price for the Company's common stock on August 20, 2001 was $2.30.

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
        DATE OF ISSUANCE    NOTE AMOUNT       CONVERSION        NUMBER OF SHARES  PRICE PER SHARE   EXPIRATION DATE
                                              SECURITIES
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        8/20/01             $5,000            Common            3,333             $1.50             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          6,667             $1.25             8/19/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         44) Issuance of Warrants to Freedom Funding Inc.

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

         45) Issuance of Warrants to Freedom Funding, Inc.

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

         46) Issuance of Warrants to Venture Investment Group, Inc.

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

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

         On  August  23,  2001,  the  Company  issued  a  five-year  convertible
debenture for $100,000. The note accrues interest at a rate of 12% per annum and
both the principal and interest are convertible  into the Company's common stock
at $1.50 per share.  As additional  consideration,  the Company  granted 133,333
warrants with an exercise price of $1.25 per share,  with and expiration date of
August 22, 2006.  The market price for the Company's  common stock on August 23,
2001 was $2.70.

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
        DATE OF ISSUANCE    NOTE AMOUNT       CONVERSION        NUMBER OF         PRICE PER SHARE   EXPIRATION DATE
                                SECURITIES SHARES
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        8/23/01             $100,000          Common            66,667            $1.50             8/22/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          133,333           $1.25             8/22/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         48) Issuance of Promissory Note to David Weissberg

         On August 29, 2001,  the Company issued a one-year  promissory  note to
David  Weissberg  for $50,000.  The note  accrues  interest at a rate of 10% per
annum.  If the Company elects to pre-pay the loan, then the lender has the right
to convert both the principal  and interest  into the Company's  common stock at
$3.00 per  share.  As  additional  consideration,  the  Company  granted  16,667


                                       49
<PAGE>

warrants with an exercise price of $1.50 per share,  with an expiration  date of
August 28, 2002.  The market price for the Company's  common stock on August 29,
2001 was $3.55.

         49) Issuance of Promissory Note to Edward P. Engle Jr.

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

         50) Issuance of Promissory Note to Kare C. Anderson

         On September 4, 2001, the Company issued a one-year  promissory note to
Kare C.  Anderson  for $15,000.  The note accrues  interest at a rate of 10% per
annum.  If the Company elects to pre-pay the loan, then the lender has the right
to convert both the principal  and interest  into the Company's  common stock at
$3.00 per share. As additional consideration, the Company granted 5,000 warrants
with an exercise price of $1.00 per share,  with an expiration date of September
3, 2002.  The market price for the  Company's  common stock on September 4, 2001
was $3.50.

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

         On  September  14,  2001,  the Company  issued a five-year  convertible
debenture for $100,000. The note accrues interest at a rate of 12% per annum and
both the principal and interest are convertible  into the Company's common stock
at $1.00 per share.  As additional  consideration,  the Company  granted 300,000
warrants with an exercise price of $1.00 per share,  with an expiration  date of
September 14, 2006. The market price for the Company's common stock on September
17, 2001 was $3.40.

<TABLE>
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
        DATE OF ISSUANCE    NOTE AMOUNT       CONVERSION        NUMBER OF SHARES  PRICE PER SHARE   EXPIRATION DATE
                                              SECURITIES
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                         <C>               <C>               <C>               <C>               <C>
        9/14/01             $100,000          Common            100,000           $1.00             9/14/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                              Warrants          300,000           $1.00             9/13/06
        ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         52) Issuance of Promissory Note to Michael D. Lockwood

         On September 19, 2001, the Company issued a one-year promissory note to
Michael D. Lockwood for $500,000.  The note accrues  interest at a rate of 10.5%
per annum.  If the principal and interest are not paid when due, then they shall
bear interest  thereafter at 13.5%.  If the Company  elects to pre-pay the loan,
then the lender has the right to convert both the  principal  and interest  into
the Company's  common stock at $2.00 per share in the name of Algonquin  Capital
Management. As additional consideration, the Company granted 500,000 warrants to
Algonquin Capital  Management with an exercise price of $1.50 per share, with an
expiration date of September 18, 2004. The market price for the Company's common
stock on September 19, 2001 was $3.00.

         53) Issuance of Promissory Note to Melaroba Corp.

         On October 12, 2001, the Company issued a ninety-day promissory note to
Melaroba  Corp.  for  $225,000.  The note accrues  interest at a rate of 10% per
annum.  If the  principal  and interest are not paid when due,  then the Company
must issue  150,000  shares of common stock to Melaroba  Corp.  The Company must
also pay for all fees and  expenses,  which  have been  preset at  $25,000.  The
market price for the Company's common stock on October 12, 2001 was $2.30.

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

         On  October  29,  2001,  the  Company  issued a  five-year  convertible
debenture for $100,000. The note accrues interest at a rate of 12% per annum and
both the principal and interest are convertible  into the Company's common stock
at $1.00 per share.  As additional  consideration,  the Company  granted 300,000
warrants with an exercise price of $1.00 per share,  with an expiration  date of
October 28, 2006. The market price for the Company's common stock on October 29,
2001 was $2.30.



                                       50
<PAGE>

<TABLE>
----------------- --------------- ---------------- --------------- ------------- ---------------
Date of                             Conversion       Number of       Price per     Expiration
Issuance            Note Amount     Securities       Shares          share         Date
----------------- --------------- ---------------- --------------- ------------- ---------------
<S>               <C>             <C>              <C>             <C>           <C>
10/29/01          $100,000        Common           100,000         $1.00         10/29/06
----------------- --------------- ---------------- --------------- ------------- ---------------
                                  Warrants         300,000         $1.00         10/28/06
----------------- --------------- ---------------- --------------- ------------- ---------------
</TABLE>

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

         On  November  16,  2001,  the Company  issued a  five-year  convertible
debenture for $100,000. The note accrues interest at a rate of 12% per annum and
both the principal and interest are convertible  into the Company's common stock
at $1.00 per share.  As additional  consideration,  the Company  granted 300,000
warrants with an exercise price of $1.00 per share,  with an expiration  date of
November 15, 2006.  The market price for the Company's  common stock on November
16, 2001 was $1.70.

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
11/16/01            $100,000          Common            100,000           $1.00             11/16/06
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          300,000           $1.00             11/15/06
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         56) Issuance of Convertible Debenture to Cornell Capital Partners L.P.

         On  November  29,  2001,  the Company  issued a  five-year  convertible
debenture for $500,000. The debenture accrues interest at a rate of 6% per annum
and both the principal and interest are  convertible  into the Company's  common
stock at either (a) an amount equal to one hundred  twenty percent (120%) of the
closing bid price of the common stock as of November 29, 2001,  or (b) an amount
equal to eighty  percent  (80%) of the lowest  closing  bid prices of the common
stock for the five (5) trading days  immediately  preceding the conversion date.
As additional consideration, the Company issued to Cornell Capital Partners L.P.
260,270 shares of common stock. As part of this  transaction,  fees were paid to
Yorkville  Advisors  Management  of $50,000.  The market price for the Company's
common stock on November 29, 2001 was $1.75.

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

         On  December  18,  2001,  the Company  issued a  five-year  convertible
debenture for  $100,000.  The  debenture  accrues  interest at a rate of 12% per
annum and both the  principal  and interest are  convertible  into the Company's
common  stock at $1.00 per  share.  As  additional  consideration,  the  Company
granted  300,000  warrants  with an exercise  price of $1.00 per share,  with an
expiration date of December 17, 2006. The market price for the Company's  common
stock on December 18, 2001 was $1.21.

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
12/18/01            $100,000          Common            100,000           $1.00             12/18/06
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          300,000           $1.00             12/17/06
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>



                                       51
<PAGE>

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

         On January 8, 2002,  the Board of Directors  authorized the issuance of
3,044,588  stock  options  to  purchase  common  shares  of the  Company  to the
non-employed board directors,  employees,  including board member employees, and
certain  consultants  to the Company.  The stock  options are valid for ten (10)
years and are exercisable at $1.00 per share. The market price for the Company's
common stock on January 8 was $1.06.

          --------------------------------------- -----------------------------
                    Option Holder                      Amount of Options
          --------------------------------------- -----------------------------
          Gloria Rose Ott, Chairman                          250,000
          --------------------------------------- -----------------------------
          Ed Juchniewicz, Director                           500,000
          --------------------------------------- -----------------------------
          Employees of Ocean Power Corporation              2,090,248
          --------------------------------------- -----------------------------
          Employees of Sigma Elektroteknisk                  86,063
          --------------------------------------- -----------------------------
          Employees of Ocean Power (UK)                      31,145
          --------------------------------------- -----------------------------
          Consultants                                        87,132
          --------------------------------------- -----------------------------

         59) Issuance of Warrants to Terra Systems

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

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

         On January 8, 2002,  the Board of Directors  authorized  management  to
execute  a  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  market  price  for the
Company's common stock on January 8, was $1.06.

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

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

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
1/14/02             $100,000          Common            111,111           $.90              1/14/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          333,333           $.90              1/13/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

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

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

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
1/22/02             $100,000          Common            111,111           $.90              1/22/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          333,333           $.90              1/21/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

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

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

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
1/30/02             $100,000          Common            111,111           $.90              1/30/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          333,333           $.90              1/29/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         64)      Issuance of Promissory Note to Cocomodo Investments, LLP

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


                                       52
<PAGE>

warrants to Cocomodo Investments,  LLP, with an exercise price of $.75 per share
and an expiration  date of January 28, 2003.  The market price for the Company's
common stock on January 29 was $1.00

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

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

         66) Issuance of Transferable Options for Consulting Services

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

         67) Issuance of Promissory Note to Daniel Chestler

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

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

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

<TABLE>
--------------------------- ----------------------- -------------- ------------------------ --------------
      Warrant Holder            Original Date         Number of       Replacement Date        Price per
                                                       Shares                                   Share
--------------------------- ----------------------- -------------- ------------------------ --------------
<S>                            <C>                    <C>             <C>                       <C>
    Algonquin Capital          January 27, 2000       1,000,000       February 19, 2002         $.50
        Management
--------------------------- ----------------------- -------------- ------------------------ --------------
    Algonquin Capital          August 29, 2000         688,000        February 19, 2002         $.50
        Management
--------------------------- ----------------------- -------------- ------------------------ --------------


                                       53
<PAGE>

--------------------------- ----------------------- -------------- ------------------------ --------------
      Warrant Holder            Original Date         Number of       Replacement Date        Price per
                                                       Shares                                   Share
--------------------------- ----------------------- -------------- ------------------------ --------------
Lockwood Children's Trust      August 29, 2000         100,000        February 19, 2002         $.50
--------------------------- ----------------------- -------------- ------------------------ --------------
    Algonquin Capital           March 5, 2001         1,000,000       February 19, 2002         $.50
        Management
--------------------------- ----------------------- -------------- ------------------------ --------------
    Algonquin Capital         September 19, 2001       500,000        February 19, 2002         $.50
        Management
--------------------------- ----------------------- -------------- ------------------------ --------------
</TABLE>

         69) Issuance of Warrants to John V. Doyle

         On February 19, 2002, the Company cancelled a total of 266,015 warrants
to John V. Doyle with an exercise price of $1.50 per share and re-issued 266,015
warrants with an exercise  price of $.50 per share,  with an expiration  date of
February 18, 2007. This was done as additional  consideration for a loan made by
John V.  Doyle to the  Company on March 5, 2001.  The  additional  consideration
consisted of amending the terms of the original  Promissory Note as follows.  1)
The payment due dates for all accrued but unpaid  interest of  September 5, 2001
and  December 5, 2001 are extended to March 5, 2002,  when all unpaid  principal
and accrued  but unpaid  interest  shall be due; 2) Interest  shall be deemed to
have  accrued at the rate of 10% until  March 5, 2002,  rather  than the default
rate provided in the Promissory  Note.; 3) If the entire amount of principal and
interest and accrued  interest is not paid on or before March 5, 2002,  then all
unpaid interest and principal shall thereafter bear interest at a rate of 13.5%.
The Company did not repay the Promissory Note and the entire amount of principal
and interest is currently  outstanding.  The market value of the Company's stock
on February 19 was $.86.

<TABLE>
--------------------------- ----------------------- -------------- ------------------------ --------------
      Warrant Holder            Original Date         Number of       Replacement Date        Price per
                                                       Shares                                   Share
--------------------------- ----------------------- -------------- ------------------------ --------------
<S>                            <C>                    <C>             <C>                       <C>
John V. Doyle, as Trustee      January 28, 2000        15,338         February 19, 2002         $.50
--------------------------- ----------------------- -------------- ------------------------ --------------
      John V. Doyle            January 28, 2000        30,677         February 19, 2002         $.50
--------------------------- ----------------------- -------------- ------------------------ --------------
      John V. Doyle            August 29, 2000         20,000         February 19, 2002         $.50
--------------------------- ----------------------- -------------- ------------------------ --------------
      John V. Doyle             March 5, 2001          200,000        February 19, 2002         $.50
--------------------------- ----------------------- -------------- ------------------------ --------------
</TABLE>

         70) Issuance of Convertible Debenture to Barry G. Bampton

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

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
2/21/02             $50,000           Common            71,428            $.70              2/21/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          357,143           $.70              2/20/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>

         71) Issuance of Promissory Note to John Cavalier

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



                                       54
<PAGE>

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

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

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

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

         74) Issuance of Promissory Note to Jay Watson

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

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

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

<TABLE>
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Date of                                  Conversion        Number of                         Expiration
Issuance             Note Amount         Securities         Shares        Price per share    Date
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S>                 <C>               <C>               <C>               <C>               <C>
3/07/02             $100,000          Common            142,857           $.70              3/07/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
                                      Warrants          714,286           $.70              3/06/07
------------------- ----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>


PTC HOLDINGS OFFERINGS

         The following are previously disclosed sales of the common stock of PTC
Holdings,  Inc.,  prior  to its June 22,  1999  merger  with  Ocean  Power.  The
following  information is provided as a supplement to the sales of  unregistered
securities by Ocean Power listed above.

