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

                                  FORM 10-KSB/A
                        Amendment No. 1 to Annual Report

(Mark One)

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

                   For the fiscal year ended December 31, 2000

                                       or

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

             For the transition period from __________to ___________

                             Commission File Number:


                             Ocean Power Corporation
             (Exact name of registrant as specified in its charter)


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

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

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE


           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                          Common Stock, $.01 par value

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

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

State issuer's revenues for its most recent fiscal year.  $0________.

As of March 29 , 2001,  the  aggregate  market  value of  common  stock  held by
non-affiliates  of the registrant was  $69,598,311  based on the average bid and
asked price of the common stock on February 20, 2001.

The number of shares outstanding of the registrant's Common Stock was 38,149,942
as of March 29, 2001.


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<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

None

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



                           FORWARD-LOOKING STATEMENTS

IN  ADDITION  TO  HISTORICAL  INFORMATION,  THIS FORM  10-KSB  CONTAINS  CERTAIN
FORWARD-LOOKING   STATEMENTS   UNDER  THE  CAPTIONS   "DESCRIPTION  OF  BUSINESS
OPERATIONS," AND "MANAGEMENT'S  DISCUSSION AND ANALYSIS,"  INCLUDING  STATEMENTS
CONCERNING (I) THE COMPANY'S STRATEGY; (II) THE COMPANY'S EXPANSION PLANS, (III)
THE MARKET FOR THE COMPANY'S PRODUCTS; (IV) THE EFFECTS OF GOVERNMENT REGULATION
OF THE COMPANY'S  PRODUCTS;  AND (V) THE EFFECTS ON THE COMPANY OF CERTAIN LEGAL
PROCEEDINGS.  BECAUSE SUCH  STATEMENTS  INVOLVE RISKS OF  UNCERTAINTIES,  ACTUAL
RESULTS  MAY  DIFFER   MATERIALLY  FROM  THOSE  EXPRESSED  OR  IMPLIED  BY  SUCH
FORWARD-LOOKING  STATEMENTS.  READERS ARE  CAUTIONED TO CONSIDER  SPECIFIC  RISK
FACTORS  DESCRIBED  HEREIN (SEE ITEM 6 "MANAGEMENT'S  DISCUSSION AND ANALYSIS OR
PLAN OF  OPERATIONS,"  UNDER  SECTION  (a)  "PLAN OF  OPERATION").  THE  COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING  STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF,  EXCEPT AS
REQUIRED BY ITS REPORTING OBLIGATIONS.

                                     PART I

ITEM 1.  Description of Business

                                   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 arrived at
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


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<PAGE>

discussions with Intryst, Inc., an Idaho corporation  (Intryst),  as a potential
entity  for a  business  combination  with PTC  Holdings.  We  believe  that the
management  of Intryst  entered  into these  negotiations  because it desired to
acquire and cause to be developed  through Intryst the distributed and water and
power  technology owned by 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 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 June 1998, PTC Holdings and PTC Group agreed to the terms of a reorganization
pursuant to which PTC Group would acquire PTC Holdings through a stock for stock
exchange.  Under  the terms of the  agreement,  (i) each  share of PTC  Holdings
common stock was to be exchanged for one share of PTC Group common  stock,  (ii)
Messrs.  Guarnaccia,  Maceda  and  Campbell  along  with  two  other  designated
individuals  were to become the  officers and  directors of PTC Group,  (iii) an
aggregate  fee of  4,000,000  shares of PTC Group common stock (equal to 400,000
shares after  giving  effect to the August 1999  reverse  stock split  discussed
below) was  directed to be paid to up to four  unspecified  parties as a finders
fee in  connection  with the  reorganization,  and (iv) a property in Vancouver,
Canada,  comprising the sole asset of PTC Group's sole subsidiary,  PTC Holdings
(Canada)  Ltd.,  was to be assigned to a third  party in  consideration  for the
assumption of outstanding  debt owed by such  subsidiary for such property.  The
reorganization  was  conditioned  upon PTC Group  first  consummating  a private
offering of $10 million.  Under the terms for the proposed  reorganization,  but
not accounting for the shares to be issued in the $10 million private  offering,
PTC Holdings shareholders were expected to hold, in the aggregate, approximately
80% of the outstanding  equity of PTC Group after the reorganization and the PTC
Group  shareholders  prior to the  reorganization  were expected to hold, in the
aggregate,  approximately  20% of the equity  outstanding  immediately after the
reorganization.  During the period from late 1997 to March 1999, in anticipation
of the business  combination  PTC Group advanced to PTC Holdings an aggregate of
$1,673,000.

The  aforementioned   reorganization  agreement  was  never  executed,  and  the
reorganization  was never  consummated,  due to PTC Group's failure to raise the
$10  million  in  pre-closing  financing.  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.  After Dr. Guarnaccia's resignation, the separate management teams
of PTC Holdings and PTC Group resumed  negotiations for a merger between the two
companies.  In January 1999, PTC Group and PTC Holdings  announced a new 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.  The terms of the merger agreement
were similar to those of the aforementioned reorganization agreement except that
Dr. Guarnaccia was to have no management role with the surviving corporation and
another  individual  was added as  director  in his place.  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
Form 10-KSB are presented as if the reverse stock split had taken place.


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<PAGE>

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.  We do not believe that any
financial  advisor was retained by Kaniksu in connection  with the  acquisition.
Tessier,  directly and through its wholly owned subsidiary,  Pulverizer Systems,
Inc.,  was the developer  and owner of unique  non-chemical  mechanical  ice and
compact snow removal systems for use on highways,  airport runways, sidewalk and
railroad crossings. We believe that Kaniksu acquired Tessier because it intended
to  develop  the  aforementioned  technology  into  a  business  operation.  The
then-current board of directors of Kaniksu American Mining approved the terms of
the  acquisition  of  Tessier  from  VentureTech,  Inc.  As a  condition  of the
acquisition, the then current board and officers of Kaniksu agreed to resign and
be  replaced  by a board  designated  by  Pulverizer  Systems,  a  wholly  owned
subsidiary  of  Tessier,  and to  change  its  name  to  Kaniksu  Ventures  Inc.
Immediately thereafter, Mr. Craig Bampton, a representative of VentureTech,  was
appointed President and Director of Kaniksu Ventures, and Ms. Alyssa Bampton and
Mr. G. Michael Cartmel were appointed as Directors. At the time, Ms. Bampton was
an officer of VentureTech  and Messrs.  Bampton and Cartmel were  directors.  On
March 13,  1996,  the  aforementioned  new  directors  and  officers  of Kaniksu
Ventures consummated the previously approved transaction with VentureTech.

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.

In October  1997,  Intryst  divested the Tessier  business by  transferring  the
capital stock of Tessier to persons who were  affiliated  with  VentureTech  and
Tessier,  including former  shareholders of Pulverizer prior to its ownership by
VentureTech.  The  consideration to Intryst for this transfer was the assumption
by Tessier  of  outstanding  liabilities  owed by  Kaniksu  in  connection  with
Tessier,   including  an  obligation  to  fund  the   development  of  Tessier's
technology.

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
Systems. Details of the intended joint ventures are described in the distributed
water and distributed power sections.


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<PAGE>

The company recognizes 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 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.  In
certain regions we may become the only next generation source.

Our  desalination  systems  (which we call our H2OkW Systems) 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.  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 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 will  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.  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 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 the Company 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


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<PAGE>

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 System.

H2OkW Systems refers to the Company'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
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 generally consist of five subsystems:

         1. Pretreatment Subsystem
         2. Desalination Subsystem
         3. Post Treatment Subsystem
         4. Pump and Support Equipment Subsystems
         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.


                                       6
<PAGE>

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 the company 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, the Company has been testing three ozone  generators at its
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 the spring  while the
smaller units (less than 1%  concentration at 100 mgs/hr) that have already been
tested will be put into field tests with potential customers early this summer.


         Desalination Subsystem

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 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.

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 System 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 System 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.

In  practice,  the feed water is pumped  into a closed  container,  against  the
membrane,  to pressurize  it. As the product water passes  through the membrane,
the remaining feed water and brine solution becomes more and more  concentrated.
To reduce the  concentration  of dissolved  salts  remaining,  a portion of this
concentrated feed water-brine solution is withdrawn from the container.  Without
this  discharge,  the  concentration  of dissolved salts in the feed water would
continue to increase,  requiring  ever-increasing  energy inputs to overcome the
natural  increase  of  equal  concentrations  of  fluid  on  both  sides  of the
membrane's (osmotic) pressure.

We are currently in discussions  with Water Services  Corporation (see Strategic
Partnership   section),   parent  company  of  Malta  Desalination   Systems,  a
manufacturer of reverse osmosis desalination systems to provide SWRO systems for
the H2OkW System.  Based on our observation of this  desalination  system in use
and on information supplied to us by Malta Desalination Systems, we believe that
this  desalination  system is one of the most efficient SWRO systems  available,
due to its energy recovery  capability and operation and maintenance  protocols.
Management  believes  this  should  make our SWRO  version  of the H2OkW  system
competitive in the world market. We expect that the SWRO desalination  subsystem
will employ commercially available membrane,  pressure vessels, pumps and energy
recovery  components in a configuration which accomplishes water production from
seawater  at less than 3  kilowatts  per hour (3 kWh) per cubic meter of potable
water.  (Conventional  systems  operate at more than twice these power  levels.)
Further,  we expect that the SWRO  desalination  subsystem will be configured to
best employ the waste heat of the power subsystem to increase system  efficiency
by using the recovered  heat to enhance the  desalination  process.  The current
design of the H2OkW System  contemplates  integrating  up to four  skid-mounted,
SWRO desalination  subsystems working together to provide in the aggregate up to
4,000 cubic meters (roughly 1 million gallons) per day of drinkable water, which
meet the current water  quality  standards of the European  Union,  World Health
Organization (WHO) and U.S. Environmental Protection Agency.


                                       7
<PAGE>

Our ability to produce the H2OkW System using SWRO is dependent upon our company
coming to an agreement with Water Services Corporation concerning the production
of these  subsystems.  We expect  to come to such an  agreement  in 2001.  For a
description of our discussions with Water Services Corporation see our Strategic
Partnerships section.

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 System that  desalinates  seawater  using thermal
distillation  technology instead of SWRO technology.  We believe that successful
implementation   of  this   technology   will   permit   the  H2OkW   System  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.

Our initial vapor-compression equipment would employ a mechanical compressor and
a plastic evaporator/condenser assembly in a vacuum vessel. Most heat exchangers
and  evaporator/condenser  assemblies currently  commercially available are made
from metal sheets or tubes. This is far more expensive than a plastic system and
its market is therefore limited to sites where energy is virtually free, such as
in a hybrid  configuration  with  adjacent  power  plants  (without  this "free"
energy, these systems are uneconomical in most water markets due to the cost and
limited life cycle of the metal  components,  added to periods of lost operation
during  repair and labor,  that can only be balanced  by no cost of power).  Our
initial  implementation  of vapor compression is referred to as Mechanical Vapor
Vacuum  Compression or MVVC. It heats  pretreated  seawater in a commercial heat
exchanger, capturing as much heat as possible within the vapor compression cycle
to enhance the efficiency of the vapor  compression  distillation  process.  The
heat exchanger captures most of the waste heat in the outgoing brine and product
water and exchanges it into the incoming seawater.  Increased  retention of heat
improves the overall cycle  efficiency  since the seawater enters the cycle at a
temperature  closer to the required  boiling point.  It then passes the seawater
into a vacuum  vessel  where the  seawater  is boiled  at low  temperature  from
contact  with a plastic  evaporator.  The  resultant  steam is  compressed  by a
mechanical compressor and fed to a plastic condenser connected to the evaporator
where the steam condenses as desalinated water.

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  system.  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 2002. 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 provisional  patent 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  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 provisional  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.


                                       8
<PAGE>

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  System  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 System 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
the  Company's  proposed  desalination  systems,  therefore we will  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.

The  integration  of the power  subsystem  with the rest of the H2OkW System 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 System 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 system. 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 System will be selected
based upon local fuel  availability,  local grid  conditions  and  environmental
constraints. Examples of power sources for our system include:

Grid Power.  The H2OkW system 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 system
can buy power from local suppliers just like any other industrial customer.

On-Site  Commercial  Power  Generators.  The H2OkW system 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 System 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.


                                       9
<PAGE>

Wind Power. Under certain circumstances, our H2OkW System 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 System 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 System can operate on electrical power from solar heated
Stirling engines or from concentrated  photovoltaic 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 (PV) systems can be used in a similar manner.
Ocean  Power  plans on using  concentrated  PV late in 2001  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  System  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 2001 with commercial  availability
planned for 2003.  Management  believes  that when  developed  and  commercially
available, this power technology offers the potential of the lowest cost product
water from the H20kW Systems.

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 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 (such as Ricardo),  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 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 System 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 System. Since historically each water plant was individually  designed and
built on site,  this has not  traditionally  been done for either water or power
plants. High-rate manufacturing processes for the desalination equipment include
continuous  forming and sealing of plastic heat exchange  assemblies,  automated
injection  molding of liquid  distribution  manifolds  and ejector  housings and
continuous hydrophilic treatment of plastic films for evaporators.  In order for
the  Company  to  do  business  internationally,  especially  in  infrastructure
services such as water and power, all manufacturing  will be done by contractors
that meet the  internationally  accepted ISO 9000 quality management and quality
standards.  The  ISO  9000  series  is a set of  five  individual  international
standards on quality  management and quality assurance used by manufacturing and
service  industries.   These  standards  document  the  elements  of  a  quality
management   system  used  to  ensure  products  and  services  meet  customers'
expectations. The standards were developed by the International Organization for
Standardization  (ISO), a specialized  international  agency for standardization
composed of the national standards bodies of 91 countries.

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.