         1) Issuance To Holdings Founders In Exchange For Debt Cancellation

         On June 16, 1998,  Holdings issued an aggregate of 1,061,400  shares of
its common stock to Joseph Maceda, Robert Campbell and Rocco Guarnaccia,  each a
director,   officer  and  founder  of  Holdings,   in  consideration  for  their
cancellation of Holdings debt in the aggregate amount of $83,881.00 owed to them
collectively for the prior advancement of operating funds to Holdings.

         2) Offering To Employees,  Consultants  and a Lender For  Conversion of
Debt

         On March 22, 1999, Holdings issued an aggregate of 19,011,220 shares of
its common  stock to 10 persons for  conversion  of debt,  as follows:  Holdings
issued  34,800  shares of common stock to an officer and founder of Holdings for
an aggregate of $50,000 in cash advances made to Holdings for operating funds in
1997; Holdings issued 496,248 shares of common stock to two consultants for fees
due in the  amount of  $1,426,  for  technical  advisory  services  rendered  to
Holdings;  and  Holdings  issued  18,480,172  shares  of  common  stock to eight
employees for past salary due in the amount of $53,104.



                                       55
<PAGE>

         3) Offerings to Consultants and Landlord for Conversion of Debt

         From the period of April 27,  1999 to May 3, 1999,  Holdings  issued an
aggregate  of  144,385  shares  of  common  stock to five  persons  who were the
landlord and  consultants  to Ocean Power for the conversion of debt as follows:
on April 27, 1999, Holdings issued 69,600 shares to one person for payments past
due for the lease of  commercial  space by  Holdings  in the amount of $209;  on
April 27, 1999,  Holdings  issued 26,100 shares to one  consultant  for services
rendered in connection  with a development  project  underway in Russia,  in the
amount of $75; on April 30, 1999,  Holdings issued an aggregate of 22,968 shares
to two consultants for past fees due for technical advisory services provided to
Holdings in the amount of $66; and on May 3, 1999, Holdings issued 25,717 shares
to one consultant for past fees due for technical  advisory services provided to
Holdings in the amount of $74. The shares were issued at par value.

         4) Issuance to Officer for Past Salary Due

         On May 7, 1999,  Holdings issued to Gloria Rose Ott 2,610,000 shares of
common stock for salary past due in the amount of $7,500. The shares were issued
at par value.

         5) Issuances for Cash to Employees,  Consultants,  Vendors, Lenders and
Landlord

         From February 1998 to June 1999, Holdings issued to 33 persons who were
employees,  consultants, vendors, lenders and landlords of Holdings an aggregate
of 2,217,141  shares of common stock for aggregate cash proceeds of $6,646.  The
shares were issued at par value. Holdings issued the shares as follows:

DATE OF ISSUANCE    NUMBER OF SHARES    RECIPIENTS      TOTAL CASH PROCEEDS PAID
----------------    ----------------    ----------      ------------------------
    2/98 - 6/99        1,236,791       11 Employees                $3,710
                         725,962       10 Consultants              $2,178
                          31,320       3 Vendors                      $90
                         215,760       2 Lenders                     $647
                           7,308       3 Landlords                    $21
                                                                   ------
                                       TOTAL:                      $6,646










                                       56
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

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

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


PLAN OF OPERATION

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

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

         Ocean Power has had no profit to date.  It has  experienced  a total of
$37,510,434  in losses from  inception on March 26, 1992 through to December 31,
2001.  Ocean  Power's  losses have  resulted from the fact that our products are
still in development and planned principle operations have not commenced.

         At December 31, 2001, Ocean Power's unrestricted cash position declined
to $68,914 as compared to $2,176,299 at December 31, 2000,  and we have incurred
accounts payable, notes payable, and other obligations aggregating  $21,750,344.
During the year ended  December 31,  2001,  aggregate  liabilities  increased by
$10,204,840.

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

         Due to the increased level of activity  projected during the next three
years,  additional  funding will be needed and is being sought.  From January 1,
2001 to March  22,  2002,  Ocean  Power  has  raised  $7,077,000  of  additional
financing  through  proceeds from notes payable and convertible  debentures.  Of
that  amount,   Ocean  Power  has  received   loans  of  $12,000  and  $215,000,
respectively, from related parties.

         In order to continue as a going concern,  develop a reliable  source of
revenues,  and achieve a profitable level of operations,  Ocean Power will need,
among other things, additional capital resources. Management's plans to continue
as a going concern include raising  additional capital through private placement
sales of Ocean  Power's  common  stock  and/or  loans  from third  parties,  the
proceeds of which will be used to develop Ocean Power's products,  pay operating
expenses and pursue acquisitions and strategic alliances. In our Form 10-QSB for
the  second  quarter  of 2001,  Ocean  Power  indicated  that it expects to need


                                       57
<PAGE>

$20,000,000 to  $30,000,000 of additional  funds for operations and expansion in
2001.  Due to the delays in fund raising caused in part by the September 11 acts
of war on the United States, Ocean Power expects that $20,000,000 to $30,000,000
will be raised  during the first half of 2002.  All funds raised will be used to
pay  current  debts and fund  operations  and  expansion  consistent  with Ocean
Power's business plan. However, management cannot provide any assurances that we
will  be  successful  in  accomplishing  any  of our  plans.  Failure  to  raise
sufficient capital could have a material adverse effect on Ocean Power's results
of operations, financial condition, and liquidity.

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

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

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

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

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

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

         (i) Since completion of our water quality  certification on December 9,
1999,  Ocean  Power has raised  approximately  $17  million  pursuant to private
placement  financing  and loans which has allowed  Ocean Power to implement  our
Product  Development  Program,  as  well  as to  further  business  development,
strategic  partnering and  acquisition  activities.  Based on an analysis of our
sales and development  costs,  Ocean Power intends to raise an additional $20-30
million  pursuant to private  placement  sales of our common  stock and/or loans
from third parties during the first half of 2002. In addition,  depending on the
pace of actual sales and the acquisition  activities of Ocean Power, we may seek
to raise an  additional  round of financing in an amount to be determined by us,
in the  second  half of 2002.  The  exact  method  of this  additional  round of
financing has not been  determined.  The additional  equity,  if raised by Ocean
Power, will allow us to execute our business plan.

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

         (ii) Ocean Power intends to conduct technology and product  development
in a number of areas. They are:

                  (a)      low-temperature hydrogen generation;

                  (b)      ejectors;

                  (c)      chemical-free water pretreatment;

                  (d)      enhanced heat transfer in plastic heat exchangers;



                                       58
<PAGE>

                  (e)      high-performance alkaline fuel cells;

                  (f)      Stirling engines;

                  (g)      Plasma chemical reactors.

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

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

                  (a)      further laboratory and test facilities;

                  (b)      system integration facilities; and

                  (c)      a manufacturing facility for proprietary components.

         (iv)  Although  Ocean  Power plans to  subcontract  out as much work as
possible,  during  the next year we still  anticipate  increasing  the number of
employees from the current 44 full-time  employees to approximately 75 full-time
employees.


SIGMA ELEKTROTEKNISK AS ACQUISITION

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

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

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

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



                                       59
<PAGE>

         Another  factor  drawing  us to Sigma was its focus on what we  believe
could be a profitable business in the growing distributed power market in Europe
- home heat and power  generation.  We are seeking to  configure  Sigma's  basic
engine design for a range of other uses in the commercial  and industrial  power
markets,  as well as  adapting  these  engines  as a power  source for our H20kW
Systems (TM) sea water  desalination  systems.  We believe  that  Sigma's  basic
one-cylinder  model can be expanded  from the current 3kW to up to a 25kW engine
with no basic design  change.  Our  long-term  plan,  ultimately,  is to seek to
combine  several  25kW engine  systems in parallel  arrays that will allow us to
install  distributed  power systems from  kilowatts to megawatts  with one basic
design that can share many common  parts;  thereby  reducing the cost to produce
the power  systems.  This  manufacturing  efficiency,  coupled with the inherent
flexibility of the fuel sources for a Stirling  engine (any heat source will do,
such as oil,  gas,  solar power or any biomass) we believe  will cause  Stirling
engines to have  significant  commercial  advantages as a source of  distributed
power over other  distributed  technologies  such as fuel cells, with their more
stringent fuel requirements.

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

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

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

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



                                       60
<PAGE>

         With frequent contact among the CEO of Sigma, Ocean Power's Director of
Manufacturing,  Chief  Scientist and other staff,  as well as regular visits and
internal  reports,  management  concluded that all activities  were  progressing
acceptably.  Continuous  monitoring of competing  technologies and review of our
development  progress led management to believe that the new technologies  Sigma
was applying to Stirling engines could result in competitive  advantages and the
total value of their basic patents had not decreased.

         The Board of Directors  and  management  of Ocean Power were  regularly
apprised  of  the  progress  on  all  activities,   including  Sigma.  Based  on
management's regular monitoring, we concluded that no impairment of the goodwill
or Sigma  patents  existed at any of the  quarterly  balance sheet dates between
September 2000 and June 2001.

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

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

<TABLE>
<S>                                                             <C>
TARGETED COMPLETION DATE                                        Benchmark.

FIRST QUARTER of 2001                                           Prime customer agrees to collaborate in development
                                                                efforts.

FOURTH QUARTER of 2001                                          Second generation prototype available to Sigma for testing.

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

LATE FIRST QUARTER OR EARLY SECOND QUARTER OF 2002              Release of second generation prototype for external
                                                                testing.

SECOND QUARTER 2002                                             Micro combined heat and power system ready for internal
                                                                testing.

THIRD QUARTER 2002                                              Freezing (finalization) of design of the second generation
                                                                prototype.

FOURTH QUARTER OF 2003                                          Commence production of product (small energy converter
                                                                with electrical output of 3kW and thermal output of 9kW).
</TABLE>

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

         Our initial  anticipated  time-line to develop our 3kW Stirling  engine
for  commercial  use was three  years  from the date of  initial  funding of the
capital necessary to continue the work already begun by Sigma before the date of
the acquisition. The initial funding and commencement of work began in September
2000.  That  timeline has now been extended by 12 to 14 months due to difficulty
in raising funds resulting,  in part, from delays in obtaining  relisting on the
NASDAQ  OTC  Bulletin  Board  (relisting  occurred  September  7,  2001) and the
September  11,  2001 act of war  committed  on the United  States with the World
Trade Center  devastation that disrupted the financial markets and significantly
affected and,  consequently,  delayed Ocean Power's efforts to obtain investment
funds necessary to carry out its business plans within the time lines previously
projected by Ocean Power. As a consequence of funding availability,  Ocean Power
has been forced to reduce the pace of development.  We currently expect that the
second benchmark  originally  projected to be completed in the fourth quarter of
2001  will  be  delayed  for  up  to  12  to 14  months,  depending  on  funding
availability.  However,  the  first  transaction  for the  sale  of a  prototype
Stirling Engine was consummated during the last quarter of 2001, with the actual
delivery date to be determined.  The other benchmarks will be delayed by periods


                                       61
<PAGE>

comparable  to the delay in the  benchmark  originally  scheduled for the fourth
quarter 2001, that is 12 to 14 months.

         Our  current  estimate  of our  funding  requirements  to  achieve  the
benchmarks set forth above is $27.55 million due to delays in development caused
by  difficulties in raising  sufficient  funding.  The $27.55 million  aggregate
amount needed over the revised  five-year  period to fund the  activities in the
Plan of  Development  is as follows:  $700,000 in 2000,  $4.59  million in 2001,
$11.06  million in 2002,  $8.66 million in 2003 and $2.54 million in 2004. As of
December 31, 2001,  Ocean Power has provided  approximately  $4.0 million of the
$27.55 million  revised amount  projected to be needed for project  development.
Sigma was able to meet the first Stirling engine  benchmark and continue to work
on a reduced scale toward the second and third benchmarks by (1) focusing on the
core activity of designing, developing and engineering a production prototype of
the first generation Sigma 3kW electric/9 kW thermal Stirling engine;  (2) using
available funds of  approximately  $4.0 million;  (3) obtaining vendor credit of
$1.5 million; (4) deferring  development tasks (and the related costs) that were
not part of the core activity and could be deferred without causing delay to the
time line for  development;  and (5) converting of debt to stock of Ocean Power.
By  focusing  on the  designing,  developing  and  engineering  of a  production
prototype  of the engine,  we have been able to  complete a pre-mass  production
engine  ready for  manufacture.  We have also been able to have our  engineering
consultant  begin planning the design and  manufacture of the second  generation
prototype  engine,  which is intended to be lighter,  simpler in design and less
expensive  than  the  first  generation  engine.  Thirty  units  of  the  second
generation  prototype  units have been  ordered  and were in  production  before
production  was  suspended  in  September  2001 due to  difficulties  in raising
sufficient  funding.  The first three units that were  scheduled for delivery in
the fourth quarter 2001 can be completed approximately 6 months after funding is
obtained  in  amounts  sufficient  to pay the  engineering  consultant  the $1.5
million due for services  provided to date. Upon completion of production of the
prototype  units,  we expect to start  generating  cash flow from the release of
second generation  prototype engines to utilities and other potential  customers
for testing.  Because of the low volume of  production,  pricing of these second
generation  engines will only cover the high initial  manufacturing  cost of the
initial  thirty  units.  Therefore,  early stage  production  will not  generate
sufficient  cash  flow to fund  other  development  tasks  such as the  deferred
activities and other second generation development activities such as marketing.