                                       10
<PAGE>

The current H2OkW System 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 Stirlings 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 System 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
System technology development.

 Our Business Strategy

We anticipate that production of potable water by desalinating  seawater with an
H2OkW System,  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.  These
joint  ventures  will  finance,  build,  own,  operate,  and where  appropriate,
transfer, the H2OkW System. These systems will sell the potable water and excess
power to their local  customers  under  long-term  (e.g.,  15-25 year)  purchase
contracts.

The Company 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  System  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 System installations will allow the Company and its 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  Seawater
Reverse  Osmosis  (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 System  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.  Several  such SWRO pilot  plants are  planned for
installation in our joint ventures' territories during 2001.

Depending on the customs and business  practices of a particular  region,  Ocean
Power has  developed a series of documents  that it uses to develop its regional
joint ventures. These are:

Letter of Intent.  This document  contains  binding  provisions  relating to the
conduct of  confidential  due  diligence  but is otherwise  simply a non-binding
exploration of possible affiliation.

Memorandum of Understanding.  This document provides a statement of agreement as
to  certain  aspects  of a possible  affiliation.  It may or may not  include an
obligation to continue working towards a binding joint venture agreement.

Heads of Agreement. This document provides a detailed statement of the nature of
the intended  affiliation  with the  obligation to work  diligently  and in good
faith to negotiate and enter into a binding joint venture agreement.

Joint Venture  Agreement.  This document creates the operating  committee of the
proposed venture as well as the business plan,  approval  procedures and defines
the other required documents and agreements.


                                       11
<PAGE>

We are currently in  discussions  with third parties to form joint  ventures and
develop pilot plants in Greece, Mexico and the Caribbean and other countries.

         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 System.  The principal  elements of
this joint venture agreement are summarized as follows:

1.)      The actual work in the territory assigned by this joint venture, Greece
         and Cyprus,  will be  undertaken by a Greek  limited  liability  entity
         jointly owned by us (49%), and Apollo (51%).
2.)      By contract,  we cannot undertake any water or power related activities
         in Greece and Cyprus except through the venture entity.  Neither Apollo
         nor the  venture  entity  can  undertake  any  water or  power  related
         activities  outside of Greece and Cyprus and, within Greece and Cyprus,
         will only  undertake  water and power  related  activities  through the
         venture entity.
3.)      We will contribute the rights to use our  intellectual  property to the
         joint  venture (OPC  trademarks  and  know-how,  related to the design,
         manufacture and  construction of water and power  production  systems).
         All intellectual property will remain our sole property.  All rights to
         advances  and  improvements  to  the  intellectual   property  and  all
         derivative  technologies developed by Apollo or the venture entity will
         be granted to us on a royalty  free basis.  The venture  entity will be
         licensed to use Ocean Power Corporation's trademarks in accordance with
         Ocean Power Corporation's  current trademark  guidelines (subject to US
         and international trademark laws).
4.)      The  day-to-day  control  is to be vested in the  venture  entity.  Our
         ability to direct the  venture is limited to our  chairmanship  of, and
         membership on, an operations committee. This committee must unanimously
         approve  the annual  business  plan of the venture  entity,  which will
         include an  itemized  budget and any other  items the  chairman  of the
         operations committee deems appropriate.
5.)      If the venture entity is terminated  for any reason,  we have the right
         to  acquire  the  territory  and  sole  ownership  of  the  venture  by
         purchasing  all of the  shares  of  Apollo.  Should  we  choose  not to
         purchase  such  shares,  Apollo is allowed to tender a single price per
         share at which it is willing to buy our interest. If Apollo becomes the
         purchaser,  it will be granted a  five-year  right to build and operate
         our systems in the  territory for payment of royalty fees. In the event
         neither party purchases the venture,  the venture will be dissolved and
         its assets sold.
6.)      The joint  venture  agreement is not binding on either party unless the
         supporting documents: an Operating Agreement, Terms of Trade Agreement,
         Terms of Service  Agreement,  Trademark  License,  a Business Plan, and
         Shareholder Agreement are executed within 60 days of the date the joint
         venture agreement is executed by both parties. We are currently working
         to try and complete and execute the supporting  documents within the 60
         day period.

         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 and supporting  documents  identical to the Apollo  agreement
described  above. 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 during the second quarter of 2001.

         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 System.  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 within the 60 day period.

Strategic Relationships

We have  entered  into,  or, are  currently  negotiating  the terms of,  certain
strategic  relationships  with third parties  relating to various aspects of the
H2OkW System.


                                       12
<PAGE>

      Water Services Corporation

We are currently  negotiating  the terms of a joint venture  arrangement for the
initial  production of the Reverse  Osmosis  subsystem for the H2OkW System with
Water Services Corporation,  a Maltese government owned public Limited Liability
Company ("WSC").  We anticipate that the joint venture,  in which we will have a
controlling interest,  will be responsible for the manufacturing of SWRO modules
to be used in certain  H2OkW  Systems  as well as  regional  system  engineering
support for these systems.  Initially,  the joint venture will purchase the SWRO
desalination  subsystem plants from Malta Desalination Systems,  Ltd., a Maltese
corporation  (MDS),  which is a  subsidiary  of WSC.  MDS builds,  operates  and
maintains  reverse  osmosis  plants  and  associated  facilities  in  Malta.  We
anticipate that this joint venture will be established in 2001.

We expect that finalizing this relationship will allow us to produce and deliver
H2OkW  systems  during  2001  using   commercially   available  reverse  osmosis
components. In 2001 we expect to establish Ocean Power Malta (OPM) on the island
of Malta. OPM is anticipated to be owned by Malta Desalination  Services and us,
but controlled by us. OPM will supply  packaged SWRO subsystem  modules to joint
ventures  formed  to  operate  H2OkW  Systems.  In  addition,  we will work with
specific  joint venture  entities to integrate the other  subsystems,  mentioned
above, necessary to make up a complete H2OkW system.

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

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

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

           Our Dispute with Aquamax/Keeran

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

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


                                       13
<PAGE>

           Potential Resolution of the Dispute

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

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

The  agreements  with  Aquamax/Keeran  entered into on July 20, 2001 represent a
renegotiation of the terms of the original license agreement entered into by the
Company and  Aquamax/Keeran in September 2000. Under the July agreements (a) the
Company will make payments to  Aquamax/Keeran  of $1,800,000 in cash and 600,000
shares of common stock on August 31, 2001,  unless  extended by the parties,  in
addition  to the  $400,000  already  paid to  Aquamax/Keeran,  in  exchange  for
ownership of all the  Aquamax/Keeran  technology  in any way  connected to water
treatment;  (b) the Company will grant back to  Aquamax/Keeran  a royalty  free,
exclusive,  worldwide license to exploit Newco's water  desalination  technology
for  applications  where the volume of water  processed is less than 1,000 cubic
meters per day, except that after five years such license will be non-exclusive;
(c) the parties  release each other from all claims and  liabilities,  including
amounts due in connection with the Company's obligation under the September 2000
License  Agreement as well as the Company's  claim for a price  reduction due to
the non-exclusivity of the Hadwaco license.

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


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

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

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


                                       14
<PAGE>

           Our Accounting for the Aquamax/Keeran License

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

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

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

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

The  Company  has  accomplished  the first  two  steps of its vapor  compression
desalination   development   program:  (1)  acquisition  of  the  Aquamax/Keeran
technology;  and (2) obtaining  patent rights on its own technology that will be
combined with the Aquamax/Keeran  technology  (preliminary  patents filed August
2000 and  nonpreliminary  patents filed August 2001).  The remaining  step is to
complete a PPI which  consists of 14 projects,  the combined  effect of which is
projected to yield a more economically viable seawater desalination system, with
lower energy and operating costs for both the projected vacuum vapor compression
system and the existing seawater reverse osmosis technology.  The formal PPI was
initially  designed in 1997, after the first physical  assessment of the Aquamax
equipment in Finland.  The program was  thereafter  continuously  developed  and
refined to reflect new information  gathered from the Aquamax  equipment we have
acquired  and have  under  testing  in  Malta,  as well as data  gathered  about
competitive  technologies  from our  consultants,  and our own monitoring of the
market.  The planning,  scheduling and cost estimating of the formal program was
finalized  in October of 2000.  The PPI is expected to require  approximately  4
full-time  employees and 18 to 20 months to complete once additional  funding of
approximately $5 million is arranged. Neither the time, manpower requirements or
cost necessary for the PPI have changed.  Two of the projects represent critical
path projects on which the 18 to 20 month time line will be  dependent.  The two
critical path projects are: "High Efficiency Steam Ejector Development" Project,
the goal of which is to replace a mechanical  compressor  with a high efficiency
hypercritical  ejector (OPC has a U.S.  patent  application  in process) and the
"Evaporator-Condenser  Efficiency  Increase"  Project,  the  goal of which is to
increase the overall  efficiency of the vapor  compression cycle by at least 30%
(OPC has a U.S.  patent  application in process).  Timely  completion of the two


                                       15
<PAGE>

critical path projects will be benchmarks for measuring  progress for impairment
testing purposes.  Management believes the seawater desalination products market
continues to be large, the competitive  environment is  substantially  unchanged
from that of September 2000 when the Aquamax/Keeran  patent rights were obtained
and continues to have the potential to generate  substantial  profits from which
the investment in the Aquamax/Keeran patents can be recovered.  The commencement
of the PPI has been delayed until funding is arranged. Losing our eligibility to
have our common stock traded on the Nasdaq OTC Bulletin  Board has resulted in a
delay to our  arranging  funding  for the PPI for two  reasons:  first,  because
potential  investors  have elected not to invest until we are again  eligible to
trade on the OTC Bulletin  Board;  and second,  as a result of the  diversion of
management  resources to the task of amending the SEC filings and other  efforts
necessary to re-attain  eligibility to trade on the OTC Bulletin  Board.  During
the period that the PPI has been delayed by the  unavailability of funding,  the
Company has assessed  impairment of the carrying value of its assets employed in
the  desalination  business  by  monitoring   developments  in  the  market  for
desalination  products to  determine  if  technological,  competitive  or market
conditions  indicate that the value of the assets  (including the amortized cost
of the licensed patents and the value of the research and development activities
that were expensed as incurred including research leading to Ocean Power's three
additional  patents and the "know how" resulting from our testing of the unit in
Malta)  is  less  than  the  carrying  value  of the  related  asset  consisting
principally  of  the  cost  of the  Aquamax/Keeran  patent  net  of  accumulated
amortization and the previous impairment adjustment.  Management's assessment of
market  conditions  described above leads  management to conclude that there has
been no impairment of the  Aquamax/Keeran  related license agreement asset other
than the  $400,000  that was  recorded  in  connection  with  the  dispute  with
Aquamax/Keeran over exclusivity of one of the patents, as described below.

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

                                       16
<PAGE>

           Our License to Aquamax/Keeran

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




      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
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.

         Wind Harvest

         On  May  31st,  2000  we  announced  the  signing  of a  Memorandum  of
Understanding  with Wind  Harvest  Company to enter into the  development  of an
exclusive  license  agreement  to provide  Windstar  Turbines for use with Ocean
Power's H2OkW Systems.  There are no longer any discussions  between the Company
and Wind  Harvest  concerning  the license  agreement  because of changes in the
business plan of Wind Harvest.  The companies are in  discussions,  whereby Wind
Harvest  will  provide,  and we will  purchase,  all of our needs for wind power
generators worldwide.  Concurrently,  Ocean Power has initiated discussions with
Wind Harvest  about plans for a  cooperative  development  program to accomplish
more effective  integration of next generation  Windstar Turbines with the H2OkW
Systems.


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. Once
such systems are  installed,  these factors will lead to the  discontinuance  of
this type of importation service.


                                       17
<PAGE>
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 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 will  focus on  regions  throughout  the  world  with  weak  water
infrastructures  and very high-cost water ($3-6 US dollars per cubic meter). The
Company  believes that these  underserved  areas will offer rich  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 dramatically  reduce the need for highly skilled labor. It is far
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,  the Company  experiences  competition  from a variety of sources with
respect to virtually all its proposed water system  components  and  subsystems,
although the Company knows of no single  competitor  that currently  competes in
the integrated approach offered by its H2OkW System.  Competition in the markets
to be served by the Company 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 the Company's Sea Water Reverse  Osmosis  configurations  of the
H2OkW Systems,  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.

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

The Company  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.  The Company
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.


                                       18
<PAGE>

 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.
The  Company  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 profit from the excess power produced by its various
local  desalination  joint  venture  partners  using  H2OkW  Systems  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 or plant material, vegetation, or agricultural waste used as
a fuel or energy source.

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.


                                       19
<PAGE>

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  continue  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.
Micro CHP 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 Desalination System

In the first,  Ocean Power  expects to profit from the excess power  produced by
its various local  desalination  joint venture partners using H2OkW Systems with
power subsystems to generate potable water from seawater. The Company 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 the Company  expects to engage in is the micro power
market (i.e. locally produced distributed power). The Company 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 the Company plans to sell into these
markets will be based on Stirling  engines and concentrated  solar  photovoltaic
systems.

The Company expects to profit from power sold by its various  expected  electric
utility joint venture partners using Ocean Power systems to generate electricity
locally.  The  Company  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
the  Company'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).


                                      20
<PAGE>

         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. The Company 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. The Company will 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

         Micro CHP

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 micro CHP (because of the larger energy
  demand)than smaller or medium size houses.Micro CHP 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 Micro CHP are those heated by
gas. A micro CHP 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  largest
installed base of gas boilers and water heaters,  the initial  potential  market
for Sigma  based  micro CHP 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/9
kW thermal  Stirling  Engine power plant for micro  combined  heat and power (or
Micro CHP) applications in residences.  Micro CHP is the simultaneous production
of electricity, domestic hot water and heat. Sigma's 3kW-electrical/9 kW 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


                                      21
<PAGE>

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/9 kW thermal Stirling Engine fueled by
either natural gas or kerosene.  The initial systems come pre-packaged for field
and endurance testing by interested utilities.
The  goal  of the  Company'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.