         Because of the delays in development  caused by difficulties in raising
funds, Ocean Power performed an impairment  assessment of the assets employed in
its Stirling  engine  business,  which consist  largely of the Sigma patents and
goodwill.  Using the estimated present value of future cash flows from the Sigma
engine  business,  taking  into  account  the delay in  development  and related
increases in total development  cost, as an estimate of fair value,  Ocean Power
concluded  that no  impairment  in the assets of the  Stirling  engine  business
existed at December 31, 2001. The impairment  assessment  considered whether any
significant  changes  have  occurred  in the  targeted  market  place that would
diminish the value of the  Stirling  engine  business,  such as emergence of new
competing technologies,  changes in market size and configuration, or changes in
competitors'  businesses.  We also  considered  whether the delay in development
should  result in a decrease in the useful lives  assigned to the Sigma  patents
and  goodwill  and  have  concluded  that,  because  we  intend  to  re-commence
development as soon as funds are obtained, there is no reduction in useful lives
needed at this time.  Ocean  Power will  update its  impairment  and useful life
assessment each quarter.

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

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

         Our initial  estimate,  of our manpower  requirements  for the Stirling
engine development plan was a total of 53 people by 2004. Sigma currently has 17
employees.  To develop the Stirling  engine as we currently  plan, we anticipate
increasing  Sigma's manpower to approximately 38 in 2002 and 2003, and 45 people
by 2004. To date,  Sigma's  manpower  requirements  have been less than expected
because of lack of funding to proceed with the Stirling  engine  development  as
originally planned.




                                       62
<PAGE>

ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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

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


                                       63
<PAGE>

and (2) will be  eliminated  from the  ongoing  operations  of the  entity  in a
disposal transaction.

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

































                                       64
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Our consolidated financial statements appear beginning at page F-1.
































                                       65
<PAGE>


















                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 2001
























                                      F-1
<PAGE>

                                 C O N T E N T S

Independent Auditors' Report...............................................  F-3

Consolidated Balance Sheet.................................................  F-4

Consolidated Statements of Operations and Other Comprehensive Income........ F-6

Consolidated Statements of Stockholders' Equity (Deficit)..................  F-7

Consolidated Statements of Cash Flows...................................... F-16

Notes to the Consolidated Financial Statements............................. F-18




















                                      F-2
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

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

We have  audited  the  accompanying  consolidated  balance  sheet of Ocean Power
Corporation and  Subsidiaries  (a development  stage company) as of December 31,
2001,  and  the  related   consolidated   statements  of  operations  and  other
comprehensive  income,  stockholders'  equity (deficit),  and cash flows for the
years  ended  December  31, 2001 and 2000 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  financial position of Ocean
Power  Corporation and Subsidiaries (a development stage company) as of December
31,  2001,  and  the   consolidated   results  of  their  operations  and  other
comprehensive  income and their cash flows for the years ended December 31, 2001
and 2000 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-3
<PAGE>


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


                                     ASSETS

                                                               December 31,
                                                                   2001
                                                         -----------------
CURRENT ASSETS

   Cash                                                  $          68,914
   Cash - restricted (Note 2)                                       75,217
   Advances to employees (Note 3)                                  370,107
   Prepaid expenses                                                 69,186
   Other receivables                                                26,853
                                                         -----------------

     Total Current Assets                                          610,277
                                                         -----------------

EQUIPMENT, NET (Note 2)                                          1,165,567
                                                         -----------------

OTHER ASSETS

   Debt offering costs                                             108,591
   Deposits                                                         52,663
   Patents, and licensing agreements, net (Note 4)               6,478,612
   Goodwill, net (Note 5)                                        5,656,207
                                                         -----------------

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

     TOTAL ASSETS                                        $      14,071,917
                                                         =================


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





                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                     Consolidated Balance Sheet (Continued)


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

                                                                                                   December 31,
                                                                                                       2001
                                                                                               -----------------
<S>                                                                                            <C>
CURRENT LIABILITIES

   Accounts payable                                                                            $       4,527,329
   Accrued expenses (Note 8)                                                                           9,560,522
   Notes payable - related parties (Note 6)                                                            1,315,277
   Notes and convertible debentures payable - current portion (Note 7)                                 3,952,780
   Deferred revenue (Note 2)                                                                              35,550
                                                                                               -----------------

     Total Current Liabilities                                                                        19,391,458
                                                                                               -----------------

LONG-TERM LIABILITIES

   Notes payable - related parties (Note 6)                                                               65,000
   Notes and convertible debentures payable (Note 7)                                                   2,293,886
                                                                                               -----------------

     Total Long-Term Liabilities                                                                       2,358,886
                                                                                               -----------------

     Total Liabilities                                                                                21,750,344
                                                                                               -----------------

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; 38,439,094 shares issued and outstanding                                            384,391
   Additional paid-in capital                                                                         30,254,067
   Deferred consulting expense (Note 10)                                                              (1,141,000)
   Other comprehensive income                                                                            334,549
   Deficit accumulated during the development stage                                                  (37,510,434)
                                                                                               -----------------

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

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

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


                                      F-5
<PAGE>

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

                                                                                                      From
                                                                                                 Inception on
                                                                                                    March 26,
                                                                  For the Years Ended             1992 Through
                                                                     DECEMBER 31,                 December 31,
                                                       --------------------------------------
                                                              2001                2000                2001
                                                       ------------------  ------------------  -----------------
<S>                                                    <C>                 <C>                 <C>
REVENUES                                               $                -  $                -  $               -
                                                       ------------------  ------------------  -----------------

EXPENSES
   General and administrative                                   8,150,521           8,074,830         24,093,809
   Impairment of intangible assets                                286,301             400,000            686,301
   Research and development                                     4,144,063             295,456          5,689,519
   Depreciation and amortization                                1,862,614             432,665          2,345,973
                                                       ------------------  ------------------  -----------------

     Total Expenses                                            14,443,499           9,202,951         32,815,602
                                                       ------------------  ------------------  -----------------

     LOSS FROM OPERATIONS                                     (14,443,499)         (9,202,951)       (32,815,602)
                                                       ------------------  ------------------  -----------------

OTHER INCOME (EXPENSE)
   Currency gain                                                    1,258                 522              1,780
   Interest income                                                 74,167             215,544            289,711
   Loss on sale of assets                                               -                   -           (387,649)
   Interest expense                                            (3,271,591)           (283,231)        (4,921,837)
                                                       ------------------  ------------------  -----------------

     Total Other Income (Expense)                              (3,196,166)            (67,165)        (5,017,995)
                                                       ------------------  ------------------  -----------------

LOSS BEFORE EXTRAORDINARY ITEM                                (17,639,665)         (9,270,116)       (37,833,597)

EXTRAORDINARY ITEM
   Gain on settlement of debt                                     157,822             165,341            323,163
                                                       ------------------  ------------------  -----------------

NET LOSS                                                      (17,481,843)         (9,104,775)       (37,510,434)
                                                       ------------------  ------------------  -----------------

OTHER COMPREHENSIVE INCOME
   Currency translation adjustment                                139,291             195,258            334,549
                                                       ------------------  ------------------  -----------------

     TOTAL COMPREHENSIVE LOSS                          $      (17,342,552) $       (8,909,517) $     (37,175,885)
                                                       ==================  ==================  =================

BASIC AND DILUTED LOSS PER SHARE
   Loss before extraordinary item                      $            (0.46) $            (0.25)
   Extraordinary item                                                0.00                0.00
                                                       ------------------  ------------------

     Net loss per share                                $            (0.46) $            (0.25)
                                                       ==================  ==================

WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING                                                   38,312,532          36,157,787
                                                       ==================  ==================

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


                                                      F-6
<PAGE>

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


                                                                                                          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)               -             -            -
                                       -------------  -------------   --------------  ---------------   -----------  -----------

Balance Forward                              698,400  $       6,984   $       (4,978) $             -   $         -  $(2,306,366)
                                       =============  =============   ==============  ===============   ===========  ===========


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




                                                               F-7
<PAGE>

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


                                                                                                          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                              698,400  $       6,984   $       (4,978) $             -   $         -  $(2,306,366)

June 16, 1998, common stock
issued for cash, 42,178 shares
issued to employees, 43,152 shares
issued to consultants,
60,900 shares issued to lenders,
6,960 shares issued to a landlord
and 8,352 shares 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)

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)               -             -            -
                                       -------------  -------------   --------------  ---------------   -----------  -----------

Balance Forward                           21,588,124  $     215,881   $      (23,117) $             -   $         -  $(5,224,330)
                                       =============  =============   ==============  ===============   ===========  ===========

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



                                                               F-8
<PAGE>

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


                                                                                                          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                           21,588,124  $     215,881   $      (23,117) $             -   $         -  $(5,224,330)

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)
                                       -------------  -------------   --------------  ---------------   -----------  -----------

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


                                                        F-9
<PAGE>

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


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

Balance Forward                           31,335,596  $     313,356   $    2,727,769  $             -   $         -  $(5,224,330)
                                       -------------  -------------   --------------  ---------------   -----------  -----------

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



                                                        F-10
<PAGE>

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


                                                                                                          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                           31,335,596  $     313,356   $    2,727,769  $             -   $         -  $(5,224,330)

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                -             -            -

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 9)                 -              -          650,000                -             -            -

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

Balance Forward                           31,488,096  $     314,881   $    4,520,383  $             -   $         -  $(5,224,330)
                                       -------------  -------------   --------------  ---------------   -----------  -----------


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




                                                     F-11
<PAGE>

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


                                                                                                          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                           31,488,096  $     314,881   $    4,520,383  $             -   $         -  $(5,224,330)

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)
                                       -------------  -------------   --------------  ---------------   -----------  -----------



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



                                                   F-12
<PAGE>

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


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

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


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




                                                      F-13
<PAGE>

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


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

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

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

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

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

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

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

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

Currency translation adjustment                    -              -                -          195,258             -              -

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

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

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

Balance, December 31, 2000                38,149,942  $     381,499   $   25,611,288  $       195,258   $  (410,667) $(20,028,591)
                                       =============  =============   ==============  ===============   ===========   ===========


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




                                                        F-14
<PAGE>

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


                                                                                                          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, 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)
                                       =============  =============   ==============  ===============   ===========  ===========


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




                                                        F-15
<PAGE>

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

                                                                                                          From
                                                                                                       Inception on
                                                                       For the Years Ended               March 26,
                                                                          December 31,                 1992 Through
                                                             -------------------------------------     December 31,
                                                                    2001               2000                2001
                                                             -----------------   -----------------  ------------------
<S>                                                          <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                  $     (17,481,843)  $      (9,104,775) $      (37,510,434)
   Adjustments to reconcile net loss to net
    cash used by operating activities:
     Depreciation and amortization                                   1,862,614             432,665           2,345,973
     Deferred consulting expense                                       197,665             329,333             526,998
     Value of common stock, warrants, options
      and discounts on equity instruments issued
      for services                                                           -           3,188,931           3,802,930
     Loss on sale of assets                                                  -                   -             387,649
     Amortization of debenture discount                              1,628,386                   -           2,278,386
     Gain on settlement of debt                                       (157,822)           (165,341)           (323,163)
     Impairment loss                                                   286,301             400,000             686,301
   Change in operating asset and liability accounts,
    net of amounts acquired in
    business combination:
     (Increase) decrease in advances to employees,
      prepaid expenses, and deposits                                    79,341          (5,207,210)         (5,807,236)
     (Increase)  in debt offering costs                              (108,591)                   -            (108,591)
     Increase (decrease) in accounts payable                         3,151,818            (419,000)          4,185,280
     Increase in accrued expenses                                    2,761,772           5,844,650           9,378,921
     Increase in deferred revenue                                       35,550                   -              35,550
                                                             -----------------   -----------------  ------------------

       Net Cash Used by Operating Activities                        (7,744,809)         (4,700,747)        (20,121,436)
                                                             -----------------   -----------------  ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   License agreement payments                                                -            (400,000)           (400,000)
   Cash acquired in Sigma acquisition                                        -             142,254             142,254
   Proceeds from sale of assets                                              -                   -                   1
   Purchase of fixed assets                                           (420,595)           (635,906)         (1,164,570)
   Equipment procurement costs                                               -            (200,000)           (564,110)
                                                             -----------------   -----------------  ------------------