There are three levels  supporting  this  strategy:  Energy  service  companies,
original equipment manufacturers, and engine manufacturers.

1) An energy  service  company  (ESCO) or utility must be identified and a joint
venture relationship defined.  These joint ventures will generally be limited by
local  geographic  region.  These  ESCOs  will be  responsible  for  purchasing,
installing,  maintaining,  operating and fueling the MicroCHP systems. They will
also bill the end user as well as deal with all  regulatory  compliance in their
territories. Statoil is the first ESCO under contract and they are in discussion
about the scope of the next phase of their commercialization plan (see Strategic
Partners).  Discussions are underway with prospective ESCOs in Germany, Holland,
the UK and the US. At this time there are no material documents to disclose.

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 9kw thermal engine  developed by Sigma
for micro combined heat and power. After installation at the test site, operated
by the Norwegian state oil company,  Statoil, the planned verification test will
be started with natural gas as fuel.  This test program is part of a multi-stage
Stirling  project  between  Sigma,   Statoil  and  the  Norwegian   Governmental
Development Fund. It started with a market study begun in 1996. In October 1997,
the next phase,  the development of the working  prototypes,  began,  costing to
date a total of $1.5  million  US  dollars.  The  endurance  testing  started on
October 6, 2000 and will continue  through this year while the next phase of the
commercialization program is being defined.  Negotiations are underway to extend
this program into the multi-phase  commercialization of this technology over the
next several years.

It is important to note that we believe  Ocean Power will have revenues from the
original  sale of the  MicroCHP  system to the ESCO and also earn a share of the
ongoing  revenue billed by the ESCO to the end user. Due to widely varying local
energy economics, the exact ratio of the second profit stream will be negotiated
on a case-by-case basis.

2) An  original  equipment  manufacturer  (OEM) is the next key  element  in the
Company's  commercialization  plan. These entities may be boiler  manufacturers,
air conditioning  manufacturers,  automotive subsystem suppliers or providers of
complete power systems currently using other technologies.  These companies will
perform  the final  system  integration  of the  actual  unit that the ESCO will
install at the  customer's  site.  Since the  electrical and building codes vary
from country to country and the finished systems would be expensive to ship long
distances, local OEMs will be selected in each major market. Draft documents are
currently being reviewed with major OEMs in Germany and the UK. Prospective OEMs
have been identified in the US and Holland.  As soon as the first agreements are
finalized  in either the UK or  Germany,  these  will be used as a template  for
other  territories.  A key  requirement  that we will demand of our OEMs is that
they  provide  the  capital  necessary  to produce  sufficient  units to support
regional  sales.  Since these systems  promise a significant  expansion of their
businesses, many OEMs are actively seeking micro power opportunities. This leads
the Company to believe that there will be sufficient  manufacturing capacity and
interest from qualified OEMs to support its business plan.

3) The final  component  of our  strategy is the  manufacturing  of the Stirling
power plant that is the heart of the  MicroCHP  system.  Ocean Power has already
engaged Ricardo Inc. (see Strategic Partners) to start the process of taking the
working  prototypes and redesigning them for high-rate,  lower-cost  production.
Their  initial  pre-production  prototypes  should  begin  testing  in Q4  2001.
Although  Ricardo can manufacture up to a few thousand  units,  they are working
actively  with Ocean Power to identify the  appropriate  Tier 1 auto supplier to
take over production when demand exceeds  Ricardo's  capacity.  In the long run,
the Company plan's
to  subcontract  manufacturing  of the  Stirling  engines  to  major  automobile
manufacturers.  Currently  the  manufacturing  capacity of engine  manufacturers
worldwide  exceeds  demand and the  Stirlings,  which can be made using the same
materials and processes as conventional  engines,  offer an attractive method of
absorbing  some of that capacity.  Since the efficiency of engine  manufacturing
plants  increases each year, the Company doesn't believe that this  overcapacity
will disappear.

The  Company's  Stirling  engine  development  is not yet ready for high  volume
production. This process will be completed in 2001, with commercial availability
of planned  production units in 2003. The Company's Stirling engine would employ
gas, diesel, plant material, vegetation, agricultural waste or other biomass and
or municipal solid waste as fuel sources.


                                       22
<PAGE>

In  summary  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. The  manufacturing  profit
from  selling  units to the ESCOS will be followed  by a share of the  increased
profit  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
4. Lower price per kilowatt of electric power

In terms of  efficiency  and  reliability,  the Company  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 Stirlings  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.

The Company 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.  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.


                                      23
<PAGE>

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  manufacturing  profit from selling units to the ESCOS will be
followed  by a share of the  increased  profit  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 non-binding term sheet with Science Applications  International
Corporation  (SAIC)  to  commercialize  its  solar  dish  technology  with  both
Photovoltaic  Concentrators 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 concentrators and Stirling engines. Photovoltaic 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 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.  We expect  to be able to enter the solar  concentrator
market and take orders for commercial deliveries in the second half of 2001.

The  Stirling  solar  approach may be a hybrid  configuration  so as to use heat
produced by burning gas during periods of low solar energy  concentration  (e.g.
cloudy days and at night) and solar heated in high solar energy conditions.

Ocean Power and SAIC are developing a business relationship where we plan to set
up a subsidiary to serve the U.S. and Canadian  Utility Market with a variety of
distributed  generation products. The first two will be our Stirling Engines and
SAIC's solar dish with a PV  concentrator.  SAIC and its affiliates are expected
to own a minority  equity  position in this  subsidiary  as a down  payment on a
license to the existing SAIC dish technology.  We will own the balance.  We will
convey to the subsidiary  exclusive  rights to market all of our power generator
technology  which  is not  used  in  connection  with  water  desalination.  The
subsidiary  is expected  to pay royalty  payments to SAIC for the license of the
existing SAIC dish technology on terms yet to be determined. It is also intended
that SAIC will help recruit the utilities  necessary to  commercialize  both the
solar dish and our Stirling technologies.

         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.  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.


                                       24
<PAGE>

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  will start in the second  quarter of 2001.
Limited  commercial  deliveries  of small PEM systems  should  start in Q3 2001.
Advanced  Alkaline fuel cells will start field tests in late 2002 with projected
commercial deliveries starting in 2003.

We anticipate that our H2OkW System 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 2001 with commercial  availability planned for 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, the Company 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 the Company 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 2nd quarter of 200. Effective January 1, 2001, Blair Aiken, a
founder of  HyPerTec,  joined  Ocean Power as Senior Vice  President of Business
Development.

Although we have not yet reached a final  agreement with  HyPerTec,  the Company
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
fabrication  of prototypes  will commence  during the first quarter of 2001. The
next phase of  development  is to complete  license  arrangements  with  outside
technology  sources,   build  prototypes  of  demonstration  systems  and  start
field-testing with potential customers.

The  initial  markets  will be for  communications  relays,  professional  video
equipment and military power supplies. The initial prototypes should start being
delivered in Q3 2001. Limited commercial  quantities are planned for shipment in
the middle of 2002.

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), the company is
a development  stage company with no significant  operating results to date, and
the company's  auditors have included a going concern opinion in their report on
the company'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 9kw
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.


                                       25
<PAGE>

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
totaled  $473,145 as of December 31, 2000.  These advances are convertible  into
shares of Sigma  common  stock at a  conversion  rate of NOK 15 per share (which
equaled  $1.87  at the  time  of the  Company's  acquisition  of  Sigma).  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,  2000.  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. As Sigma concentrates its efforts in supporting the fast developing
distributed  Heat &  Power  market  and  Kockums  builds  engines  for  military
applications, Sigma will benefit from sharing of know-how with Kockums.

         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.  Over the next eight months to one
year,  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. The engine is intended to
power Sigma's household-size micro combined heat and power (MCHP) units.

The objectives of preliminary phase are:
o    To provide  concepts to  productionize  the basic design of the MCHP engine
     lower  end   through   reduced   parts   count,   simplified   design   and
     design-for-assembly
o    To provide an outline for a product  development  and validation  plan that
     will  result in an  engine  lower end that  meets the  requirements  of the
     functional specification
o    To provide concepts to reduce the height and weight of the engine
o    To provide design options for  engine bearings  that will  meet engine life
     requirements

The proposed  timeline for this  activity is to see the first  Ricardo,  limited
volume units in the second half of 2001 with the first  production runs starting
in the second half of 2002.

Baxi Group Ltd.

On March 6, 2001, the Company's wholly owned subsidiary,  SIGMA,  entered into a
collaboration  agreement with Baxi Group Ltd. (a manufacturer of heating systems
in Europe).  The objective of the agreement is for Sigma and Baxi to collaborate
in  developing  and  marketing  a  prototype  combined  heat and  power  product
(micro-CHP)  package for residential use in the United Kingdom consisting of the
Sigma Energy  Converter  (Sigma  Stirling  engine) in a metal cabinet which also
contains  controls,  tanks and electrical  connections to both heating and power
systems.  The 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


                                       26
<PAGE>

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
the Company'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.  Starting in the
second quarter of 2001,  additional sensors for a wide range of other gases will
be delivered  for testing  verification.  Also the water  sensors for metals and
salts are in  development  and should be  available  for  testing in late spring
2001.

Once these sensors have been tested and  validated,  in a certified  independent
laboratory,  a system  designed to optimize  the  performance  of the  Company's
Stirling system will be built.  When  available,  it will be integrated into the
field test units for endurance  testing.  The Company  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.

         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.  Based upon the test and
evaluation  work  completed by us pursuant to the October 2000 MOU,  Batelle has
proposed on March 8, 2001 that we  participate  as an industry  partner with the
Pacific Northwest  National  Laboratory,  which is operated by Battelle,  in the


                                       27
<PAGE>

next  phase  of  refining  the  ozone   generator   technology   and   licensing
negotiations.  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. In the event that we elect
to so participate,  and the Department of Energy agrees to fund our proposal, we
would have a right to a non-exclusive,  royalty free and paid up license for any
technology  that results from the study for the specified field of use. We would
also have an option to negotiate for a royalty-bearing  exclusive license and/or
additional  fields of use.  We  intend  to  continue  our  participation  in the
project.  We have  not yet  submitted  our  proposal  for  further  study to the
Department of Energy.

         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 will  automatically  terminate on June 30, 2001 if a definitive  license
agreement is not executed by the  parties.  In addition,  we agreed with Organic
Power in the same non-binding letter of intent to commence discussions to obtain
an exclusive license to use Organic Power's gasification  technology in the U.S.
and Canada. Ocean Power and Organic Power further agreed that either party would
provide  prior  notice to the  other  party in the event  that it  entered  into
discussions  with any third party about the use of Organic Power's  gasification
technology or any similar technology.

In December  2000, we commenced  discussions  with Organic  Power  regarding the
potential  purchase of up to 50% of Organic  Power's stock.  These  discussions,
which were the  subject  of a  non-binding  memorandum  of  understanding  dated
December 20, 2000, are currently on going.

Competition

In the general sense,  competition to the Company'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 its  markets,  we will 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.   Microturbines
         Capstone,USA
         Allied Signal, USA
         Siemens , Germany

3.   Stirling Engines
         Schweizerische Industrie-Gesellschaft (SIG), Switzerland
         WhisperTech, New Zealand
         Solo, Germany
         STM, 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
         Zetec Power, UK


                                       28
<PAGE>

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  Stirlings   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
     Stirlings.
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  provisional  patent   applications.   These
provisional   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.
Non-provisional  applications  based on the priority  dates of these four United
States  provisional  applications will be filed this year. Any patents resulting
from  those  applications  will  expire  twenty  years  after the  filing of the
non-provisional  applications.  Non-provisional  applications are expected to be
filed for all four of these patents within the next ten months.

Through  a  license  agreement  with  STM,  Inc./General  Stirling,  we  have 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.  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,  including a license under one
patent  application  owned by Hadwaco  relating to a heat exchange element for a
thin film heat  exchanger  which  was  filed in  Finland  under the rules of the
Patent Cooperation Treaty ("PCT") and licensed to Aquamax/Keeran.  Under the PCT
rules, applications based on and identical to the application were then filed in


                                       29
<PAGE>

the respective patent offices of various  designated PCT member nations,  namely
Australia, Brazil, Canada, Japan, South Korea, Norway, the United States and the
European Patent Office.  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 currently 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 has  applied to the U.S.  Patent and  Trademark  Office  ("PTO") to
register  the mark  "H2OKW"  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  filed on July 26,  1999.  The PTO has  made  two  requests  for
additional   information,   to  which  Ocean  Power  has  responded.   No  final
determination as to the registrability of the mark has been made at this time.

Ocean  Power  also  owns the mark "3  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 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 US. 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
extant.  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 by in most of the rest of the world where Ocean power plans
to do business.


                                       30
<PAGE>

         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 Agency and
of the  Company  itself.  Our  standards  are  more  stringent  than  the  above
governmental agencies.

                                  Water Quality
                     (A summary of drinking water standards)
             (Values in milligrams per litre, except for pH levels)
<TABLE>
<CAPTION>

             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
                                              equal to 100     equal to 200     equal to 500      to 50
  pH (units).............................    --               --                6.5-8.5           5.5-8.5
  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
  Bromide ...............................    --               --               --                 less than 25
  Heavy Metals ..........................    --                less than 30     less than 1       less than or equal
                                                                                                  to EPA
  Turbidity .............................                                                         0.5--1.0
  Natural Turbidity Unit's ..............
  Odor ..................................                                                         3
  Threshold Taste........................    --               --               --                 B1 or B2 (1)
  Coliform...............................     No Standard      No Standard      less than 1       0
                                                                                colony/100ml
  Giardia Lambila........................     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   Quality",   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  impslemented 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

The  company  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 the company 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 the company 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.


                                       31
<PAGE>

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  the
company'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 the
company'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.

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

Employees

As of the date hereof, the Company employed 34 full-time employees,  to include,
the President,  Vice President,  Secretary Treasurer,  2 Executive Assistants to
the President and Vice  President,  2 Chemists,  Manufacturing  Manager,  Design
Engineer  and  an  Administrative   Assistant.  The  Company  hires  independent
contractors  on an "as  needed"  basis  only.  The  Company  has  no  collective
bargaining agreements with its employees. The Company believes that its employee
relationships  are  satisfactory.  In the long term,  the Company will add staff
through  acquisitions  and will attempt to hire  additional  employees as needed
based on its growth rate.

         Risks and Uncertainties

There are many risks and uncertainties involved in the Company's business and in
investment in the Company's common stock. Additional risks and uncertainties not
currently  known to the Company or that are believed to be  immaterial  may also
harm the business.  If these or any of the following risks actually  occur,  the
Company's  business could be harmed, the trading price of the common stock could
decline and shareholders may lose all or part of their investment.

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 the new and  rapidly
evolving  market for  Internet  commerce  products  and  services.  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.

To address these risks, we must, among other things:

         o   enhance  and  expand  our  products  and  services  in  the  manner
             described in the business section;
             and
         o   continue to develop our supporting technology and otherwise improve
             our business model.

Our failure to  successfully  address these risks could have a material  adverse
effect on our business, results of operations and financial condition.

We expect to continue to have losses and we may not become or remain profitable.

Whether we become and remain profitable will depend upon our ability to generate
and  sustain  increased  revenues  in  excess  of our  expenses.  We  expect  to
experience  significant  growth in our  operating  expenses for the  foreseeable
future and that our revenues during this period will not be sufficient to offset
our expenses.  Therefore,  we expect to continue to incur substantial losses and
to  operate on a  negative  cash flow basis for at least the next two years.  We


                                       32
<PAGE>

have had  significant  net losses since inception and, at December 31, 2000, our
accumulated deficit was $20,028,591. To date, we have recognized minimal revenue
and our  ability to  generate  revenue  going  forward is highly  uncertain.  In
addition, we currently intend to have substantial operating expenses relating to
marketing, hiring additional personnel and developing our technology. Therefore,
we expect to  continue to have  significant  losses and to operate on a negative
cash flow  basis for at least the next two years as we try to grow our  customer
base and our technological platform.

We cannot be sure that we will ever be profitable. Even if we are able to become
profitable,  we may not be able to remain  profitable.  Our  ability to take the
steps  necessary to implement  our business  model may be hampered if we fail to
sufficiently  increase our revenues or if any  increased  revenues are more than
offset by increased operating expenses.

We cannot predict our future  capital needs or our ability to secure  additional
financing.

Future  working  capital  requirements  depend on many  factors,  including  our
ability  to  successfully  execute  our  business  plan.  We may  need to  raise
additional  funds to support more rapid growth in our  business,  develop new or
enhanced  services  and  products,  respond to  competitive  pressures,  acquire
complementary  technologies  or respond to  unanticipated  requirements.  If our
current funding proves insufficient to support future operating requirements, we
will need to obtain additional  funding by issuing  additional equity securities
or debt in the public or private capital markets. Such funding alternatives,  if
available at all, may not be on favorable terms. Our failure to raise additional
capital or additional  funding when needed could have a material  adverse effect
on our business,  results of operations  and  financial  condition.  If we raise
additional funds by issuing equity securities,  the percentage  ownership of our
then-current stockholders would be reduced.

Furthermore, such equity securities might have rights, preferences or privileges
senior to those of our common stock.  If we raise  additional  funds through the
incurrence of debt, we may incur  significant  interest expense and the terms of
such debt may impose  certain  covenants  on us that  constrain  our  ability to
implement our business plan.

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
market  presence,   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  and changes in
             client requirements;
         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.  For a discussion of these strategic alliances,  you should read the
"Item 1. The Business --  Strategic  Partnerships"  section.  We expect 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. It is also possible that alliances with a
particular  strategic  partner may cause its  competitors to stop or avoid using
our marketplace.

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,


                                       33
<PAGE>

functionality, accessibility and features of our 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.

Our failure to provide  reliable and  consistent  access or to expand or upgrade
our systems could have a material  adverse effect on our  reputation,  business,
operating results and financial condition.

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.

We depend on the specialized  market knowledge and technology  skills of our key
management and employees.

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. We cannot assure you that we would be able to find an
appropriate  replacement for any of our key personnel.  Any loss or interruption
our key personnels'  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 may not be able to  recruit  and  retain a  sufficient  number of  adequately
trained personnel.

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.

Any acquisitions that we undertake could be difficult to integrate,  disrupt our
business, dilute stockholder value and harm our operating results.

If  appropriate  opportunities  arise,  we may  acquire or make  investments  in
complementary  businesses,  technologies,  services or products.  The process of
integrating  any  acquired  business,  technology,  service or product  into our
business and  operations  may result in unforeseen  operating  difficulties  and
expenditures.  Integration of an acquired  company also may consume  significant
management resources that would otherwise be employed in the ongoing development
of our business. In addition, we may not realize the anticipated benefits of any
acquisition.  We may be unable to  successfully  identify,  negotiate or finance
future  acquisitions or integrate any  acquisitions  with our current  business.
Future  acquisitions  could result in potentially  dilutive  issuances of equity
securities or the incurrence of debt,  contingent  liabilities  or  amortization
expenses  related to goodwill and other  intangible  assets,  any of which could
harm our business and financial results.

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
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.


                                       34
<PAGE>

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[dot]powerco[dot]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.

Any  infringement  by us of the  proprietary  rights of others  could  result in
litigation.

We do not believe  that we infringe  the  proprietary  rights of others,  and to
date, no third parties have notified us of any such  infringement.  However,  we
may be subject to infringement  claims in the future.  The defense of any claims
of infringement made against us by third parties could involve significant legal
costs and require our  management  to divert time from our business  operations.
Either of these  consequences  of an  infringement  claim  could have a material
adverse  effect on our  future  financial  results.  If we are  unsuccessful  in
defending  any claims of  infringement,  we may have to obtain  licenses  or pay
royalties to continue to provide our services.  We may not be able to obtain any
necessary  licenses on commercially  reasonable  terms, or at all. If we fail to
obtain necessary  licenses or other rights, or if these licenses are too costly,
our operating  results may suffer either from  reductions in revenues due to our
inability  to serve  clients or from  increases  in costs  incurred in licensing
third-party technology.

Our business is subject to government and other regulation.

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 and
criminal liability and indemnification  liability to third parties,  among other
consequences.

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.

There is no active public  trading  market for our common  stock,  and we cannot
assure you that an active trading market will develop or be sustained.

Although much of our common stock is available for trading on the "pink sheets",
there has been no strong public market for our common stock and we cannot assure
you that an active trading market will develop or be sustained. The market price
of our common stock may  fluctuate  widely and trade at prices below the initial
public offering price. The price of our common stock may fluctuate  widely,  due
to many factors,  including our perceived prospects,  the prospects of the water
distribution and power generation industries in general, differences between our
actual  financial  and  operating  results and those  expected by investors  and
analysts,  changes  in  analysts'  recommendations  or  projections,  changes in
general  economic  or  market  conditions  and  broad  market  fluctuations.  In
addition,  securities class action litigation has often been instituted  against
companies  following  periods  of  volatility  in  the  market  price  of  their
securities.  This type of  litigation  could result in  substantial  costs and a
diversion of management attention and resources.


                                       35
<PAGE>

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 own approximately  27.9%, 18.3%
and  6.8%,  of our  common  stock.  In  addition,  our  executive  officers  and
directors,  in the  aggregate,  own  approximately  57.0% 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.

Future sales of our shares would adversely affect the market price of our common
stock.

If our existing  stockholders  sell a large  number of shares,  or if we issue a
large  number  of  shares  of  our  common  stock  in  connection   with  future
acquisitions  or  otherwise,  the market price of our common stock could decline
significantly.  Moreover,  the  perception  in  the  public  market  that  these
stockholders might sell shares of common stock could depress the market price of
our common stock.

Our forward-looking statements are speculative and may prove to be wrong.

We have made  forward-looking  statements in this  prospectus,  including in the
section entitled  "Management's  Discussion and Analysis of Financial  Condition
and  Results  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 are 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.
We do not  intend and are not  obligated  to update  forward-looking  statements
after the date of this Form 10-KSB.

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 21,600  square feet
building  which is currently  configured  as office,  engineering  and warehouse
space.  The term of the Lease is for 5 years commencing  April,  1997 and ending
April 30, 2002. The company has two,  three-year options to extend the lease. 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

The Company is not subject to any legal proceedings or claims.

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

None to report.


                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         A.       Market Information

The Company's common stock is traded on OTC Pink Sheets under the symbol PWRE.


                                       36
<PAGE>

The following table sets forth high and low bid prices for the Company's  common
stock for the past two years.  The amounts set forth in this table are  adjusted
to account for the August 22, 1999 10 to 1 reverse stock split. The prices below
also reflect  inter-dealer  quotations,  without  retail  mark-up,  mark-down or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>

                                                                      High              Low
                        Quarter Ended                                 Ask$              Bid$            Close$
<S>                                                                   <C>               <C>              <C>
March 1999.................................................           8.10              6.20             6.80
June 1999 .................................................           5.40              5.10             5.30
September 1999 ............................................           2.25              1.50             2.12
December 1999..............................................           1.37              1.25             1.37
March 2000 ................................................          13.37              1.56             7.50
June 2000..................................................           5.75              3.00             4.06
September 2000 ............................................           6.15              2.85             5.00
December 2000..............................................           5.50              2.37             3.40
</TABLE>

      Source: Financial Web.  Historical Data

Please  note that  until June 22,  1999,  which is the date of the merger of PTC
Group (which had a public market for its  securities)  into PTC Holdings  (which
had no market for its securities before the merger),  the above prices including
those of June,  1999 were for PTC Group only. As of March 29, 2001,  the closing
price of the Company's Common Shares was $ 2.66 per share.

         B.       Holders

As of March 29,  2001,  there  were  approximately  240  record  holders  of the
Company's common stock, as reported by the Company's transfer agent. This number
does not reflect those  shareholders whose shares are held by a broker-dealer or
other institutional nominee.

         C.       Dividends

The  Company  has not  paid any  dividends  on its  Common  Stock.  The  Company
currently intends to retain any earnings for use in its business,  and therefore
does not anticipate paying cash dividends in the foreseeable future.

         D.       Recent Sales of Unregistered Securities

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

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


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

In June 1999, the Company 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 the
Company under the consulting agreement,  Weckstein,  in its capacity as a broker
dealer,  makes a market in the  Company's  common  stock.  Weckstein is a broker
dealer and a member of the National  Association  of Securities  Dealers.  Under
this agreement,  Weckstein  assists the Company by utilizing its contacts in the
water and power industries to identify for the Company business opportunities in
keeping with the Company's business plan. For example,  Weckstein has introduced
the  Company  to  electric  utilities   corporations  in  Europe  and  to  water
desalination plants in South America.  Weckstein has also introduced the Company
to investment banks and institutional investors in the United States and Europe.
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.

         A.  Pursuant  to the  terms of the  agreement,  on June 23,  1999,  the
Company issued to Weckstein  options to purchase  30,000 shares of the Company's
common  stock at a price of $5.00 per share for a period of three years from the
date of the agreement.  On December 7, 1999,  the Company and Weckstein  amended
the June 1999 consulting agreement. The Company 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.


                                       37
<PAGE>

         B. On February 18, 2000,  the Company again amended its agreement  with
Weckstein.  The Company  cancelled the options  granted to Weckstein in December
1999 and issued to Weckstein options to purchase 100,000 shares of the Company'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.

         C. On April 19, 2000,  the Company  further  amended its agreement with
Weckstein.  The Company  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.

         D. On August 8, 2000, the Company granted Weckstein  additional options
to purchase 100,000 shares of the Company's common stock at an exercise price of
$3.50 per share,  which options will expire August 8, 2003. The Company  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.

         2)  Issuance  of Common  Stock To Xcel Associates, Inc.  for Default on
             Interest Payments

         On August 9, 1999, the Company  executed a promissory  note in favor of
Xcel in return  for a loan of  $250,000  to the  Company.  On  January  4, 2000,
pursuant to the default  provisions of such promissory  note, the Company issued
the preset  number of 25,000  shares to Edward  Meyer,  Jr. and 25,000 shares to
Edward  Whelan,  at the direction of Xcel.  The Company has since  satisfied the
debt in full.


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

                  A. On November 16, 1999,  the Company  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 the Company's common stock
on  November  16, 1999 was $1.50 per share.  Such  convertible  debentures  were
issued as follows:
<TABLE>
<CAPTION>

Date of Issuance      Conversion     Number    of  Price     per  Expiration      Recipient
                      Securities     Shares        Share          Date
--------------------- -------------- ------------- -------------- --------------- ---------------
<S>                   <C>            <C>           <C>            <C>             <C>
11/16/99              Common         233,333       $1.50          8/1/04          Freedom
                      Warrants       466,667       $.75                           Funding
--------------------- -------------- ------------- -------------- --------------- ---------------
                      Common         66,667        $1.50          8/1/04          Freedom
                      Warrants       133,333       $.75                           Funding
--------------------- -------------- ------------- -------------- --------------- ---------------
                      Common         66,667        $1.50          11/1/04         Regis
                      Warrants       133,333       $.75                           Investments
--------------------- -------------- ------------- -------------- --------------- ---------------
                      Common         66,667        $1.50          8/1/04          Venture
                      Warrants       133,333       $.75                           Investment
                                                                                  Group
</TABLE>

                  B. On March 16,  2000,  the  Company  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 held by Regis  Investments.  Aggregate cash proceeds to the Company for
the  exercise  of the  warrants,  at an  exercise  price of $.75 per share,  was
$200,000.