       Net Cash Used by Investing Activities                          (420,595)         (1,093,652)         (1,986,425)
                                                             -----------------   -----------------  ------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Repayment of related party notes payable                           (113,776)         (1,521,200)         (1,634,976)
   Repayment of note payable                                          (179,988)         (1,090,839)         (1,519,062)
   Loans from related parties                                          227,000                   -           7,451,287
   Proceeds from notes payable                                       4,400,000                   -           4,400,000
   Issuance of convertible debentures                                1,800,000                   -           2,450,000
   Common stock issued for cash                                              -          10,240,750          11,131,032
   Stock offering costs                                                      -             (26,289)            (26,289)
                                                             -----------------   -----------------  ------------------

       Net Cash Provided by Financing Activities                     6,133,236           7,602,422          22,251,992
                                                             -----------------   -----------------  ------------------

NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS                                             (2,032,168)          1,808,023             144,131

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

CASH AND CASH EQUIVALENTS AT END OF PERIOD                   $         144,131   $       2,176,299  $          144,131
                                                             =================   =================  ==================

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




                                                         F-16
<PAGE>

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

                                                                                                          From
                                                                                                       Inception on
                                                                       For the Years Ended               March 26,
                                                                          December 31,                 1992 Through
                                                             -------------------------------------     December 31,
                                                                    2001               2000                2001
                                                             -----------------   -----------------  ------------------
<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                                                 $               -   $       3,188,931  $        3,802,930
   Equity instruments issued for deferred
    consulting expense                                       $               -   $         740,000  $          740,000
   Common stock issued for recapitalization                  $               -   $               -  $        2,761,773
   Common stock issued for conversion of debt                $         456,286   $       1,171,812  $        2,963,511
   Acquisition of licenses through license agreement
    payable                                                  $               -   $       6,940,000  $        6,940,000
   Warrants granted in conjunction with debt instruments     $       3,261,386   $               -  $        3,261,386

   Acquisition of subsidiary:
       Assets acquired                                                           $       1,272,392
       Liabilities assumed                                                              (2,362,148)
       Goodwill                                                                          6,589,756
                                                                                 -----------------
         Purchase price                                                                  5,500,000
       Payment with 1,718,748 shares of
         common stock                                                                   (5,500,000)
                                                                                 -----------------

       Cash used for acquisition                                                 $               -
                                                                                 =================


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





                                                         F-17
<PAGE>

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



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  is  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 plans to pursue  regional joint ventures in
              water and power  challenged  markets to build,  own,  operate  and
              transfer modular seawater desalination and power plants.

              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 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.



                                      F-18
<PAGE>

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


NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued)

              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.

              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.

              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-19
<PAGE>

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


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.  The earnings
              per share for periods prior to the business  combination have been
              restated to reflect the  equivalent  number of shares  received by
              Holdings.

<TABLE>
                                                                                      For the Years Ended
                                                                                         December 31,
                                                                            --------------------------------------
                                                                                   2001                2000
                                                                            ------------------  ------------------
<S>                                                                         <C>                 <C>
              Net loss before extraordinary item (numerator)                $      (17,639,665) $       (9,270,116)

              Weighted average number of shares
               outstanding (denominator)                                            38,312,532          36,157,787
                                                                            ------------------  ------------------

              Loss per share                                                $            (0.46) $            (0.25)
                                                                            ==================  ==================

              Extraordinary item (numerator)                                $          157,822  $          165,341

              Weighted average number of shares
               outstanding (denominator)                                            38,312,532          36,157,787
                                                                            ------------------  ------------------

              Income per share                                              $             0.00  $             0.00
                                                                            ==================  ==================
</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, 2001.

              At  December  31,  2001,   the  Company  has  net  operating  loss
              carryforwards  of  approximately  $19,900,000  that may be  offset
              against  future  taxable  income  through 2021. No tax benefit has
              been  reported  in the  financial  statements  because the Company
              believes  that it is more likely  than not that the  carryforwards
              will expire unused. Accordingly, the potential tax benefits of the
              loss carryforwards are offset by a valuation allowance of the same
              amount.



                                      F-20
<PAGE>

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


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  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.

              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, 2001 and 2000 was $186,872 and $73,863, respectively.

              Equipment consists of the following:

<TABLE>
              Estimated Useful                                                                      December 31,
                   Life                                                                                 2001
              ----------------                                                                  -------------------
<S>                                          <C>                                                <C>
              20 years                       Distillation equipment                             $          564,110
              5 - 7 years                    Office equipment and furniture                                543,564
              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                                     (404,096)
                                                                                               -------------------

                                             Net Equipment                                      $        1,165,567
                                                                                                ==================
</TABLE>

              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.



                                      F-21
<PAGE>

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


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.  Newly Issued Accounting Pronouncements

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

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

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



                                      F-22
<PAGE>

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              i.  Newly Issued Accounting Pronouncements (Continued)

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

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

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

              SFAS 144 develops one accounting model (based on the model in SFAS
              121) for long-lived  assets that are to be disposed of by sale, as
              well as addresses the principal  implementation  issues.  SFAS 144
              requires that long-lived assets that are to be disposed of by sale
              be  measured at the lower of book value or fair value less cost to
              sell. That  requirement  eliminates the requirement of APB 30 that
              discontinued  operations  be measured at net  realizable  value or
              that  entities  include  under  "discontinued  operations"  in the
              financial  statements  amounts for operating  losses that have not
              yet occurred.



                                      F-23
<PAGE>

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              i.  Newly Issued Accounting Pronouncements (Continued)

              Additionally, FAS 144 expands the scope of discontinued operations
              to include all  components of an entity with  operations  that (1)
              can be  distinguished  from the rest of the entity and (2) will be
              eliminated from the ongoing operations of the entity in a disposal
              transaction.

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

              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,  2001  and  2000,
              respectively,  and $35,550 and $-0-  deferred  revenue at December
              31, 2001 and 2000, respectively.

              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,  2001 and 2000 was  $38,006  and $-0-,
              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.




                                      F-24
<PAGE>

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              l.  Long-lived Assets (Continued)

              Likewise,  the intangible  assets  recorded in connection with the
              Company's licensing agreement with Aquamax and Keeran (Note 10(e))
              is  assessed  to  determine  whether or not  impairment  exists 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.

              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,  2001  and  2000  was  $4,144,063  and
              $295,456, 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  softwear  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.




                                      F-25
<PAGE>

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


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              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.

              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.

              r.  Restricted Cash

              At December 31, 2001, the Company's subsidiary,  Sigma had cash of
              $75,217 in a separate  bank account  which is  restricted  for the
              payment of payroll taxes. The payroll taxes are paid monthly.





                                      F-26
<PAGE>

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


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.

NOTE 4 -      PATENTS AND LICENSING AGREEMENTS

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

               Patents                                     $          973,658
               Licensing Agreement - Aquamax/Keeran                 6,540,000
               Licensing Agreement - STM                              500,000
               Accumulated amortization                            (1,535,046)
                                                           ------------------

                                                           $        6,478,612
                                                           ==================

              As part of the  purchase of Sigma,  the Company  acquired  patents
              valued  at their  fair  value of  $973,658.  The  patents  have an
              estimated  remaining  life of 90 months from the date of the Sigma
              acquisition. The patents are pledged as collateral for obligations
              of $489,043 at December 31, 2001 (Note 7).

              The  license  agreement  represents  rights to patent  and  patent
              applications for technology acquired from Aquamax and Keeran (Note
              10). The cost of the license agreement is being amortized over its
              estimated  useful life of 10 years.  Amortization  expense for the
              years ended  December  31, 2001 and 2000 was $129,067 and $41,129,
              respectively  for the  Patents  and  was  $864,850  and  $190,850,
              respectively  for  the  Licensing   Agreement  -   Aquamax/Keeran.
              Accumulated  amortization  at December  31, 2001 was  $864,850 and
              $170,196  for the  Licensing  Agreement -  Aquamax/Keeran  and the
              Patents, respectively.

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

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




                                      F-27
<PAGE>

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


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 is being amortized over 10 years
              by the  straight-line  method.  Amortization  expense  amounted to
              $658,976 and  $274,573  for the years ended  December 31, 2001 and
              2000,  respectively.   Net  Goodwill  at  December  31,  2001  was
              $5,656,207.

              The  results  of   operations   of  SIGMA  are   included  in  the
              consolidated financial statements from the date of acquisition.

              Unaudited pro forma  consolidated  results of  operations  for the
              year ended  December 31, 2000 as though SIGMA had been acquired as
              of January 1, follows:

              The unaudited pro forma  consolidated  results include the amounts
              for the  Company  and  Sigma and a full  year of  amortization  of
              goodwill as well as $50,000 of estimated acquisition costs.

                                                                    December 31,
                                                                        2000
                                                                    ------------
                          Sales                                  $            -
                          Net loss                                  (10,099,010)
                                                                 ==============

                          Basic and diluted earnings per share   $        (0.27)
                                                                 ==============

              The unaudited  proforma  results of operations are not necessarily
              indicative of what the results would have been had the acquisition
              actually occurred on the dates indicated,  and are not necessarily
              representative of future results of operations.




                                      F-28
<PAGE>

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


NOTE 6 -      NOTES PAYABLE - RELATED PARTIES

<TABLE>
              Notes payable - related  parties at December 31, 2001 consisted of
              the following:

<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.                $          88,696

              Unsecured note payable to an employee bearing interest
               at 10% per annum, all unpaid interest and principal due
               upon demand.                                                                    282,813

              Unsecured note payable to an officer bearing interest at
               10% per annum, due upon demand.                                                 232,585

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                  54,263

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                 240,910

              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.                                                 116,197

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                   5,659

              Unsecured note payable to an employee bearing interest at
               10% per annum due upon demand.                                                   70,270

              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                                                                    12,000
                                                                                     -----------------

                         Total Notes Payable - Related Parties                       $       1,380,277
                                                                                     =================
</TABLE>

              Total interest expense to related parties was $93,909 and $163,938
              for the years ended December 31, 2001 and 2000, respectively.

              During the year ended  December  31,  2000,  the  Company  settled
              amounts due of $511,575 with three previously employed persons for
              $346,234,  resulting  in a  gain  on  extinguishment  of  debt  of
              $165,341. The former employees settled to accelerate the repayment
              process.



                                      F-29
<PAGE>

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


NOTE 6 - NOTES PAYABLE - RELATED PARTIES (Continued)

              Annual maturities of notes related parties payable are as follows:

              Years Ending
              December 31,
              ------------
              2002                                             $       1,315,277
              2003                                                        60,000
              2004                                                         5,000
                                                               -----------------
                                                               $       1,380,277
                                                               =================

NOTE 7 -      NOTES AND CONVERTIBLE DEBENTURES PAYABLE

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

                                                                                         December 31,
                                                                                             2001
                                                                                         -------------
<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.                          $        3,000,000

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

              Notes payable to ten parties bearing interest at 10% to 10.5%,
               without collateral, due in full one year from issue.                            1,400,000

              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

              Six (6)  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.                               700,000


              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                                                         $        6,321,000
                                                                                      ------------------
</TABLE>



                                      F-30
<PAGE>

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


NOTE 7 -      NOTES AND DEBENTURES PAYABLE (Continued)

<TABLE>
<S>                                                                                     <C>
              Balance forward                                                           $       6,321,000

              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.                500,000

              Less discount resulting from allocation of proceeds
               to warrants and conversion rights issued with the debt.                         (1,633,000)
                                                                                       ------------------
                      Subtotal                                                                  5,188,000

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual  payments which began
               May 1, 2000, collateralized by machinery
               and lease.                                                                         100,140

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual  payments which began
               May 10, 2000, collateralized by machinery
               and lease.                                                                         433,632

              Note payable to Silent Clean Power bearing interest at 12.00%, due
               in equal semi-annual payments, collateralized
               by patents and licenses.                                                           489,043

              Note payable to SND bearing a variable  interest  rate,  (10.9% at
               December 31, 2000) due in equal semi-annual  payments which began
               April 3, 2000, collateralized by
               machinery and lease.                                                                35,851
                                                                                       ------------------

              Total Notes and Debentures Payable                                       $        6,246,666
                                                                                       ==================
</TABLE>

              Annual maturities of notes and debentures payable are as follows:

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

                      2002                                $        3,952,780
                      2003                                           472,886
                      2004                                           616,000
                      2005                                                 -
                      2006                                         1,205,000
                                                          ------------------

                                                          $        6,246,666
                                                          ==================

                                      F-31
<PAGE>

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


NOTE 7 -      NOTES AND DEBENTURES PAYABLE (Continued)

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

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

              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 will be amortized to interest expense over the term of
              the debt using the effective interest rate method.






                                      F-32
<PAGE>

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


NOTE 7 -      NOTES AND DEBENTURES PAYABLE (Continued)

              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  to be  allocated  to  equity  will be
              $621,488.  The discount of $621,488  will be amortized to interest
              expense  over the term of the debt  using the  effective  interest
              rate method.

              For the year  ended  December  31,  2001,  the  Company  amortized
              $1,628,386 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.

              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
              $218 at December 31, 2001.




                                      F-33
<PAGE>

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


NOTE 7 - NOTES AND DEBENTURES PAYABLE (Continued)

              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 $19,267 at December 31, 2001.

              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 $1,048 at December 31, 2001.

              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.

              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  $47,250 at
              December 31, 2001.






                                      F-34
<PAGE>

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


NOTE 7 -      NOTES AND DEBENTURES PAYABLE (Continued)

              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
              $1,834 at December 31, 2001.

              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 $8,733 at December 31, 2001.

              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 $4,366 at December 31, 2001.