         4)  Issuance  for  Consulting  Services  Related  to a  1999  Rule  504
             Offering To Colorado Residents.

In December  of 1999,  the  Company  issued a total of 755,085  shares of common
stock to 4 persons  for total  cash  proceeds  to the  Company of  $600,000.  In
connection  with this  offering,  in November  1999 the Company  entered  into a
one-time  30  day  consulting  agreement  with  Intercontinental  Capital  Corp.
("Intercontinental  Capital")  to assist  the  Company in  obtaining  financing.
Pursuant to the  agreement,  Intercontinental  Capital  acted as a finder in the
above  described  offering.   In  consideration   therefor,   the  Company  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.


                                       38
<PAGE>

         5)  Issuance to Clement J. Wohlreich

By  agreement  dated  January 1, 2000,  the Company  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 the Company  issued  warrants  and
common  stock to  Wohlreich  as  consideration  for  services.  Pursuant  to the
contract,  and per a treasury  order dated July 25, 2000,  the Company issued to
Wohlreich  100,000  shares of common stock.  Also pursuant to the contract,  the
Company 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.

         6)  Conversion of Debt

On January 4, 2000,  the Company  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 the Company for rent of office space.

         7)  Private Offering to Foreign Resident

On January 26, 2000, the Company 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 the Company 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.

         8)  Issuance of Warrants to Donner Corp. International

In January 2000,  the Company  entered into a consulting  agreement  with Donner
Corp. International ("Donner") for marketing and promotion services for sales of
securities. The agreement calls for the Company to pay a retainer of $2,500, and
$10,000 for services in connection  with  assisting the Company in  implementing
its business objectives.  In addition,  pursuant to the contract, on February 1,
2000, the Company  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.

         9)  Issuance of Options to EBM, Inc.

On January 1, 2000, the Company entered into consulting agreement with EBM, Inc.
("EBM")  for a one  year  term to  disseminate  information  on the  Company  to
analysts,  brokers and investors and for marketing and promotion of sales of the
Company'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,  the Company
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 sales price for these shares was $6.25 on the
date of the signing of the agreement. These options are currently outstanding.

         10) Conversion of Debt

Pursuant to an agreement  dated March 3, 2000,  on March 27,  2000,  the Company
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 the Company  assumed the debt from  Holdings upon its merger
with  Holdings  completed  on June 22,  1999.  The  closing  sales price for the
Company's common stock on March 27, 2000 was $7.19.

         11) Conversion of Debt

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


                                       39
<PAGE>

         12) Conversion of Debt

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

         13) Issuance of Options to Company Officer

On May 26,  2000,  the Company  issued to J. Michael  Hopper,  an officer of the
Company,  options to purchase 598,680 shares of the Company's common stock at an
exercise price of $1.50. The options are exercisable for the life of his current
employment  agreement with the Company.  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 the Company.  Mr. Hopper's
employment agreement as currently in effect will terminate on January 1, 2003.

         14) Issuance Per Merger With Sigma Elektroteknisk

On  August  10,  2000,  the  Company  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 the Company and SIGMA dated July 25, 2000. All of the
recipients  of  Company  shares  were  foreign  residents.  There  were no prior
material relationships between or among any of the Shareholders of SIGMA and the
Company or any of their officers, directors, associates or affiliates.

         15) Private Placement For $6,915,731

From  January 25,  2000 to August 14,  2000,  the  Company  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 the
Company 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,  the Company  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 the Company of $125,109, pursuant to the exercise of warrants received in the
units  purchased  on the same day as part of the  Company'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 the  Company  as
accredited investors.

         16) Private Placement For $3,000,000.

On August 29, 2000, the Company 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  three  years  from the time of the unit
purchase. The market value of the shares on August 29 was $5.00.

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


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

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  expressions  are  intended to identify  forward-looking
statements.

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


                                       40
<PAGE>

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

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

Plan Of Operation

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

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

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

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

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

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

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

The Company currently has outstanding debt with an aggregate principal amount of
$11,545,504  as of December 31, 2000.  For the year ended December 31, 2000, the
Company  has  issued  210,733  shares of common  stock in  conversion  of, or to
otherwise  retire or cancel,  debts of the Company with an  aggregate  principal
amount of $431,812.  These issuances of common stock are more fully described in
Part II, Item 5 of this Form 10-KSB.

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


                                       41
<PAGE>

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

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

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

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

         (i) Since  completion of its water quality  certification on 9 December
             1999, the Company has raised  approximately $10 million pursuant to
             private  placement  financing  which has  allowed  the  Company  to
             implement its Product  Development  Program,  as well as to further
             business   development,   strategic   partnering  and   acquisition
             activities.  Based on an  analysis  of its  sales  and  development
             costs,  the Company  intends to raise an additional  $20-30 million
             pursuant to private  placement and financing  during the first half
             of  2001  and,  depending  on the  pace  of  actual  sales  and the
             acquisition  activities  of the  Company,  an  additional  round of
             financing  (for a minimum of $100  million  dollars)  in the second
             half of 2001.  The exact method by which this  additional  round of
             financing  will be  raised  will be  based on the  maximization  of
             shareholder value. The additional equity, if raised by the Company,
             will allow the Company to execute its business plan.

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

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

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

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

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

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

          (iv)    Although the Company plans to subcontract  out as much work as
                  possible, during the next year it still anticipates increasing
                  the  number  of  employees  from the  current  34 full time to
                  approximately 40 full time.

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


                                       42
<PAGE>

it has fewer parts than an internal  combustion  engine, it is potentially lower
in cost with higher reliability. Sigma's research and design work had focused on
the development of an external  combustion  engine capable of generating 3 kW of
electricity  and 9 kW of recoverable  heat. We acquired Sigma in order to obtain
distributed power generation technology,  such as Sigma's Stirling engines, that
we believe is commercially viable and has demonstrated technical viability.

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

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

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

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

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

The process of allocating the purchase price for the Sigma acquisition  included
assigning an  estimated  useful life to the patents and goodwill for purposes of
amortizing  their carrying value of these assets on our financial  statements as
required by generally accepted accounting  principles.  The useful life assigned
to the patents was 90 months  (representing the remaining weighted average terms
on the patents at the date of the purchase of Sigma by the Company) and 10 years


                                       43
<PAGE>

for the goodwill which resulted from the acquisition.  The time periods assigned
for these useful lives recognized that Sigma (1) was well along in its technical
development,  (2) had identified a market for its product (i.e., the residential
distributed  heat and power market in Europe),  and (3) had developed a business
plan to exploit the European market for combined heat and power generation.  Our
expectation  at the time of  allocating  the  purchase  price was that the Sigma
business would begin generating modest amounts of revenues in late 2001 or early
2002,  and that  commercial  production  would  begin in 2003 and  continue on a
profitable basis at least through 2010, which would be 10 years from the date of
the acquisition.

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

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

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

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

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


                                       44
<PAGE>

The development benchmarks for Sigma's Stirling engine business are as follows:
<TABLE>
<CAPTION>

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

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  (See  Micro  CHP  strategy  in Item 1,
"Description of Business,  Residential Market Strategy, Micro CHP"). The Company
expects  that  the  collaboration  will  take  the  form  of  a  vendor-customer
relationship  and not include a legal  entity,  such as a  partnership  or joint
venture.

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

Our  initial  anticipated  time-line  to develop  our 3 kW  Stirling  engine for
commercial  use was three years from the date of initial  funding of the capital
necessary  to continue  the work  already  begun by Sigma before the date of the
acquisition.  The initial  funding and  commencement  of work began in September
2000  and,  as of  August  2001,  there  has  been  no  change  to the  plan  of
development.  To reduce the risk that the time  necessary for  development  will
have to be extended,  the Company has contracted for outside engineering support
from  Ricardo  Inc. A  description  of our work with  Ricardo is set forth above
under "The Business - Distributed Power Generation/Renewable Energy Technologies
-Strategic Relationships - Ricardo US."

Our initial  estimate of our funding  requirements to achieve the benchmarks set
forth above was  approximately  $19.9 million,  which amount continues to be the
estimate.  The $19.9 million aggregate amount needed over a three year period to
fund the activities in the Plan of Development is as follows:  $700,000 in 2000,
$9.0  million  in 2001,  $6.7  million in 2002 and $3.5  million in 2003.  As of
August  2001,  the Company has provided  approximately  $3.0 million of the $9.7
million originally  projected to be needed in 2000 and 2001. While the remaining
$6.7  million has not yet been  provided to Sigma,  it has been able to meet the
Stirling  engine  benchmarks  to date by (1)  focusing  on the core  activity of
designing,  developing  and  engineering  a  production  prototype  of the first
generation Sigma 3kW electric/9 kW thermal Stirling engine;  (2) using available
funds  of $3.0  million;  (3)  obtaining  vendor  credit  of $1.0  million;  (4)
deferring  development  tasks (and the related  costs) that were not part of the
core activity and could be deferred  without  causing delay to the time line for
development;  and (5) converting of debt to stock of Ocean Power. By focusing on
the  designing,  developing  and  engineering  of a production  prototype of the
engine,  we have been able to complete a pre-mass  production  engine  ready for
manufacture. We have also been able to have Ricardo, our engineering consultant,
begin  planning the design and  manufacture of the second  generation  prototype
engine,  which is intended to be lighter,  simpler in design and less  expensive
that  the  first  generation  engine.  Thirty  units  of the  second  generation
prototype  units have been  ordered  and are under  production.  The first three
units are scheduled for delivery (subject to the availability of funding) in the
fourth  quarter  2001.  In fourth  quarter 2001 or first quarter 2002, we expect
(subject to the  availability of funding) to start generating cash flow from the
release of second generation  prototype engines to utilities and other potential
customers for testing. Because of the low volume of production, pricing of these
second generation engines will only cover the high initial manufacturing cost of
the initial thirty units.  Therefore,  early stage  production will not generate
sufficient  cash  flow to fund  other  development  tasks  such as the  deferred
activities and other second generation development activities such as marketing.


                                       45
<PAGE>

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

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

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

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

Aquamax/Keeran
Our  strategic   objective   for  acquiring  or  licensing  the   Aquamax/Keeran
intellectual  property  was to  secure  rights  to a  technology  with  existing
commercially  viable  applications  that we believe  can  provide  the basis for
developing  economically viable seawater desalination equipment based on a vapor
compression distillation cycle.

The deficiencies with the majority of commercial vapor  compression  systems are
twofold: the cost of capital equipment is too high to support the target product
water cost and certain component  failure modes (for example,  compressor leaks)
make other commercial technology  unreliable.  Based upon our experience and our
study and analysis of the Aquamax/Keeran  technology (including modification and
testing of Aquamax/Keeran  equipment that resulted in a working, and potentially
marketable,  thermal  compression  seawater  desalination  system that served to
confirm our plan of product  improvement to improve performance and cost factors
to make the  market  more  competitive),  we  believe  that  the  Aquamax/Keeran
technology,  when combined with planned technical  improvements  currently under
development by us, could will serve as the basis for an economically  viable sea
water   seawater   desalination   system  which  employs  a  vapor   compression
distillation  cycle. The development  tasks remaining  involve the transition of
proven technologies from water remediation to seawater desalination. As such, we
are  applying  technology  that has been  used in  other  applications  with the
Aquamax/Keeran design in order to reduce the cost of desalinated seawater to the
level of the cost of ground water. Because of this we believe we will be able to
achieve the objectives in our plan of product improvement.

Management believes that the Aquamax/Keeran  vapor compression process is unique
in its use of  plastic  heat  exchange  surfaces  for  the  evaporator-condensor
assembly.  Competitive  vapor  distillation  technology  uses either titanium or
other  expensive  inert  metal   implementations  of  the   evaporator-condenser
assembly.   As  discussed   above  in  "The  Business  -  Distributed   Seawater
Desalination - Our Solution: The H20KW System - Desalination Subsystem - Thermal
Distillation   Technology",   we   believe   that  a   configuration   based  on
Aquamax/Keeran's  technology  will be more  reliable  and  cost  effective  than
configurations based on a metal evaporator condenser assembly.

Based upon commercially  available market studies performed by third parties, we
believe that  desalination  systems  based on such existing  vapor  distillation
technology  are favored by potential  water  customers in certain  world markets
(such as  members of the Gulf  Cooperative  Counsel  and the  Middle  East) over
Reverse  Osmosis  desalination  technologies,  primarily due to the higher water
quality.

Ocean Power's  sales plans call for the  introduction  of the vapor  compression
distillation  based  H20KW  systems  within  two  years  after  the start of the
Company's vapor  compression  distillation  development  program.  In turn, this
program was to be initiated  after the  Aquamax/Keeran  technology was acquired.
Under current plans, the vapor compression  distillation  technology will be the
basis of  desalination  equipment sales expected to start in 2004 with a view to
eventually  replacing the Reverse Osmosis based H20KW systems for about half the
annual projected sales of equipment, components, services and water.

For  additional   information   concerning  the  Company's   relationship   with
Aquamax/Keeran,   please  see  the   discussion   in  "The   Business--Strategic
Relationships--Aquamax   Business  --  Distributed   Seawater   Desalination  --
Strategic   Relationships  --  Aquamax  International  Holdings  BV  and  Keeran
Corporation."