              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 $3,533 at December 31, 2001.

              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 $2,067 at December 31, 2001.






                                      F-35
<PAGE>

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


NOTE 7 -      NOTES AND DEBENTURES PAYABLE (Continued)

              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 $1,500 at December 31, 2001.

              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 $32,548
              at December 31, 2001.

              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 $433 at December 31, 2001.

              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.






                                      F-36
<PAGE>

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


NOTE 8 - ACCRUED EXPENSES

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

                                                                 December 31,
                                                                     2001

                  Accrued payroll taxes payable               $          47,325
                  Accrued interest payable - payroll                     52,717
                  Accrued payroll tax penalty                            98,845
                  Accrued franchise taxes payable                        97,828
                  Accrued fringe benefits taxes payable                  25,607
                  Accrued vacation payable                              234,607
                  Accrued other expenses                                 42,758
                  Aquamax/Keeran contingency accrual                    934,800
                  Aquamax/Keeran license fee payable                  6,540,000
                  Accrued STM license fee payable                       500,000
                  Accrued deferred compensation - Moard                 115,824
                  Accrued legal settlement - Mchargue                    63,400
                  Accrued interest payable                              806,811
                                                              -----------------

                                Total                         $       9,560,522
                                                              =================

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, 2001 of approximately  $37,500,000.  The Company does
              not have an  established  source of funds  sufficient to cover its
              operating  costs,  has a working capital deficit of  approximately
              $18,800,00,  has relied  exclusively on debt and equity financing,
              accordingly,  there is  substantial  doubt  about its  ability  to
              continue as a going concern.

              In order to develop a reliable  source of revenues,  and achieve a
              profitable level of operations, the Company will need, among other
              things,  additional capital resources.  Management's plans include
              raising  additional capital through the private placement sales of
              our common stock and/or loans from third parties,  the proceeds of
              which  will  be  used  to  develop  the  Company's  products,  pay
              operating   expenses  and  pursue   acquisitions   and   strategic
              alliances.  The Company  expects that it will need  $20,000,000 to
              $30,000,000  of additional  funds for  operations and expansion in
              2002.  However,  management cannot provide any assurances that the
              Company will be successful in accomplishing any of its plans.

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





                                      F-37
<PAGE>

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


NOTE 10 -COMMITMENTS AND CONTINGENCIES

              a.  Employment Agreements

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

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

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

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

              b.  Consulting Agreements

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

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






                                      F-38
<PAGE>

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


NOTE 10 -COMMITMENTS AND CONTINGENCIES (Continued)

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

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

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

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

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

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






                                      F-39
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES (Continued)

              b.  Consulting Agreements (Continued)

              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.

              During  January  2000,  the  Company   entered  into  a  one  year
              consulting  agreement  with  EBM,  Inc.  to  disseminate  investor
              information  on the Company to the market place and develop buyers
              who purchase the Company's  stock.  The  agreement  called for the
              Company to pay $4,000 per month until the Company  secured a total
              of  $5,000,000  in  financing,  then the Company  granted  100,000
              options to purchase the Company's common stock. The grant date and
              measurement  date were on February  22,  2000.  The options have a
              four year life and are exercisable at $1.50 per share. The Company
              recognized  consulting  expense of  $624,998  to reflect  the fair
              value of the  options,  and  increase the monthly fee for on-going
              services  to  $6,000  for 12  months  as  determined  by the Black
              Scholes pricing model upon the grant of the options.






                                      F-40
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES (Continued)

              b.  Consulting Agreements (Continued)

              During  January  2000,  the  Company  entered  into  a  consulting
              agreement  with  Donner  Corp.  International  to provide  initial
              marketing and  promotion  services.  The agreement  called for the
              Company to pay a retainer of $2,500,  and $10,000 for  services in
              connection  with  assisting  the Company to implement its business
              objectives  and issue 10,000  warrants to purchase  the  Company's
              common stock at a strike price equal to 80% of the lowest five-day
              average stock closing price from January 2-31,  2000. The warrants
              are exercisable  for three years  beginning  February 1, 2000. The
              grant date and  measurement  date were on  February  1, 2000.  The
              Company  recognized  consulting  expense of $41,242 to reflect the
              fair value of the  options  as  determined  by the Black  Schole's
              pricing model upon the grant of the warrants.

              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.

              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.






                                      F-41
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES (Continued)

              b.  Consulting Agreements (Continued)

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

              c.   Office and Building Lease

              The  Company  leases  its  office  space  under a  non-cancellable
              operating  lease which expires on April 30, 2006. The monthly rent
              amount is $22,500 with yearly  increases of  approximately  2% per
              year.  Rent expense for the years ended December 31, 2001 and 2000
              was $298,550 and $187,066,  respectively. The Company also has the
              option to purchase the building from May 1, 2003 to April 30, 2006
              at $2,350,000.

              During July 2000, the Company's  wholly-owned  subsidiary,  SIGMA,
              signed a one year  lease  with its  Chief  Executive  Officer  for
              building use and warehouse  space. The lease calls for payments of
              $6,220 per month and is renewable for 2 years at the discretion of
              the Company.

              During  October 2001,  the Company  signed a 6-month  office space
              lease which expires on March 31, 2002.  The monthly rent amount is
              $7,318. The lease will renew  automatically with the monthly lease
              payment adjusting to the then market rate.

              During October 2000, the Company formed a wholly-owned subsidiary,
              Ocean Power UK Limited,  to serve as a sales office in Europe. The
              Company  signed a lease for office space in the United Kingdom for
              $4,700 per month. The lease is for a minimum of three months, then
              is on a month-to-month basis. The Company terminated this lease at
              December 31, 2001.

              d.  Commitment to Register Shares

              The Company has committed to registering  31,000 shares which were
              issued in 1996 to the  shareholders  of  Venturetech  as part of a
              spin-off of subsidiaries by Group. The shares are recorded as part
              of the recapitalization.






                                      F-42
<PAGE>

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


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

              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-43
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES

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 to the
              Licensors.  No shares of common stock have been issued pursuant to
              the License Agreement.

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

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






                                      F-44
<PAGE>

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


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-45
<PAGE>

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


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
              under the License  Agreement pending the outcome of the resolution
              of  the  dispute  in  connection  with  the  one  element  of  the
              Agreement.  In any event,  the Company intends to proceed with its
              planned  uses  of  the  technology,  whether  on an  exclusive  or
              non-exclusive  basis.  A  portion  of  the  cost  of  the  License
              Agreement  amounting to $400,000  was  expensed in September  2000
              which  management has  determined to be an appropriate  impairment
              adjustment to reduce the asset book value by management's estimate
              of the difference between the amount the Company is obliged to pay
              under the License  Agreement and the fair value of the  technology
              based on management's  estimate of the reduction in purchase price
              had it been known that one patent application was non-exclusive.

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






                                      F-46
<PAGE>

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


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-47
<PAGE>

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


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.

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






                                      F-48
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES (Continued)

              e.  License Agreements (Continued)

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

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

              SIGMA
              -----

              On March 6, 2001, the Company's  wholly owned  subsidiary,  SIGMA,
              entered  into a  collaboration  agreement  with Baxi Group Ltd. (a
              manufacturer of heating systems in Europe) for the development and
              marketing of a combined heat and power product (micro-CHP) for the
              residential  market in the United  Kingdom.  The  objective of the
              agreement  is  to  form  a  joint  working   arrangement  for  the
              development of a micro-CHP package, consisting of the Sigma Energy
              Converter  (Sigma  Stirling  engine) and the metal  cabinet,  into
              which  each  unit  will  be  mounted,   including   controls   and
              connections to both systems and the  electricity  supply  network.
              The  purpose  of  the  collaboration  agreement  is  to  design  a
              prototype  micro-CHP  package to be installed in  compliance  with
              applicable  regulations in older and larger houses as replacements
              for boilers that have reached the end of their service  life.  The
              parties will work  together in assigning  sufficient  priority and
              allocating  necessary  resources (which have already been budgeted
              by Sigma) to the  project  to  develop  the  package in a mutually
              agreeable  time frame,  which is  currently  anticipated  to be by
              mid-2003  if the  Company  can raise  sufficient  capital  to fund
              completion of its Stirling engine and pay its portion of the costs
              in connection with the  collaboration  agreement.  Pursuant to the
              terms of the  Collaboration  Agreement,  each  party  pays its own
              expenses.  The agreement has no fixed termination date, but can be
              terminated at any time by either party on three months notice. The
              costs incurred by the Company,  which are associated with the Baxi
              collaboration,  have been expensed when incurred.  During the year
              ended December 31, 2001,  such costs consisted of travel costs and
              research and  development  costs.  For the year ended December 31,
              2001,  the Company  expensed  $18,754 of travel  costs for monthly
              planning and update meetings in connection with the  collaboration
              which is  included  in general  and  administrative  expenses  and
              $31,647 of engineer  compensation  costs which are included in the
              research and development expenses.






                                      F-49
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES (Continued)

              e. License Agreements (Continued)

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

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

              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.






                                      F-50
<PAGE>

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


NOTE 10 -     COMMITMENTS AND CONTINGENCIES (Continued)

              e.  License Agreements (Continued)

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

              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.  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-51
<PAGE>

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


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, 2001 is presented below:

<TABLE>
                             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              -
                                                     -------------                                 -------------

    Balance December 31, 2001                              765,000                                       120,000
                                                     =============                                 =============
</TABLE>


<TABLE>
                                                                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
                                                                                                  ----------------

    Balance December 31, 2001                                                                     $      1,615,793
                                                                                                  ================
</TABLE>






                                      F-52
<PAGE>

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


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.

              The following table  summarizes  information  about employee stock
              options at December 31, 2001:

<TABLE>
                                          Number of         Weighted
                                           Options          Average              Weighted           Number of
                                         Outstanding       Remaining             Average          Exercisable at
                                          December 31,    Contractual            Exercise          December 31,
                  Exercise Price             2001              Life               Price                2001
               -----------------      ----------------  ------------------  ------------------  ------------------
<S>                                            <C>                       <C> <C>                           <C>
              $             1.50               598,650                   2   $            1.50             598,650
</TABLE>

              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:

<TABLE>
                                                                                      For the Years Ended
                                                                                         December 31,
                                                                            --------------------------------------
                                                                                   2001                 2000
                                                                            ------------------  ------------------
<S>                                                                       <C>                   <C>
               Net (loss) as reported                                     $        (17,481,843) $       (9,104,775)
               Proforma                                                            (17,481,843)        (10,002,373)
               Basic and diluted (loss) per share as reported                            (0.46)              (0.25)
               Pro forma                                                                 (0.46)              (0.27)
</TABLE>

              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:

                                                                          2001
                                                                        --------
              Risk free interest rate                                     6.75%
              Expected life                                                   2
              Expected volatility                                          414%
              Dividend yield                                                0.0




                                      F-53
<PAGE>

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


NOTE 11 -     DILUTIVE INSTRUMENTS (Continued)

              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, 2001 is presented below:

<TABLE>
                                                                                       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) Donner 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              -
                                                     -------------                                 -------------
Balance, 12/31/01                                        4,690,399                                         2,913
                                                     =============                                 =============
</TABLE>


<TABLE>
                                          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%             0         360,173
2) Donner Corp, Intl.         2/1/03          6.43%              3            419%             0          41,242
3) Clement Wohlreich         7/25/03          6.43%              3            419%             0         340,000
4) Gene Martineau            6/29/06          4.97%              5            216%             0               -
5) Various Lenders          12/20/06          4.53%            3.5            220%             0       1,628,386
                                                                                                   -------------

Balance, 12/31/01                                                                                  $   2,369,801
                                                                                                   =============
</TABLE>

              The warrants  granted to Clement  Wohlreich and Gene  Martineau do
              not have a measurement date because the services have not yet been
              completed,  accordingly, the warrants will continually be revalued
              pursuant to the requirements of EITF 96-18.

NOTE 12 -         STOCK ISSUANCES

              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.

              One 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.






                                      F-54
<PAGE>

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


NOTE 12 -     STOCK ISSUANCES (Continued)

              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.

              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.






                                      F-55
<PAGE>

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


NOTE 12 -     STOCK ISSUANCES (Continued)

              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.

              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.






                                      F-56
<PAGE>

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


NOTE 12 -     STOCK ISSUANCES (Continued)

              On December 9, 1999,  the Company  issued  49,020 shares of common
              stock  valued at $0.71 per  share  for  $35,00 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.

              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.






                                      F-57
<PAGE>

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


NOTE 12 -     STOCK ISSUANCES (Continued)

              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.

              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).






                                      F-58
<PAGE>

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


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-59
<PAGE>

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


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 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 has not yet been declared effective.

NOTE 16 - SUBSEQUENT EVENTS

              EMPLOYEE OPTIONS

              On  January  8, 2002,  the  Company  authorized  the  issuance  of
              3,044,588 options to the Board of Directors, Employees and certain
              consultants.   The   options  are  valid  for  10  years  and  are
              exercisable  at $1.00 per share.  The closing price on the date of
              grant was $1.06 per share. Accordingly, the Company will recognize
              $182,675 of compensation expense in the first quarter of 2002.

              CONVERTIBLE DEBENTURES

              From  January to March 7, 2002,  the  Company  has issued five (5)
              convertible  debentures  totaling  $450,000 which bear interest at
              12% per year, are convertible into shares of common stock at $0.70
              to $0.90 per  share  and have  2,071,428  attached  warrants.  The
              warrants  carry  exercise  prices  of $0.70 to $0.90 per share and
              have a life of 5 years from the date of grant.  The  Company  will
              allocate  the  proceeds  of the debt to  equity  based on the fair
              value  of  the  warrants  as   determined  by  the  Black  Scholes
              calculation  and will  amortize the discount  over the life of the
              convertible debentures.






                                      F-60
<PAGE>

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


NOTE 16 - SUBSEQUENT EVENTS (Continued)

              NOTES PAYABLE

              From  January to March 7, 2002,  the  Company  has issued five (5)
              Notes Payable totaling  $200,000 to unrelated  parties.  The Notes
              Payable bear  interest at 13% per year,  are unsecured and are due
              one year from the date of issue.  Each note includes terms that if
              the Company elects to pre-pay any principal or interest,  then the
              Holder has the right to convert any amount of the prepayment  into
              the Company's common stock at $0.75 per share.  Additionally,  the
              Company granted 200,000 warrants as additional consideration which
              are  exercisable  at $0.75 per  warrant and have a life of 1 year.
              The Company will allocate the proceeds of the debt to equity based
              on the fair  value of the  warrants  as  determined  by the  Black
              Scholes  calculation  and will amortize the discount over the life
              of the Notes Payable.

              REVALUATION OF WARRANTS

              On February 19, 2001, the Company  cancelled a total of $3,554,015
              warrants  which had been  previously  granted in  various  private
              placements and debt  financings and had an exercise price of $1.50
              per warrant 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  these
              warrants  will  cause  the  Company  to  recognize  an  additional
              $1,360,574 of expense associated with the fair market value of the
              new warrants.

              OPTIONS FOR CONSULTING SERVICES

              On  February  7,  2002,  the  Company  entered  into a  consulting
              agreement  which  extends for three  years.  The  Consultant  will
              assist  the  Company  in  preparing  material  to be  used in fund
              raising activities, and business development activities as well as
              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.

              ISSUANCE OF COMMON STOCK FOR NOTE DEFAULT

              On February 28, 2002,  the Company issued 150,000 shares of common
              stock to a Note Holder  pursuant to the  default  provisions.  The
              shares will be valued at the closing price on the date of issue.






                                      F-61
<PAGE>

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


NOTE 16 - SUBSEQUENT EVENTS (Continued)

              EXTENSION OF CONSULTING AGREEMENT

              On  January  8,  2002,  pursuant  to an  Extension  and  Expansion
              Agreement  with  Weckstein,  the Company  extended the  consulting
              agreement with Weckstein for a minimum period of six months and up
              to three years at the option of the Company.  As compensation  for
              this extension, the Company has issued to Weckstein 200,000 shares
              of common stock which will be valued at $1.09 per share on January
              8, 2002 and revalued at each  reporting date for the following six
              months or until the services have been completed.

              ISSUANCE OF COMMON STOCK FOR EQUITY LINE OF CREDIT

              On February 28, 2002,  the Company issued 260,270 shares of common
              stock  valued at $1.92 per share or  $500,000  to Cornell  Capital
              Partners,  LP as an  incentive  to enter into the  equity  line of
              credit dated November 29, 2001. (See Note 15)

              ASSET PURCHASE TERM SHEET

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

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

              The Company has not issued any shares of common  stock  associated
              with this  agreement,  nor has the bankruptcy  court in Las Vegas,
              Nevada  approved  the sale of the  assets  from  Elektryon  to the
              Company.






                                      F-62
<PAGE>

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


NOTE 16 - SUBSEQUENT EVENTS (Continued)

              CONSULTING AGREEMENT

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

              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.











                                      F-63
<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

         None.


































                                       66
<PAGE>

                                    PART III


ITEM  10.  DIRECTORS,   EXECUTIVE  OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Our  directors  and  executive  officers and their ages as of March 25,
2002, are as follows:

       NAME               AGE                   POSITION
       ----               ---                   --------
  Gloria Rose Ott          47       Chairman of the Board and Director
  Joseph P. Maceda         49       President and Director
  Robert L. Campbell       57       Vice-President and Director
  J. Michael Hopper        54       Secretary/Treasurer
  Thomas G. Redmon         58       Senior Vice-President and General Counsel
  Philip M. Johnson        46       Vice-President, International Operations
  Blair Aiken              34       Senior Vice-President, Business Development
  Cheng-Guan Quah          51       Senior Vice-President Asia, Chief Technology
                                    Officer
  David Moard              46       President of Powerco US

         The following is a brief description of the background of our directors
and executive officers.


OVERVIEW

         Gloria  Rose Ott was a Director  of Ocean  Power  from May 26,  1998 to
September 18, 1998. Subsequently, Ms. Ott and Messrs. Maceda and Campbell became
Directors  of Ocean  Power on June 22,  1999 as a result  of the  merger  of PTC
Holdings,  Inc.  with and into Ocean  Power.  Previously,  all such persons were
Directors  of  Holdings.  Gloria Rose Ott had served as Director and Chairman of
the Board of  Holdings  since  October  1998;  Joseph P.  Maceda had served as a
Director of Holdings  since  January  1997;  and Robert L.  Campbell  had been a
Director of Holdings since June 1997.


BACKGROUND INFORMATION

         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.

         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.



                                       67
<PAGE>

         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).

         J. MICHAEL  HOPPER.  Mr.  Hopper joined Ocean Power in January of 1997.
Prior to his  current  position,  from 1986 to 1996 Mr.  Hopper  was  President,
Founder and Partner of Rainbow  Video  Duplicating,  Inc.,  of New York, a video
duplicating service company with clients in corporate, medicine,  entertainment,
and  instructional  fields.  Mr. Hopper worked closely with clients  through all
stages  of  package,  design,  printing,  duplication,   fulfillment  and  final
production of an annual distribution exceeding 3 million units. Mr. Hopper has a
Bachelor of Arts degree in communications from the University of Florida.

         THOMAS G. REDMON.  Thomas G.  Redmon,  joined Ocean Power on January 1,
2001 as Senior  Vice-President and General Counsel. Mr. Redmon received a Doctor
of Jurisprudence from University of California at Davis in 1969.

         From 1976  through  2000 he was a  partner  with the law firm of Wilke,
Fleury,  Hoffelt,  Gould and Birney. During that time he did both litigation and
transactional  work  serving as business and  corporate  counsel for a number of
small to medium sized businesses and specializing in complex business litigation
in the  healthcare  and  accounting  fields.  Mr. Redmon was appointed  Managing
Partner in 1998 and held that position until December,  2000.  During his tenure
as Managing Partner,  Mr. Redmon was responsible for all aspects of the business
operations of the firm.

         PHILIP M. JOHNSON. Mr. Johnson joined Ocean Power in September, 2000 as
Ocean Power's Vice-President  responsible for International  Operations.  Philip
joined Ocean Power from Innogy, and prior to that,  National Power.  Immediately
prior to joining Ocean Power, Mr. Johnson was Managing Director of Innogy, where
he was responsible for the development of the  Regenesys(TM)  regenerative  fuel
cell system.  From the period 1989 to 1997, while at National Power, Mr. Johnson
created four successful businesses, two based on service provision and two based
on unique  intellectual  property.  He has global  experience  in power  project
development and technology  development  including product and brand management,
process,  licensing  and joint  ventures.  Mr.  Johnson  personally  led some of
National  Power's major change programs and was National  Power's first Business
Development Manager. He has extensive experience in the energy sector,  covering


                                       68
<PAGE>

business  development  and  policy,  corporate  strategy,   economics,  finance,
regulation,   institutional   development,   power   production,   transmission,
distribution and sales.

         A Coopers &  Lybrand-trained  management  consultant,  Mr.  Johnson has
carried out a wide variety of UK and overseas  assignments  in Energy and Water.
His earlier career  involved  periods with The North of Scotland  Hydro-Electric
Board, British Electricity  International and the Central Electricity Generating
Board.

         Mr. Johnson,  a citizen of the U.K.,  received an M.B.A.  (Distinction)
from Glasgow University and a B.S.C. with Honors from Aston University.  He is a
Chartered Engineer, and a member of the Institution of Electrical Engineers, the
Institution of Mechanical Engineers, and the Institute of Energy.

         BLAIR AIKEN.  Mr.  Aiken  joined  Ocean Power on January 1, 2001,  from
Hydrogen  Performance  Technologies,   or  HyPerTec.  Mr.  Aiken  has  11  years
experience  developing and advising  companies.  Over the last three years,  Mr.
Aiken has focused on emerging  technology start up concerns,  through Think Tank
Capital,  New York. He originated and evaluated  start up technology  companies,
for  investors  advising  clients  whether to proceed  with  development  and/or
financing.  Industries  of clients  previously  advised by Mr.  Aiken  included:
defense contractors, computer security, power generation and fuel cells. In late
1999, this work lead to the founding of Hydrogen Performance Technologies.

         From 1995 until  2000,  Mr.  Aiken was with AIM Inc.,  based in Europe,
where he worked to improve  and perfect  business  practices  of large  European
multinationals, first for Akzo Nobel Inc., and later Mobil Oil, SCA Paper, Fuji,
Schiphol Airport, and others. Focusing on paradigm improvements through the Best
Practice approach has helped clients attain  world-class  status in the field of
site operations with specific attention to safety, health and environment.

         AIM Inc. authored and implemented training programs for do-it-right the
first time processes to increase  productivity and profits,  decrease  injuries,
reduce  illness rates,  and reduce  unacceptable  emissions to the  environment.
Employees from the shop floor to the board room are taught total involvement for
mutual success. The Aim Training, Tools and Process Controls are in use in North
America,  South America,  Europe (18 countries) and will be introduced in Africa
and the Far East in the new millennium.

         DR.  CHENG-GUAN  (MICHAEL) QUAH. Dr. Quah joined Ocean Power in October
of 2001 as the Chief  Technology  Officer and Senior  Vice-President  - Asia. In
these roles Dr. Quah is charged with  coordinating  and building up a technology
portfolio to support the company's power and water projects globally and leading
the growth of Ocean Power in Asia specifically in the ASEAN region and East Asia
through joint  developmental and commercial ventures with key strategic partners
in the region.

         Dr. Quah comes to Ocean  Power after over 22 years of broad  experience
in global business development including Research and Development and technology
marketing of components to the water and alternative energy industries. For over
19 of those years Dr. Quah worked at E.I. du Pont de Nemours & Co.  Inc.,  (U.S.
Japan  and  Singapore)  in  various  R&D,  marketing  and  business  development
functions in DuPont's membrane  businesses:  Permasep(R)for  water desalination,
gas separation membranes, and Nafion(R)for use in chloralkali  electrolyzers and
PEM fuel  cells.  Dr.  Quah was born in  Malaysia,  originally  and holds  M.S.,
M.Phil.,  and Ph.D.  degrees from Yale, after having completed his undergraduate
studies in Chemistry and Physics at Harvard in 1974.

         DAVID MOARD.  David Moard joined Ocean Power in June of 2001. Mr. Moard
heads its  subsidiary,  Powerco  US,  Inc.,  which was formed for the purpose of
owning, developing, marketing and selling distributed power and water generation
equipment in the United States and Canada.  Mr. Moard is the former Chairman and
CEO of Hydrogen  Burner  Technology,  Inc. Prior to his  co-founding of Hydrogen
Burner Technology,  Inc., he was assigned by Southern California Gas to serve as
an executive to the Gas Research  Institute  working on the  deployment of 40 kW
and 200 kW fuel cells manufactured by United Technologies.  His responsibilities
included  deregulation,  amendment  to local and  national  codes  and  industry
standards to allow for  distributed  power  generation  in an  environment  that
previously favored centralized power generation. Prior to that Mr. Moard led the
initial  micro-turbine  development  and  testing  of  Stirling  engines  in the
mid-1980's.  In the 1970's Mr. Moard was responsible for the  implementation  of
solar energy  project  development  for Southern  California  Gas as well as the
commercialization  of  cogeneration  equipment  and the  deployment  of internal
combustion engines to customers.

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




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<PAGE>

SIGNIFICANT EMPLOYEES


SVEIN HESTEVIK, CHIEF EXECUTIVE OFFICER OF SIGMA, ELEKTROTEKNISK AS

         Mr. Hestevik holds a Master's  degree in business and economics  (1973)
from the Norwegian  School of Management,  BI. He has twenty years of experience
in managing small to medium-sized  manufacturing companies,  including companies
within the ABB group. Mr. Hestevik's  experience includes project management and
establishing manufacturing operations from prototyping to volume manufacturing.


ROBERT ZHAO, PH.D., DIRECTOR OF FUEL CELL TECHNOLOGY

         Dr. Robert Zhao has 18 years of research and development  experience in
the field of electrochemical energy generation and storage, ranging from primary
and secondary batteries to fuel cells. He holds a Ph.D. in Electrochemistry from
Case  Western  Reserve  University,  Cleveland,  Ohio.  As the director of Ocean
Power's  fuel  cell  technology,  he  oversees  the  development  of  fuel  cell
components and low temperature fuel processors.