                                       46
<PAGE>

ITEM 7.           FINANCIAL STATEMENTS

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)

                   RESTATED CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2000



                                 C O N T E N T S

Independent Auditors' Report................................................. 48

Consolidated Balance Sheet................................................... 49

Consolidated Statements of Operations and Other Comprehensive Income......... 51

Consolidated Statements of Stockholders' Equity.............................. 53

Consolidated Statements of Cash Flows........................................ 61

Notes to the Consolidated Financial Statements............................... 63




                                       47
<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,
2000,  and  the  related   consolidated   statements  of  operations  and  other
comprehensive  income,  stockholders' equity, and cash flows for the years ended
December 31, 2000 and 1999 and from inception on March 26, 1992 through December
31, 2000. 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  generally   accepted  auditing
standards.  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,  2000,  and  the   consolidated   results  of  their  operations  and  other
comprehensive  income and their cash flows for the years ended December 31, 2000
and 1999 and from  inception  on March 26,  1992  through  December  31, 2000 in
conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in Note 11 to
the  consolidated  financial  statements,  the  Company is a  development  stage
company  which has  generated  significant  losses from  inception  which 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 11. The consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

As  discussed in Note 2(s) to the  consolidated  financial  statements,  certain
errors were discovered  regarding the measurement date for the license agreement
valuation which resulted in  understatements  of the assets and liabilities,  as
well as the net loss for the year ended December 31, 2000.



HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 26, 2001,  except as to Note 18 which is April 2, 2001,  and Note 13(f) as
to which the date is August 28, 2001.



                                       48
<PAGE>

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


                                     ASSETS
                                     ------

                                                          December 31,
                                                              2000
                                                          (Restated)
                                                      -----------------
CURRENT ASSETS

   Cash                                               $       2,152,593
   Cash - restricted (Note 2)                                    23,706
   Advances to employees (Note 3)                               320,567
   Prepaid expenses (Note 4)                                    222,235
                                                      -----------------
     Total Current Assets                                     2,719,101
                                                      -----------------
EQUIPMENT, NET (Note 2)                                         922,980
                                                      -----------------
OTHER ASSETS

   Deposits                                                      55,348
   Patents, and licensing agreements, net (Note 5)            7,281,679
   Goodwill, net (Note 6)                                     6,315,183
                                                      -----------------
     Total Other Assets                                      13,652,210
                                                      -----------------
     TOTAL ASSETS                                     $      17,294,291
                                                      =================



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


                                       49
<PAGE>

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


                      LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                     December 31,
                                                                         2000
                                                                      (Restated)
                                                                  -----------------
<S>                                                               <C>
CURRENT LIABILITIES
   Accounts payable                                               $       1,127,414
   Accrued expenses (Note 10)                                             6,844,282
   Notes payable - related parties (Note 7)                               1,317,618
   Notes payable - current portion (Note 8)                                 488,457
   Research advances (Note 12)                                              473,145
                                                                  -----------------
     Total Current Liabilities                                           10,250,916
                                                                  -----------------
LONG-TERM LIABILITIES

   Convertible debentures payable (Note 9)                                  550,000
   Notes payable (Note 8)                                                   744,588
                                                                  -----------------
     Total Long-Term Liabilities                                          1,294,588
                                                                  -----------------
     Total Liabilities                                                   11,545,504
                                                                  -----------------
STOCKHOLDERS' EQUITY

   Preferred stock: 20,000,000 shares authorized of
    $0.001 par value; no shares outstanding                                    --
   Common stock: 500,000,000 shares authorized of
    $0.01 par value; 38,149,942 shares issued and outstanding               381,499
   Additional paid-in capital                                            25,611,288
   Deferred consulting expense (Note 13)                                   (410,667)
   Other comprehensive income                                               195,258
   Deficit accumulated during the development stage                     (20,028,591)
                                                                  -----------------
     Total Stockholders' Equity                                           5,748,787
                                                                  -----------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $      17,294,291
                                                                  =================
</TABLE>



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


                                      50
<PAGE>

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


                                                                                                   From
                                                                                               Inception on
                                                                                                  March 26,
                                                                  For the years Ended           1992 Through
                                                                       December 31,             December 31,
                                                                 2000               1999             2000
                                                       ------------------  ------------------  -----------------
                                                            (Restated)                             (Restated)
<S>                                                    <C>                 <C>                 <C>
REVENUES                                               $             --    $             --    $            --
                                                       ------------------  ------------------  -----------------
EXPENSES

   General and administrative                                   8,074,830           3,966,043         15,943,288
   Impairment of intangible assets                                400,000                   -            400,000
   Research and development                                       295,456             258,000          1,545,456
   Depreciation and amortization                                  432,665              18,742            483,359
                                                       ------------------  ------------------  -----------------
     Total Expenses                                             9,202,951           4,242,785         18,372,103
                                                       ------------------  ------------------  -----------------
     LOSS FROM OPERATIONS                                      (9,202,951)         (4,242,785)       (18,372,103)
                                                       ------------------  ------------------  -----------------
OTHER INCOME (EXPENSE)

   Currency gain                                                      522                --                  522
   Interest income                                                215,544                --              215,544
   Loss on sale of assets                                            --              (387,649)          (387,649)
   Interest expense                                              (283,231)         (1,069,052)        (1,650,246)
                                                       ------------------  ------------------  -----------------
     Total Other Income (Expense)                                 (67,165)         (1,456,701)        (1,821,829)
                                                       ------------------  ------------------  -----------------
LOSS BEFORE EXTRAORDINARY ITEM                                 (9,270,116)         (5,699,486)       (20,193,932)

EXTRAORDINARY ITEM

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

NET LOSS                                                       (9,104,775)         (5,699,486)       (20,028,591)
                                                       ------------------  ------------------  -----------------
OTHER COMPREHENSIVE INCOME

   Currency translation adjustment                                195,258                -  -            195,258
                                                       ------------------  ------------------  -----------------
     TOTAL COMPREHENSIVE LOSS                          $       (8,909,517) $       (5,699,486) $     (19,833,333)
                                                       ==================  ==================  =================
</TABLE>



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



                                       51
<PAGE>

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


<TABLE>
<CAPTION>

                                                                  For the years Ended
                                                                       December 31,
                                                                 2000               1999
                                                       ------------------  ------------------
                                                           (Restated)
<S>                                                    <C>                 <C>
BASIC AND DILUTED LOSS PER SHARE

   Operating loss                                      $            (0.25) $            (0.22)
   Extraordinary item                                                0.00                0.00
                                                       ------------------  ------------------

     Total                                             $            (0.25) $            (0.22)
                                                       ==================  ==================

WEIGHTED AVERAGE NUMBER OF SHARES
 OUTSTANDING                                                   36,157,787          26,465,941
                                                       ==================  ==================
</TABLE>



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



                                       52
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                                          Deficit
                                                                                                        Accumulated
                                                                  Additional    Other       Deferred    During the
                                             Common Stock          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)
                                       -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>



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



                                       53
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                                   Deficit
                                                                                                                 Accumulated
                                                                           Additional    Other       Deferred    During the
                                                       Common Stock         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 issued to
employees,  43,152 issued to
consultants,  60,900 issued to
lenders, 6,960 issued to a landlord
and 8,352 issued to vendors,
at $0.003 per share                                 161,542        1,615       (1,152)        --           --           --

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

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

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

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 fo         r
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)
                                                -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>



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


                                       54
<PAGE>

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

                                                                                                                   Deficit
                                                                                                                 Accumulated
                                                                           Additional    Other       Deferred    During the
                                                     Common Stock           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)
                                                -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>



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



                                       55
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                                   Deficit
                                                                                                                 Accumulated
                                                                           Additional    Other       Deferred    During the
                                                      Common Stock          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)
                                                -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>



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



                                       56
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                          Deficit
                                                                                                        Accumulated
                                                                  Additional    Other       Deferred    During the
                                             Common Stock          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)
                                       -----------  -----------  -----------  -----------  -----------  -----------
</TABLE>



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



                                       57
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                          Deficit
                                                                                                        Accumulated
                                                                  Additional    Other       Deferred    During the
                                             Common Stock          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)
                                       -------------  -------------   --------------  ---------------   ------------
</TABLE>



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



                                       58
<PAGE>


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

<TABLE>
<CAPTION>

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


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

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

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

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

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

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

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

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

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

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



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



                                       59
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                                          Deficit
                                                                                                        Accumulated
                                                                  Additional    Other       Deferred    During the
                                       Common Stock                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 (restated)                  --           --          --            --           --      (9,104,775)
                                       -----------  -----------  -----------  -----------  -----------  ------------

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



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



                                      60
<PAGE>


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


<TABLE>
<CAPTION>


                                                                                                   From
                                                                                               Inception on
                                                                                                  March 26,
                                                                  For the years Ended           1992 Through
                                                                       December 31,             December 31,
                                                                 2000               1999             2000
                                                       ------------------  ------------------  -----------------
                                                            (Restated)                             (Restated)
<S>                                                    <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net loss                                            $       (9,104,775) $       (5,699,486) $     (20,028,591)
   Adjustments to reconcile net loss to net
    cash used by operating activities:
     Depreciation and amortization                                432,665              18,742            483,359
     Deferred consulting expense                                  329,333                --              329,333
     Value of common stock, warrants, options
      and discounts on equity instruments issued
      for services                                              3,188,931             613,999          3,802,930
     Loss on sale of assets                                          --               387,649            387,649
     Amortization of debenture discount                              --               650,000            650,000
     Gain on disposition of debt                                 (165,340)               --             (165,340)
     Impairment loss                                              400,000                --              400,000
   Change in operating asset and liability accounts,
    net of amounts acquired in business combination:
     (Increase) decrease in advances to employees,
      prepaid expenses, and deposits                           (5,207,210)           (116,978)        (5,886,577)
     Increase (decrease) in accounts payable                     (419,001)            474,814          1,033,461
     Increase (decrease) in accrued expenses                    5,844,650             524,064          6,617,149
                                                       ------------------  ------------------  -----------------
       Net Cash Used by Operating Activities                   (4,700,747)         (3,147,196)       (12,376,627)
                                                       ------------------  ------------------  -----------------
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                  1
   Purchase of fixed assets                                      (635,906)             (1,738)          (743,975)
   Equipment procurement costs                                   (200,000)           (364,110)          (564,110)
                                                       ------------------  ------------------  -----------------
       Net Cash (Used) by Investing Activities                 (1,093,652)           (365,847)        (1,565,830)
                                                       ------------------   -----------------  -----------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Repayment of related party notes payable                    (1,521,200)               --           (1,521,200)
   Repayment of note payable                                   (1,090,839)           (246,933)        (1,339,074)
   Loans from related parties                                        --             2,671,239          7,224,287
   Issuance of convertible debentures                                --               650,000            650,000
   Common stock issued for cash                                10,240,750             803,829         11,131,032
   Stock offering costs                                           (26,289)                  -            (26,289)
                                                       ------------------  ------------------  -----------------
       Net Cash Provided by Financing Activities                7,602,422           3,878,135         16,118,756
                                                       ------------------  ------------------  -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                       1,808,023             365,092          2,176,299

CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD                                                        368,276               3,184               --
                                                       ------------------  ------------------  -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD             $        2,176,299  $          368,276  $       2,176,299
                                                       =================   ==================  =================
</TABLE>



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



                                       61
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                                   From
                                                                                               Inception on
                                                                                                  March 26,
                                                                  For the years Ended           1992 Through
                                                                       December 31,             December 31,
                                                                 2000               1999             2000
                                                       ------------------  ------------------  -----------------
                                                            (Restated)                             (Restated)
<S>                                                    <C>                 <C>                 <C>
CASH PAID FOR:

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

NON-CASH FINANCING ACTIVITIES

   Value of common stock, warrants, options and
    discounts on equity instruments issued for
    services                                           $        3,188,931  $          613,999  $       3,802,930
   Equity instruments issued for deferred
     consulting expense                                $          740,000  $             --    $         740,000
   Common stock issued for recapitalization            $             --    $        2,761,773  $       2,761,773
   Common stock issued for conversion of debt          $        1,171,812  $        1,335,413  $       2,507,225
   Acquisition of licenses through license agreement
    payable                                            $        6,940,000  $             --    $       6,940,000

   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                       $             --
                                                       ==================
</TABLE>



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



                                      62
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

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.


                                       63
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

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 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  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 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
              6) 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.

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.



                                       64
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

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>
<CAPTION>

                                                                                      For the Years Ended
                                                                                            December 31,
                                                                            --------------------------------------
                                                                                     2000                1999
                                                                            ------------------  ------------------

<S>                                                                         <C>                 <C>
              Net loss from operations (numerator)                          $       (9,104,775) $       (5,699,486)

              Weighted average number of shares
               outstanding (denominator)                                            36,157,787          26,465,941
                                                                            ------------------  ------------------

              Loss per share                                                $            (0.25) $            (0.22)
                                                                            ==================  ==================

              Extraordinary item (numerator)                                $          165,341  $                -

              Weighted average number of shares
               outstanding (denominator)                                            36,157,787          26,465,941
                                                                            ------------------  ------------------

              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, 2000.

              At  December  31,  2000,   the  Company  has  net  operating  loss
              carryforwards  of  approximately  $14,900,000  that may be  offset
              against  future  taxable  income  through 2020. 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.

              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.



                                       65
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 2 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              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 and SIGMA Elektroteknisk,
              AS and  Ocean  Power  UK  Limited.  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, 2000 and 1999 was $73,863 and $18,742, respectively.

              Equipment consists of the following:

              Estimated Useful                                      December 31,
                    Life                                              2000
              --------------------------------------------        --------------

              20 years      Distillation equipment                $     564,110
              5 - 7 years   Office equipment and furniture              319,786
              3 - 5 years   Computers and software                      107,506
              7 years       Phone system                                 19,667
              7 years       Leasehold improvements                      140,042
                            Artwork                                       1,421
                            Accumulated depreciation                   (229,552)
                                                                  --------------

                            Net Equipment                         $     922,980
                                                                  ==============

              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.  Amortization
              expense  for the  years  ended  December  31,  2000  and  1999 was
              $274,573 and $-0-, respectively.

              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.