         Before he joined Ocean Power,  Dr. Zhao was the program manager of high
power PEM fuel cells and a member of Ocean Power's strategic  planning committee
at H Power Corporation.  He was with H Power for two months before accepting his
present  position  with Ocean Power in May 1997.  His  responsibilities  at both
companies are in the area of  electrochemical  development.  Specifically he has
worked on advanced fuel cell electrodes,  stacks,  and systems.  Currently he is
working on advanced  alkaline fuel cell  technology  as well as  low-temperature
hydrogen generators.

         While Dr. Zhao was working on Defense Advance Research  Projects Agency
projects at Case Center for Electrochemical  Sciences, he accumulated five years
of experience  on the  electrochemical  properties  of small  organic  molecular
fuels. He has designed and expanded a variety of technology tools to enhance the
development of direct organic fuel cell  technologies,  such as direct  methanol
fuel  cells.   Dr.  Zhao's   experience   also  includes  the   development   of
maintenance-free lead-acid and lithium batteries.


RANDALL L. PEETERS, PHD, CHIEF SCIENTIST

         Dr. Peeters joined Ocean Power in December, 2000 as Chief Scientist. In
his capacity as Chief  Scientist he directs the  development of platelet hot end
devices for  Stirling  engines.  This  project is  multidisciplinary  in nature,
international in scope,  and has the potential to revolutionize  Stirling engine
applications.  Randy  received his Ph.D.  and MS degrees from the  University of
Washington  in  Aeronautics  and  Astronautics  and his BS degree  in  Aerospace
Engineering from the California State Polytechnic University.
         Before  joining Ocean Power,  Dr.  Peeters was the Chief  Scientist for
GenCorp Aerojet. His primary  responsibility was to ensure that Aerojet remained
technically  viable  in  a  constantly   changing,   demanding  and  competitive
marketplace.  Dr.  Peeters  had  previously  served  as  Manager  of  Aging  and
Surveillance,  Manager of Advanced Technology, Director of Chemical Research and
Development,  Director of Chemical and Material Operations, Director of Research
and   Development,   Director   of   Advanced   Development   Engineering,   and
Vice-President of Engineering since joining Aerojet in l982. These organizations
varied in size from 10 to 1050 employees and included numerous projects covering
a  broad  spectrum  of  interdisciplinary  activities  including  liquid  rocket
engines,   solid  rocket  motors,   satellites,   armaments,   weapon   systems,
environmental   remediation,   resource  recovery,   chemical   synthesis,   and
pharmaceuticals.

         Dr. Peeters has extensive  management  training,  including  courses at
Aerojet,  Eastman  Kodak and Xerox  Corporations,  UC Davis,  and Cal Tech.  Dr.
Peeters has also recently pursued graduate and  undergraduate  course work at UC
Davis resulting in two certificate  programs in the  environmental  area. He has
over 35 technical  publications and  presentations,  has chaired seven technical
sessions  at  national  meetings  and has  served  on six  professional  society
committees.  Currently  he is an Associate  Fellow of the American  Institute of
Aeronautics and Astronautics, a member of Tau Beta Pi, on the board of directors
for  the  California   Engineering  Foundation  and  the  Software  Productivity
Consortium,  and serves on the Advisory  Boards for the Highly Filled  Materials
Institute  at  the  Stevens  Institute  of  Technology,   the  California  State
Polytechnic University, and the University of Washington.


KEVIN TYSON

         Mr.  Tyson  joined the  Company  in March of 2001 as Chief  Information
Officer.  Mr. Tyson has been building  mission-critical  information systems for
financial  services and other  enterprises  for more than 25 years. He designed,


                                       70
<PAGE>

programmed  and delivered  systems for  e-Commerce,  funds  transfer,  equities,
fixed-income  and  derivatives  trading,  settlement,  clearance and  compliance
operations.  Mr. Tyson has been an active  participant  in the Financial  Domain
Task Force and Architecture  Board of the Object  Management Group. He us also a
member of the  Association  for  Computing  Machinery  and has  participated  in
several Program Committees for the OOPSLA and EDOC conferences.


COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  our
directors  and  executive  officers,  and  persons  who own  more  than 10% of a
registered  class of our  equity  securities  to file  with the  Securities  and
Exchange  commission  initial  reports of  ownership  and  reports of changes in
ownership  of  Common  Stock  and  other  of our  equity  securities.  Officers,
directors and greater than 10%  shareholders  are required by SEC regulations to
furnish us copies of all Section 16(a) forms they file.

         We are nat aware of any instances during fiscal yar 2001, when an
executive officer, director or owner of more than ten percent of the outstanding
shares of our common  stock  failed to comply  with  reporting  requirements  of
Section 16(a) of the Securities Exchange Act of 1934.























                                       71
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth  compensation  for the fiscal year ended
December 31, 2001, for our executive officers:

<TABLE>
<CAPTION>
                                                   SUMMARY COMPENSATION TABLE

                                                ANNUAL COMPENSATION                        LONG TERM COMPENSATION
                                                -------------------                        ----------------------
                                                                                AWARDS
                                                                              RESTRICTED       SECURITIES
                                                                                 STOCK         UNDERLYING         ALL OTHER
NAME AND PRINCIPAL POSITION               YEAR       SALARY        BONUS       AWARD(S)         OPTIONS          COMPENSATION
---------------------------               ----       ------        -----       --------         -------          ------------
<S>                                       <C>     <C>              <C>                <C>           <C>                     <C>
 Joseph P. Maceda                         2001    $197,907(1)           --            --                 --                 --
  President                               2000    $191,400(1)           --            --                 --                 --
                                          1999    $186,368(1)           --            --                 --                 --

Cheng-Guan Quah                           2001    $240,000(2)           --            --                 --                 --
  Senior VPA Asia                         2000             --           --            --                 --                 --
  Chief Technology Officer                1999             --           --            --                 --                 --

David Moard                               2001    $240,000(3)           --            --                 --                 --
  President, Powerco US                   2000             --           --            --                 --                 --
                                          1999             --           --            --                 --                 --

Thomas G. Redmon                          2001    $230,000(4)           --            --                 --                 --
  Senior VP/General Counsel               2000             --           --            --                 --                 --
                                          1999             --           --            --                 --                 --

J. Michael Hopper                         2001    $208,000(5)           --            --                 --                 --
  Secretary/Treasurer                     2000    $136,714(5)      $37,500            --            598,680                 --
                                          1999    $133,120(5)           --            --                 --                 --

Robert L. Campbell                        2001    $196,907(6)           --            --                 --                 --
  Vice-President                          2000    $191,400(6)           --            --                 --                 --
                                          1999    $186,368(6)           --            --                 --                 --
</TABLE>

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

(1)      The amounts set forth above represent the salary payable by Ocean Power
         to Mr. Maceda.  In 1999, Ocean Power did not pay any cash salary to Mr.
         Maceda,  but the  amount  shown in the table was due under the terms of
         Mr. Maceda's employment agreement with Ocean Power. 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 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.


(2)      Mr. Quah was employed by Ocean Power in October of 2001. The amount set
         forth  above  represents  the  salary  payable in the first year of Mr.
         Quah's  employment  agreement.  In 2001,  Mr.  Quah  was  paid  $46,154
         pursuant to his employment agreement.


(3)      Mr. Moard, President of Powerco US, was employed by Ocean Power in June
         of 2001.  Powerco US is a wholly-owned  subsidiary of Ocean Power.  The
         amount set forth above represents the salary payable in the first year.
         Mr.  Moard  agreed to defer his  salary  for the first two years of his
         employment  until the third  year.  This  arrangement  was  amended  in
         November of 2001,  wherein  Mr.  Moard  agreed to defer  $60,000 of the
         salary  until the  third  year.  In 2001,  Mr.  Moard was paid  $26,615
         pursuant to his term sheet.


(4)      Mr.  Redmon was employed by Ocean Power on January 1, 2001.  The amount
         set forth  above  represents  the salary  payable by Ocean Power to Mr.
         Redmon in 2001. In 2001,  Ocean Power paid Mr.  Redmon  $221,154 of his
         salary in cash and assumed an uncertified  obligation to pay Mr. Redmon
         the remaining approximately $8,846 due under his employment agreement.


(5)      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


                                       72
<PAGE>

         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.


(6)      The amounts set forth above represent the salary payable by Ocean Power
         to Mr. Campbell.  In 1999 and 2000, Ocean Power paid cash salary to Mr.
         Campbell in the amount of $66,635 and $182,000,  respectively,  but the
         full  amounts  shown in the  table  were  due  under  the  terms of Mr.
         Campbell's employment agreement with Ocean Power. While the full amount
         of salary due to Mr.  Campbell under his employment  agreement for 1999
         was not paid,  no note was ever  issued,  and the  obligation  of Ocean
         Power to pay  $119,733  remained  an  uncertified  obligation  of Ocean
         Power.  In 2000 and 2001,  Ocean  Power paid Mr.  Campbell  $87,500 and
         $2,632, respectively, of the amount owing for his 1999 salary. In 2000,
         Ocean  Power paid Mr.  Campbell  $182,000 of his salary in cash and the
         remaining  approximately  $9,400 was paid in 2001. In 2001, Ocean Power
         paid  Mr.  Campbell  $175,000  of his  salary  in cash and  assumed  an
         uncertified  obligation to pay Mr.  Campbell the remaining  $22,907 due
         under his employment agreement.


         The  following  table sets forth  certain  information  concerning  the
number and value of securities  underlying  exercisable and unexercisable  stock
options as of the fiscal year ended  December  31,  2001 by the Named  Executive
Officer.

<TABLE>
<CAPTION>
                            AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                                          YEAR-END OPTION VALUES

                                                                   NUMBER OF SECURITIES
                                      NUMBER OF                   UNDERLYING UNEXERCISED           VALUE OF UNEXERCISED
                                       SHARES                           OPTIONS AT                IN-THE-MONEY OPTIONS AT
                                     ACQUIRED ON       VALUE       DECEMBER 31, 2001(1)            DECEMBER 31, 2001(1)
NAME                                  EXERCISE        REALIZED   EXERCISABLE/UNEXERCISABLE     EXERCISABLE/UNEXERCISABLE(1)
----                                  --------        --------   -------------------------     ----------------------------
<S>                                                         <C>  <C>             <C>       <C>                           <C>
J. Michael Hopper                              0            0    Exercisable     598,680   Exercisable                   $0.00
                                                                 Unexercisable         0   Unexercisable                 $0.00
</TABLE>

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

(1)      The value of  unexercised  in-the-money  options at fiscal  year end is
         calculated  using the last sale price of $0.90 per share as of December
         31,  2001,  the last trading day of fiscal year 2001 as reported on the
         Over-the-Counter Bulletin Board.


COMPENSATION OF DIRECTORS

         We have no standard  arrangement,  pursuant to which our  Directors are
compensated for services provided as a Director.


EMPLOYMENT AGREEMENTS


JOSEPH 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


                                       73
<PAGE>

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.


ROBERT CAMPBELL

         Ocean Power and Robert Campbell are parties to an employment  agreement
dated June 1, 1998 which has been  assumed by Ocean  Power  pursuant to its June
22, 1999 merger with PTC  Holdings.  Pursuant  to the  agreement,  Mr.  Campbell
serves as a director and Vice-President.  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.  Campbell's death or total  disability.  Under
the agreement,  Mr. Campbell 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. Campbell 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.  Campbell to receive  options to acquire
Company common stock, in amounts to be set forth in a separate memorandum, which
has never been agreed to. In addition to standard  health and related  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.  Campbell's  spouse or  another  family  member to  accompany  Mr.
Campbell 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.  Campbell  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. Campbell
relating to Ocean  Power's  business,  and Mr.  Campbell  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. Campbell to keep and protect the  confidentiality  of
Ocean  Power's  trade  secrets and  proprietary  information.  As a condition of
employment,  Mr. Campbell was required under the agreement to execute a separate
confidentiality and invention agreement,  which sets forth in greater detail Mr.
Campbell's duties regarding the  confidentiality of proprietary  information and
the assignment to, and Company  ownership of,  intellectual  property created by
Mr. Campbell during the term and 6 months thereafter.


J. 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.




                                       74
<PAGE>

THOMAS G. REDMON

         Ocean Power and Thomas G. Redmon are parties to an employment agreement
pursuant  to which Mr.  Redmon  serves as a Senior  Vice-President  and  General
Counsel of Ocean Power. The agreement term is three years,  from January 1, 2001
to  December  1, 2004.  The  agreement  may be  terminated  early by Ocean Power
without cause, for cause, or for Mr. Redmon's death or total  disability.  Under
the agreement,  Mr. Redmon  receives  $230,000 in annual  salary,  adjusted each
January  1  during  the term  according  to the  Consumer  Price  Index  for the
preceding year. In addition, Mr. Redmon 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.  Redmon to receive  options to acquire  Company
common stock,  in amounts set forth in the Agreement.  Mr. Redmon is entitled to
receive standard health and related benefits,

         During  the  term  of the  agreement,  Mr.  Redmon  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.  Redmon
relating to Ocean Power's business,  and Mr. Redmon 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.  Redmon to keep and protect the  confidentiality  of Ocean
Power's trade secrets and proprietary information. As a condition of employment,
Mr.   Redmon  was   required   under  the   agreement   to  execute  a  separate
confidentiality and invention agreement,  which sets forth in greater detail Mr.
Redmon's duties regarding the confidentiality of proprietary information and the
assignment to, and Company  ownership of,  intellectual  property created by Mr.
Redmon during the term and 6 months thereafter.


DAVID MOARD

         Ocean Power and David Moard are parties to a term sheet,  which has not
been converted to an employment agreement,  providing that Mr. Moard shall serve
as the President of Powerco US, Inc, a company  formed by Ocean Power to provide
all of Ocean Power's power and power  equipment in the United States and Canada.
The term of  employment  will be three  years.  The base salary is $240,000  per
year,  with the salary for the first two years to be deferred to future years as
the parties shall agree.  Ocean Power and Mr. Moard agreed in November,  2001 to
amend the term sheet such that  $60,000 of his annual  salary  shall be deferred
from each of the first two years to the third year of his employment.  Mr. Moard
is to receive stock  options in Ocean Power stock at an exercise  price of $1.50
per share for 260,000,  360,000 and 200,000 shares of stock respectively vesting
at the end of each of the first three years of  employment.  Mr. Moard will also
receive  five percent of the stock issued in Powerco US, Inc. at the time of any
initial  public  offering in  exchange  for the return to Ocean Power of 260,000
shares/options  in Ocean Power stock. The terms are also subject to execution of
a mutually agreeable employment agreement.  No employment agreement has yet been
executed


C. MICHAEL QUAH

         Ocean Power and C. Michael Quah are parties to an employment  agreement
pursuant  to which  Mr.  Quah  serves  as Chief  Technology  Office  and  Senior
Vice-President  of Ocean Power.  The agreement term is five years,  from October
15, 2001 to October 14, 2006.  The agreement  may be  terminated  early by Ocean
Power without  cause,  for cause,  or for Mr. Quah's death or total  disability.
Under the agreement,  Mr. Quah receives $240,000 in annual salary, adjusted each
January  1  during  the term  according  to the  Consumer  Price  Index  for the
preceding  year. In addition,  Mr. Quah is eligible for annual merit bonuses and
salary  increases which shall be a combined minimum of 20% and maximum of 40% of
his base annual  salary,  as  determined  by the board of directors on an annual
basis.  The  agreement  also  entitles  Mr.  Quah to receive  options to acquire
Company common stock, in amounts to be determined by the Board of Directors. Mr.
Quah is entitled to receive standard health and related benefits,

         During  the  term  of  the  agreement,  Mr.  Quah  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.  Quah
relating to Ocean  Power's  business,  and Mr. Quah 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.  Quah to keep and  protect  the  confidentiality  of Ocean
Power's trade secrets and proprietary information. As a condition of employment,
Mr. Quah was required under the agreement to execute a separate  confidentiality


                                       75
<PAGE>

and invention  agreement,  which sets forth in greater  detail Mr. Quah's duties
regarding the confidentiality of proprietary  information and the assignment to,
and Company ownership of,  intellectual  property created by Mr. Quah during the
term and 6 months thereafter.


STOCK OPTION PLAN

         Our Board of Directors has directed the creation and  implementation of
a stock  incentive  option plan for all  employees.  Details of this plan are in
development,  however,  a block of 7 million  shares  of  common  stock has been
authorized for use by such a plan at such time as it may be adopted. A plan will
be developed and a proposal will be presented to the Board of Directors.


INDEMNIFICATION

         As permitted by the  provisions of the General  Corporation  Law of the
State of Delaware,  Ocean Power has the power to indemnify any person who was or
is a party or is  threatened  to be made a party to any  threatened,  pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative,  by  reason of the fact  that the  person  is or was a  director,
officer,  employee or agent of the corporation if such officer or director acted
in good faith and in a manner reasonably believed to be in or not opposed to the
best  interest  of Ocean  Power.  Any such  person  may be  indemnified  against
expenses,  including  attorneys' fees,  judgments,  fines and settlements to the
extent they have been on the merits or otherwise in defense of any action,  suit
or proceeding.  Further,  Ocean Power does not maintain  liability  insurance on
behalf of its officers, directors, employees and agents.







                                       76
<PAGE>

ITEM 11.  SECURITY OWNERSHIP  OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


BENEFICIAL OWNERS

         COMMON  STOCK.  As of  March  26,  2002,  other  than  (i) the  persons
identified in the following table and (ii) the directors and executive  officers
identified in the table under "Directors and Executive  Officers" section below,
no person owned beneficially more than five percent (5%) of our common stock.

<TABLE>
                                                                SHARES
                                                          BENEFICIALLY              PERCENT
NAME AND ADDRESS                     TITLE OF CLASS              OWNED          OF CLASS(1)
----------------                     --------------              -----          -----------
<S>                                  <C>                  <C>                        <C>
Algonquin Capital Management         Common               5,087,000(2)               12.0 %
440 Main Street
Ridgefield, CT 06877
</TABLE>

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

(1)      Applicable  percentage  of common stock is based on  39,049,364  shares
         outstanding,  plus any  securities  convertible  or  exchangeable  into
         shares of common stock for the purpose of computing  the  percentage of
         ownership of such person only as of March 26, 2002.


(2)      Includes  4,876,000  shares  of our  common  stock  which  are  held by
         Algonquin Capital  Management LLC  ("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.



DIRECTORS AND EXECUTIVE OFFICERS

         The following table shows the amount of our capital stock  beneficially
owned by our directors, the executive officers named in the Summary Compensation
Table above and by all directors  and executive  officers as a group as of March
26, 2002.  Unless otherwise  indicated,  beneficial  ownership is direct and the
person indicated has sole voting and investment  power. As of March 26, 2002, we
had 39,049,364 shares of common stock outstanding.

<TABLE>
                                                                        SHARES
                                                                  BENEFICIALLY              PERCENT
NAME AND ADDRESS                         TITLE OF CLASS                  OWNED          OF CLASS(1)
----------------                         --------------                  -----          -----------
<S>                                      <C>                     <C>                          <C>
Joseph P. Maceda                         Common                  11,716,579(2)                29.1%
1023 Folsom Ranch Drive, #301
Folsom, CA  95630

Robert L. Campbell                       Common                   7,205,341(3)                18.3%
15009 Rio Circle
Rancho Murieta, CA  95683

Gloria Rose Ott                          Common                   2,870,000(4)                 7.3%
20250 Edgewood Farm Lane
Purcellville, VA  20132

J. Michael Hopper                        Common                   2,000,000(5)                 5.0%
2803 Bellhaven Place
Davis, CA  95616



                                       77
<PAGE>

                                                                        SHARES
                                                                  BENEFICIALLY              PERCENT
NAME AND ADDRESS                         TITLE OF CLASS                  OWNED          OF CLASS(1)
----------------                         --------------                  -----          -----------

C. Michael Quah                          Common                       7,692(7)                    *
67 Kanney Road
Durham, NH 03824

David Moard                              Common                       4,615(8)                    *
1545 South El Molino Avenue
Pasadena, CA 91106

Thomas G. Redmon                         Common                     200,000(9)                    *
4800 Oak Vista Drive
Carmichael, CA 95608

Officers and Directors as a Group (8)    Common                 24,004,227(10)                57.2%
</TABLE>

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

*        Less than 1%.


(1)      Applicable  percentage  of ownership is based on  39,049,364  shares of
         common stock outstanding as of March 26, 2002, together with applicable
         options for each  shareholder.  Beneficial  ownership is  determined in
         accordance with the rules of the Securities and Exchange Commission 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 March 26, 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.


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


(5)      Includes  options  to  purchase  598,680  shares of common  stock at an
         exercise  price of $1.50 per share;  and  includes  options to purchase
         500,000 shares of common stock at an exercise price of $1.00 per share.


(6)      Includes  options  to  purchase  500,000  shares of common  stock at an
         exercise price of $1.00 per share.


(7)      Includes  options  to  purchase  7,692  shares  of  common  stock at an
         exercise price of $1.00 per share.


(8)      Includes  options  to  purchase  4,615  shares  of  common  stock at an
         exercise price of $1.00 per share.


(9)      Includes  options  to  purchase  100,000  shares of common  stock at an
         exercise  price of $1.50 per share;  and  includes  options to purchase
         100,000 shares of common stock at an exercise price of $1.00 per share.


(10)     Includes options to purchase 3,385,987 shares of common stock.








                                       78
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         CASH  ADVANCES.   During  1999,  Ocean  Power  made  loans  to  certain
employees.  Certain of these  loans  were made to the  officers  of Ocean  Power
identified  below.  These  loans were made by Ocean  Power in order to allow its
officers and  employees to provide some access to cash but which Ocean Power was
not in a position to pay out in wages and salary. The advances were evidenced by
notes  receivable  bearing interest at 7% per annum. If the notes are not repaid
at the end of the first year the accumulated interest is added to the balance of
the notes as additional  principal.  In 1999 Ocean Power loaned  Joseph  Maceda,
$137,670.  Other than Mr. Maceda, no officer was loaned more than $60,000 during
1999 or 2000. In 2000,  following Ocean Power's payment of past due salary,  Mr.
Maceda was able to repay  Ocean Power  $149,489 of amounts  owed by him to Ocean
Power for loans from Ocean  Power made in 1997 and 1998 on the same terms as the
loan in 1999. Mr. J. Michael Hopper, who had taken loans from Ocean Power on the
same terms as Mr.  Maceda  during  prior years which were  formalized  in a note
dated December 31, 1998, made full repayment to Ocean Power in 2000, of $63,085.

         LOANS TO  COMPANY.  Throughout  1997,  in order to fund  Ocean  Power's
general operating  expenses,  Mr. Maceda loaned an aggregate in principal amount
of $625,000 to Ocean Power  represented  by an  unsecured  note  payable to J.P.
Maceda  bearing  interest at 10% per annum.  On September 30, 1999,  the amounts
owing under this note were  reduced by $178,610,  as a result of Mr.  Maceda and
Ocean  Power  agreeing  to offset  this  amount  with debt to Ocean  Power of AB
Securities Corporation, owned by Mr. Maceda. At various times during 2000, Ocean
Power repaid an aggregate  amount in principal and accrued  interest on the note
of $318,542. As of December 31, 2000, Ocean Power owed $342,613 in principal and
accrued interest under the note.

         On August 28,  2001,  Gloria Rose Ott loaned  $12,000 to Ocean Power by
advancing  that sum to an Ocean Power  creditor.  To date,  none of the loan has
been repaid.

         On November 21, 2001 Robert L.  Campbell  loaned  $215,000 in principal
amount to Ocean Power  represented by an unsecured  promissory note. The term of
the note is 36 months,  $90,000 of  principal  was to be paid out of the sale of
debentures to Cornell Capital Partners. The balance owing is to be paid monthly,
interest only,  beginning  December 20, 2001,  and with principal  reductions of
$15,000 due quarterly. None of the principal or interest has been repaid.

         HYPERTEC.  On September 10, 2000, Ocean Power signed a letter of intent
to acquire a controlling  interest in Hydrogen  Performance  Technologies,  Inc.
("HYPERTEC"),  a start-up  developer of small Proton Exchange Membrane Fuel Cell
Systems.  Blair Aiken,  HyPerTec's founder, is now our Senior  Vice-President of
Business  Development.  We are continuing to explore a transaction with HyPerTec
on revised terms. For a discussion of this proposed  transaction see Description
of Business--Fuel Cell.

         We believe that each of the above  referenced  transactions was made on
terms  no  less  favorable  to  us  than  could  have  been  obtained  from  and
unaffiliated third party. Furthermore,  any future transactions or loans between
us and our officers,  directors,  principal stockholders or affiliates,  and any
forgiveness  of such loans,  will be on terms no less favorable to us than could
be obtained from an unaffiliated third party, and will be approved by a majority
of our  directors,  including a majority of our  independent  and  disinterested
directors who have access at our expense to our legal counsel.







                                       79
<PAGE>

ITEM 13.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)(1)(2)  FINANCIAL  STATEMENTS.  See index to consolidated  financial
statements and supporting schedules.

         (a)(3)  EXHIBITS.

<TABLE>
EXHIBIT NO.          DESCRIPTION                                                  LOCATION
------------         -----------------------------------------------------        ---------------------------------------------
<S>                  <C>                                                          <C>
2.01                 Sigma Share Purchase Agreement dated July 25, 2000           Incorporated by reference to the
                                                                                  Registrant's Report filed on Form 8-K/A on
                                                                                  October 19, 2000

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

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

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

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

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

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

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

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

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

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

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



                                       80
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



                                       82
<PAGE>

EXHIBIT NO.          DESCRIPTION                                                  LOCATION
------------         -----------------------------------------------------        ---------------------------------------------
10.30                Placement Agent Agreement between Ocean Power and Westport   Incorporated by reference to Exhibit 10.30
                     Advisors, Inc.                                               to the Registrant's Registration Statement
                                                                                  on Form SB-2 filed on February 13, 2002

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


         (b)      REPORTS ON FORM 8-K.

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






























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<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

Date:    April 1, 2002                    OCEAN POWER CORPORATION


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


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE                       TITLE                            DATE
---------                       -----                            ----


 /s/ Gloria Rose Ott            Chairman of the Board            April 1, 2002
-------------------------
Gloria Rose Ott


/s/ Joseph P. Maceda            President                        April 1, 2002
-------------------------
Joseph P. Maceda



/s/ Robert L. Campbell          Vice-President                   April 1, 2002
-------------------------
Robert L. Campbell



/s/ J. Michael Hopper           Secretary Treasurer              April 1, 2002
-------------------------
J. Michael Hopper









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