                                       66
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 2 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              i.  Newly Adopted Accounting Principles

              The Company has adopted the  provisions of FASB  Statement No. 138
              "Accounting  for  Certain   Derivative   Instruments  and  Hedging
              Activities, (an amendment of FASB Statement No. 133.)" Because the
              Company had  adopted the  provisions  of FASB  Statement  No. 133,
              prior to June 15, 2000, this statement is effective for all fiscal
              quarters  beginning  after June 15,  2000.  The  adoption  of this
              principle  had no material  effect on the  Company's  consolidated
              financial statements.

              The Company has adopted the  provisions of FASB  Statement No. 140
              "Accounting  for Transfers  and Servicing of Financial  Assets and
              Extinguishments  of  Liabilities  (a replacement of FASB Statement
              No.  125.)"  This  statement  provides  accounting  and  reporting
              standard for  transfers  and  servicing  of  financial  assets and
              extinguishments  of  liabilities.  Those  standards  are  based on
              consistent  application  of a  financial-components  approach that
              focuses on control. Under that approach, the transfer of financial
              assets,  the Company recognized the financial and servicing assets
              it controls  and the  liabilities  it has  incurred,  derecognizes
              financial   assets  when   control  has  been   surrendered,   and
              derecognizes   liabilities  when   extinguished.   This  statement
              provides  consistent  standards  for  distinguishing  transfers of
              financial  assets that are sales from  transfers  that are secured
              borrowings.   This   statement  is  effective  for  transfers  and
              servicing of financial assets and  extinguishments  of liabilities
              occurring  after March 31, 2001.  This  statement is effective for
              recognition and reclassification of collateral and for disclosures
              relating to securitization  transactions and collateral for fiscal
              years  ending  after  December  15,  2000.  The  adoption  of this
              principle  had no material  effect on the  Company's  consolidated
              financial statements.

              The Company has adopted the provisions of FIN 44  "Accounting  for
              Certain    Transactions    Involving   Stock    Compensation   (an
              interpretation  of APB Opinion No.  25.)" This  interpretation  is
              effective  July 1,  2000.  FIN 44  clarifies  the  application  of
              Opinion No. 25 for only  certain  issues.  It does not address any
              issues  related to the  application  of the fair  value  method in
              Statement  No.  123.  Among other  issues,  FIN 44  clarifies  the
              definition  of employee for  purposes of applying  Opinion 25, the
              criteria   for   determining   whether  a  plan   qualifies  as  a
              noncompensatory  plan,  the  accounting   consequence  of  various
              modifications  to the terms of a previously  fixed stock option or
              award, and accounting for an exchange of stock compensation awards
              in a business  combination.  The adoption of this principle had no
              material   effect   on  the   Company's   consolidated   financial
              statements.

              j.  Revenue Recognition Policy

              The  Company   currently  has  no  source  of  revenues.   Revenue
              recognition  policies will be determined when principal operations
              begin.

              k.  Advertising

              The  Company   follows  the  policy  of  charging   the  costs  of
              advertising to expense as incurred.


                                       67
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 2 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              l.  Long-lived Assets

              In accordance with SFAS No. 121,  Accounting for the Impairment of
              Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed  Of,
              long-lived  assets,   including  goodwill  associated  with  other
              long-lived assets, are evaluated for impairment whenever events or
              changes in  circumstances  indicate that the carrying amount of an
              asset  may  not be  recoverable.  Goodwill  acquired  as  part  of
              business  combinations is also evaluated  continuously per ABP No.
              17, Intangible Assets, for the need for adjustments to useful life
              and  reductions  in  unamortized  costs.  Any changes in estimated
              useful  life  are  recorded   prospectively   and  any  impairment
              adjustments  are recorded as expense in the period the  impairment
              occurs.  Since the Company's goodwill and patent intangible assets
              are related to the Company's subsidiary,  Sigma, they are assessed
              to  determine  the  appropriateness  of the  useful  life used for
              amortization  and  are  assessed  to  determine   whether  or  not
              impairment  exists  under  both APB No.  17 and  SFAS  No.  121 by
              comparing Sigma's progress to the Company's benchmark expectations
              for  development of its technology and  positioning for commercial
              operations  of its  alternative  energy  business.  Likewise,  the
              intangible  assets  recorded  in  connection  with  the  Company's
              licensing agreement with Aquamax and Keeran (Note 13f) 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.

              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.



                                       68
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 2 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              o.  Stock Options

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

              p.  Valuation of Options and Warrants

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

              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.


                                       69
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 2 -      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

              r.  Restricted Cash

              At December 31, 2000, the Company's subsidiary,  Sigma had cash of
              $23,706  which is in a separate  bank account  which is restricted
              for the  payment  of payroll  taxes.  The  payroll  taxes are paid
              monthly.

              s.  Restatement of Financial Statements

              The  following  is a  reconciliation  of  the  December  31,  2000
              financial  statements  as  originally  reported  to  the  restated
              December 31, 2000 financial statements:

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

              Assets                 $  16,707,391 $  17,294,291  $  586,900 (1)

              Liabilities               10,915,504    11,545,504     630,000 (2)

              Stockholders' Equity       5,791,887     5,748,787     (43,100)(3)

              Net Loss               $   9,061,675  $  9,104,775  $   43,100 (3)

              Loss per share         $       (0.25) $      (0.25) $     --

              (1)     Difference represents (i) increase of $630,000 in recorded
                      cost of license  agreement  as the  result of  determining
                      that a measurement date for valuation of common stock owed
                      on purchase obligation occurred on September 21, 2000, net
                      of additional accumulated amortization of $43,100.

              (2)     Difference  represents  increase  of  $630,000 in recorded
                      liability   for  license   agreement   as  the  result  of
                      determining  that a  measurement  date  for  valuation  of
                      common  stock  owed on  purchase  obligation  occurred  on
                      September 21, 2000.

              (3)     Difference represents additional accumulated  amortization
                      on license agreement resulting from change in its recorded
                      cost.

NOTE 3 -      ADVANCES

              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,  2000,  the  Company  had  outstanding  employee
              advances of $320,567.


                                       70
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 4 -      PREPAID EXPENSES

              The Company's prepaid expense is comprised of the following items:
                                                                December 31,
                                                                   2000

                  Prepaid license agreement - STM (Note 13f)   $   125,000
                  Prepaid services                                  50,000
                  Prepaid insurance                                  6,390
                  Prepaid VAT tax                                   22,879
                  Prepaid software license                          12,283
                  Prepaid director fees                              5,683
                                                               -----------

                             Total prepaid expenses                222,235
                             Less current portion                 (222,235)
                                                               -----------
                             Long-Term Portion                 $
                                                               ===========

NOTE 5 -      PATENTS AND LICENSING AGREEMENTS

              The  Company's  patents and license  agreements  consisted  of the
following at December 31, 2000:

                   Patents                                     $   973,658
                   Licensing Agreement                           6,540,000
                   Accumulated amortization                       (231,979)
                                                               -----------

                                                               $ 7,281,679

              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 $498,686 at December  31, 2000 (Note 8). The license  agreement
              represents rights to patent and patent applications for technology
              acquired  from  Aquamax  and Keeran  (Note  13f).  The cost of the
              license  agreement is being  amortized  over its estimated  useful
              life  of 10  years.  Amortization  expense  for the  period  ended
              December  31, 2000 and  accumulated  amortization  at December 31,
              2000 amounted to $41,129 and $41,129,  respectively  (Patents) and
              $190,850 and $190,850, respectively (Licensing Agreement).

NOTE 6 -      BUSINESS COMBINATION

              In August 2000,  the Company  acquired  SIGMA  Elektroteknisk,  AS
              (SIGMA) by exchanging 1,718,748 shares of its common stock for all
              of the common stock of SIGMA.  The purchase was accounted for as a
              purchase in accordance with APB 16, "Business  Combinations."  The
              excess of the total  acquisition  cost over the fair  value of the
              net assets acquired of $6,589,756 is being amortized over 10 years
              by the  straight-line  method.  Amortization  expense  amounted to
              $274,573 at December 31, 2000.

              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 and 1999 as though  SIGMA had been
              acquired as of January 1, follows:


                                       71
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 6 - BUSINESS COMBINATION (Continued)

              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 $50,000of estimated merger costs.
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                     2000                1999
                                                               -----------------  ------------------

<S>                                                            <C>                <C>
              Sales                                            $           --     $             --
              Net loss                                              (10,099,010)          (7,720,098)
                                                               ------------------ ==================

              Basic and diluted earnings per share             $          (0.27)  $            (0.28)
                                                               ================== ==================

              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.

NOTE 7 -      NOTES PAYABLE - RELATED PARTIES

              Notes  payable - related party at December 31, 2000 consist of the
following:

              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.             $           93,574

              Unsecured note payable to an employee bearing interest
               at 10% per annum, all unpaid interest and principal due
               upon demand.                                                                  294,934

              Unsecured note payable to an officer bearing interest at
               10% per annum, due upon demand.                                               342,910

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                57,398

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                               256,007

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                 68,073

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                               122,911

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                 5,986

              Unsecured note payable to an employee bearing interest at
               10% per annum due upon demand.                                                 74,330

              Unsecured note payable to an employee bearing interest at
               10% per annum, due upon demand.                                                 1,495
                                                                                  ------------------

              Total Notes Payable - Related Parties                               $        1,317,618
                                                                                  ==================
</TABLE>


                                       72
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 7 -      NOTES PAYABLE - RELATED PARTY (Continued)

              Total  interest  expense  to  related  parties  was  $163,938  and
              $322,545  for  the  years  ended   December  31,  2000  and  1999,
              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.

NOTE 8 -      NOTES PAYABLE
<TABLE>
<CAPTION>

<S>                                     <C>                                       <C>
              Notes payable at December 31, 2000 consist of the following:

              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, unsecured.                       $          121,049

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

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

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

              Total Notes Payable                                                 $        1,233,045
                                                                                  ==================

              Annual maturities of notes payable are as follows:

                         Years Ending
                         December 31,

                               2001                                               $          488,457
                               2002                                                          388,908
                               2003                                                          355,680
                                                                                  ------------------

                                                                                  $        1,233,045
                                                                                  ==================
</TABLE>



                                       73
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 9 -      CONVERTIBLE DEBENTURES

              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.  Interest  expense  associated  with these  debentures
              amounted to $25,000 at December 31, 2000.

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

              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.

              The Company  recorded a discount on the convertible  debentures 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
              $650,000  was  recognized  as the  result of  amortization  of the
              discount.



                                      74
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 10 -      ACCRUED EXPENSES

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

                                                                   December 31,
                                                                        2000
                                                                        ----

                 Accrued payroll taxes payable                 $          26,657
                 Accrued interest payable - payroll                       52,717
                 Accrued payroll tax penalty                              98,845
                 Accrued interest payable - notes                        118,155
                 Other accrued items                                       7,908
                 Accrued license agreement payable (Note 13f)          6,540,000
                                                               -----------------

                                Total                          $       6,844,282
                                                               =================

NOTE 11 -      GOING CONCERN

              The Company's  financial  statements are prepared using  generally
              accepted accounting principles applicable to a going concern which
              contemplates   the   realization  of  assets  and  liquidation  of
              liabilities in the normal course of business.  The Company has had
              limited activities since inception and is considered a development
              stage company  because it has no  significant  operating  revenues
              and,  planned  principal  operations  have not yet commenced.  The
              Company has incurred  losses from its inception  through  December
              31, 2000 of approximately  $20,000,000.  The Company does not have
              an established  source of funds  sufficient to cover its operating
              costs  and,  accordingly,  there is  substantial  doubt  about its
              ability to continue as a going concern.

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



                                       75
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 12 -     RESEARCH ADVANCES

              The Company's wholly-owned subsidiary, SIGMA, has received a total
              of $473,145 as advances for its PCP project,  a project to develop
              an energy  converter  utilizing  a  Stirling  engine  that runs on
              natural gas or propane and produces  electricity  and heat for use
              in the  micro CHP  (combined  heat and  power),  an  appliance  to
              produce heat and power in households.  This amount is payable upon
              demand or may be converted  into Sigma's common stock at a rate of
              $1.87 per share at any time.  The  Company is in  negotiations  to
              convert the payable into the Company's common stock.

NOTE 13 -     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 June 1998, the Company  entered into a four year employment
              agreement with an employee.  The agreement calls for a base salary
              of $55,000 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 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.



                                       76
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              b.  Consulting Agreements

              During July 1997, the Company entered into a consulting  agreement
              with Richard Morris Associates for services in connection with the
              development of the Company's  desalination project on an as needed
              basis.  The agreement is for one year and calls for the payment of
              $1,000 per month plus  expenses.  During  June 1998,  the  Company
              extended this  agreement  through  December  1998.  During January
              1999, the Company  extended this agreement  through December 1999.
              During January 2000, the Company  extended this agreement  through
              December 2000.

              During June 1999, the Company entered into a consulting  agreement
              with D. Weckstein & Co., Inc. (Weckstein) as financial consultants
              and  investment  bankers for a period of two years.  The agreement
              calls for the Company to issue  options to purchase  30,000 shares
              of the Company's common stock  exercisable at a price of $5.00 per
              share for a period of three years from the date of the  agreement.
              The  agreement  also calls for cash  payments in  connection  with
              certain  financial   transactions   consummated  as  a  result  of
              introduction  by Weckstein  such as mergers,  acquisitions,  joint
              ventures,   debt  or  lease   placements  and  similar  or  other,
              on-balance or off-balance sheet corporate finance  transactions as
              follows:

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

              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 14).

              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,  2000.  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.



                                       77
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              b.  Consulting Agreements (Continued)

              Effective February 18, 2000, the Company amended its agreement for
              consulting  services with  Weckstein  dated  December 7, 1999. The
              amendment cancels the 100,000 options previously issued and called
              for the Company to issue 110,000 options to purchase the Company's
              common  stock  exercisable  at $3.00 per share until  February 18,
              2003.  The Company did not  recognize  any  additional  consulting
              expense upon the grant of the options because the value of the new
              options did not exceed the value of the options previously granted
              as determined by the Black Scholes pricing model.

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

              During July 1999, the Company  entered into a business  consulting
              agreement  with  Xcel   Associates,   Inc.  to  perform   business
              management  and  marketing  services,  which may be renewed  for a
              provisional  three  month  period  upon  mutual  agreement  of the
              parties.  The Company issued 55,000 shares of the Company's common
              stock as follows:  1) 15,000 shares within one week of signing the
              agreement;  2)  15,000  shares  within 30 days  based on  mutually
              agreed upon  performance;  and 3) 20,000  within the  following 60
              days based on  mutually  agreed  upon  performance  as well as the
              right to  purchase up to 100,000  shares of common  stock at $5.00
              per share and the  payment of expenses  incurred.  Pursuant to the
              agreement  the Company  issued  15,000 shares on July 15, 1999 for
              services and 10,000  shares for the exercise of options,  July 26,
              1999,  10,000  shares were issued for the  exercise of options and
              20,000 shares on September 2, 1999.

              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


                                      78
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              b.  Consulting Agreements (Continued)

              $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.

              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.

              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.

              d.   Office and Building Lease

              The  Company  leases  its  office  space  under a  non-cancellable
              operating  lease which expires on April 30, 2002. The monthly rent
              amount is $15,312 with yearly  increases of  approximately  2% per
              year.  Rent expense for the years ended December 31, 2000 and 1999
              was $187,066 and $220,565, respectively.

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



                                       79
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              d.  Office and Building Lease (Continued)

              During  December  2000,  the Company signed a 6-month office space
              lease which  expires on June 30, 2001.  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.

              e. 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. 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 four years is set and is open for  negotiation
              after four years.

                  Year                                           Amount
                  ----                                       --------------

                  2001                                       $      500,000
                  2002                                            1,500,000
                  2003                                            2,000,000
                  2004                                            3,000,000
                                                             --------------

                                                             $    7,000,000

              The  Company  paid an  initial  amount of  $500,000  that is being
              amortized  over  twelve  months.  As of  December  31,  2000,  the
              unamortized amount of $125,000 is included in prepaid expenses.



                                       80
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 13 -      COMMITMENTS AND CONTINGENCIES (Continued)

              f. License Agreements (Continued)

              AQUAMAX/KEERAN

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

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

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



                                       81
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              f. License Agreements (Continued)

              AQUAMAX/KEERAN


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



                                      82
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              f. License Agreements (Continued)

              AQUAMAX/KEERAN (Continued)

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

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



                                       83
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              AQUAMAX/KEERAN (Continued)

              f.  License Agreements (Continued)

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

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



                                       84
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 13 -     COMMITMENTS AND CONTINGENCIES (Continued)

              f.  License Agreements (Continued)

              AQUAMAX/KEERAN (Continued)

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

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

NOTE 14 -     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, 2000 is presented below:
<TABLE>
<CAPTION>

                           Date of                      Exercise        Exercise        Trading        Amount
      Description           Grant        Vesting         Number            Price          Price      Exercised
--------------------  --------------  -------------  -------------   -------------  -------------  -------------
<S>                   <C>             <C>            <C>             <C>            <C>            <C>
1) D. Weckstein             06/23/99      Immediate         30,000   $        5.00  $        5.20       Canceled
2) Xcel Associates          07/12/99      Immediate        100,000   $        5.00  $        7.80         20,000
3) Xcel Associates          09/09/99      Immediate        100,000   $        1.00  $        2.90        100,000
4) D. Weckstein             12/07/99      Immediate        125,000   $        1.00  $        1.16       Canceled
                                                     -------------                                 -------------

    Balance 12/31/99                                       355,000                                       120,000
                                                     =============                                 =============

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 12/31/00                                       765,000                                       120,000
                                                     =============                                 =============
</TABLE>



                                       85
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 14 -     DILUTIVE INSTRUMENTS (Continued)

              a.  Stock Options (Continued)
<TABLE>
<CAPTION>

                                        Risk-Free
                        Expiration        Interest     Expected        Expected       Expected
    Description             Date            Rate            Life        Volatility    Dividends       Expense
--------------------  --------------  -------------  -------------   -------------  -------------  -------------
<S>                   <C>             <C>            <C>             <C>            <C>            <C>
1) D. Weckstein             Canceled          5.57%              3           186%              0  $         14,097
2) Xcel Associates          07/12/00          4.97%              1           227%              0            62,561
3) Xcel Associates          03/09/00          5.14%            0.5           113%              0             1,139
4) D. Weckstein             12/07/03          5.92%              5           394%              0           130,402
                                                                                                  ----------------

    Balance 12/31/99                                                                                       208,199
                                                                                                  ----------------

5) D. Weckstein             02/18/03          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 12/31/00                                                                              $      1,615,793
                                                                                                  ================
</TABLE>

              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, 2000:
<TABLE>
<CAPTION>

                                         Number of             Weighted
                                          Options              Average          Weighted           Number of
                                       Outstanding            Remaining         Average         Exercisable at
                                          December 31,       Contractual       Exercise         December 31,
                  Exercise Price            2000                Life             Price               2000
               -----------------      ----------------  ------------------  ------------------  ------------------
<S>            <C>                    <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:


                                       86
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 14 -     DILUTIVE INSTRUMENTS (Continued)
<TABLE>
<CAPTION>

                                                                                            For the
                                                                                          Years Ended
                                                                                          December 31,
                                                                                   2000                1999
                                                                            ------------------  ------------------
<S>                                                                         <C>                 <C>
               Net (loss) as reported                                       $       (9,104,775) $       (5,699,486)
               Proforma                                                            (10,002,373)         (5,699,486)
               Basic and diluted (loss) per share as reported                            (0.25)              (0.22)
               Pro forma                                                                 (0.27)              (0.22)

               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:

                                                                                                              2000
                                                                                                              ----

               Risk free interest rate                                                                       6.75%
               Expected life                                                                                     2
               Expected volatility                                                                            414%
               Dividend yield                                                                                  0.0

               b.  Warrants
</TABLE>

              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, 2000 is presented below:
<TABLE>
<CAPTION>

                                                                                       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    12/31/98          Upon              533,333     $     1.50        $   1.50        533,333
                                        debenture
                                        conversion
2) Various lenders    3/30/99           Upon               70,000     $     1.50        $   0.63         70,000
                                        debenture
                                        conversion
3) Various lenders    5/17/99           Upon              720,730     $     1.50        $   0.50          2,913
                                        debenture
                                        conversion
4) Donner Corp, Intl.  2/1/00           Immediately        10,000     $     2.17        $  4.125           --
5) Clement Wohlreich  7/25/00           Immediately       100,000     $     1.50        $   4.00           --


Balance, 12/31/00                                        1,434,063                                       606,246
                                                     =============                                 =============
</TABLE>



                                      87
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 14 -      DILUTIVE INSTRUMENTS (Continued)
<TABLE>
<CAPTION>

                                          Risk-Free
                        Expiration        Interest     Expected        Expected       Expected
    Description             Date            Rate            Life        Volatility    Dividends       Expense
--------------------  --------------  -------------  -------------   -------------  -------------  -------------

<S>                    <C>            <C>            <C>             <C>             <C>            <C>
1) Various lenders      12/31/04            4.77%          1               181%           0        $      52,460
2) Various lenders       3/30/04            4.77%          5               190%           0               41,183
3) Various lenders       5/19/04            4.77%          5               319%           0              360,173
4) Donner Corp, Intl.     2/1/03            6.43%          3               419%           0               41,242
5) Clement Wohlreich     7/25/03            6.43%          3               419%           0              340,000
                                                                                                   -------------

Balance, 12/31/00                                                                                  $     835,058
                                                                                                   =============
</TABLE>

              The  warrants   granted  to  Clement   Wohlreich  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. At December 31, 2000, the warrants
              were valued at $3.40 per share (Note 13).

NOTE 15 -     STOCK ISSUANCES

              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.


                                       88
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 15 -     STOCK ISSUANCES (Continued)

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

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

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

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

              On November 4, 1998,  the Company  issued a convertible  debenture
              for $800,000 to related  parties for funds advanced to Group.  The
              Debenture  was  convertible  into common  stock at $1.50 per share
              which represented the closing price on the date of the issuance of
              the debenture.  Each share converted carried one (1) warrant which
              was  exercisable  at $1.50 per  share for a period of 4 years.  At
              December 31, 1998,  the related  parties had  converted the entire
              debenture into 533,333 shares of common stock and exercised 13,502
              warrants for total consideration of $820,252.  On January 5, 1999,
              the  original  debenture  terms  were  amended  as  follows:   The
              debenture  amount was  increased to  $2,000,000  convertible  into
              common  stock at $1.50 per  share  with one (1)  attached  warrant
              exercisable   for  5  years  from  the  dates  of  the   debenture
              conversions.  On March 30, 1999,  the Company issued 70,000 shares
              and warrants pursuant to the conversion of this debenture.  On May
              17, 1999, the Company issued 720,730 and warrants  shares pursuant
              to the conversion of the debenture.  Pursuant to the modification,
              the debenture was canceled as of the date of the recapitalization.
              On December 31, 1999,  the Company issued 592,744 shares of common
              stock  pursuant  to  the  exercise  of  warrants  attached  to the
              convertible  debenture.  At December 31, 1999,  there were 717,817
              warrants which have not been exercised and expire by May 17, 2004.
              All share issuances prior to the  recapitalization are included in
              the  recapitalization  line  on  the  statement  of  stockholders'
              equity.

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

              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.


                                       89
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 15 -     STOCK ISSUANCES (Continued)

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

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

              On December 9, 1999,  the Company  issued  49,020 shares of common
              stock  valued at $0.71 per  share  for  $35,00 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.


                                       90
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 15 -     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).


                                       91
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 16 -     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 17 -     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.



                                       92
<PAGE>

                    OCEAN POWER CORPORATION AND SUBSIDIARIES
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 18 -     SUBSEQUENT EVENTS

              On March 5, 2001, the Company received  $3,000,000 in exchange for
              promissory  notes  payable of $2,500,000  and $500,000.  Each note
              bears  interest  at 10.5% per annum,  and is due by March 5, 2002.
              Both  notes  are  guaranteed  by the  president  of  the  Company.
              Concurrent  with  the  promissory   notes,   the  Company  granted
              1,200,000  warrants with an exercise  price of $1.50 per share and
              an expiration date of March 4, 2004. The warrants were granted for
              funding  of the  promissory  notes and will be valued at $3.11 per
              share  ($3,730,212 in total) pursuant to the Black Scholes pricing
              model. The proceeds will be allocated  between debt and additional
              paid-in  capital in  proportion  to the relative fair value of the
              debt and the warrants.  The portion to be allocated to equity will
              be $1,662,746  and the balance of  $1,337,254  will be recorded as
              debt,  net  of  discount.  The  discount  of  $1,662,746  will  be
              amortized to interest  expense over the term of the debt using the
              effective interest rate method.

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

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

None to report.




                                       93
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;COMPLIANCE
         WITH SECTION 16(a) OF THE EXCHANGE ACT
<TABLE>
<CAPTION>

A.       Directors and Executive Officers.

                      Name                            Age                              Office (1)
<S>                                                   <C>            <C>
Gloria Rose Ott ............................           46            Chairman of the Board and  Director
Joseph P. Maceda ...........................           48            President and Director
Robert L. Campbell .........................           56            Vice President and Director
J. Michael Hopper...........................           53            Secretary/Treasurer
Thomas G. Redmon............................           55            Senior Vice President & General Counsel
Philip M. Johnson...........................           45            Vice President, International Operations
Blair Aiken.................................           33            Senior Vice President Business Development
</TABLE>

1.  Directors  serve a term of one year.  Gloria  Rose Ott was a Director of the
Company  from May 26, 1998 to  September  18,  1998.  Subsequently,  Ms. Ott and
Messrs.  Maceda and Campbell became Directors of the Company on June 22, 1999 as
a result  of the  merger  of PTC  Holdings,  Inc.  with  and  into the  Company.
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.

Ms.  Gloria  Rose Ott -  Chairman  Of The Board.  Ms. Ott joined the  Company 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  -  President.   In  January  of  1997,  Mr.  Maceda  founded
Manufacturing   Technologies   Corporation   to  pursue  the  modular   seawater
desalination and power markets. This company became a wholly owned subsidiary of
PTC Holdings,  Inc, in March of 1998.  Mr.  Maceda also served as President.  In
June, 1997, PTC Holdings merged with PTC Group,  Inc. (OTCBB Symbol:  PWRE), and
Mr. Maceda became President of the merged company.

Mr.  Maceda has 22 years of  experience  in  business  development,  management,
finance,   technology  acquisition,   and  development  in  support  of  product
commercialization.

Since Mr. Maceda founded the Company in January 1997, he has devoted 100% of his
time to the  development  of the business that has evolved into Ocean Power.  As
the financials show,  Ocean Power has had no sales since its inception.  For the
seven and half years prior, Mr. Maceda, was the VP of Development of H Power. In
March of 1987,  Mr.  Maceda  founded  Teledata  International,  Inc.,  which was
developing  wireless,  wide-area  networks  for remote  monitoring  and  control
systems. Fuel cells were a subsidiary  technology  development as power supplies
but in June 1988, because of the potential of fuel cells, all other technologies
were  shelved  and a new  corporation  was formed call H Power  Corporation,  to
develop fuel cell, hydrogen generation,  and storage technologies for use in the
battery replacement, stationary power, and transportation markets.

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.


                                       94
<PAGE>

Robert L. Campbell - Vice President. 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,(IW&P)  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. While Mr. Campbell was President and CEO of Advanced
Distillation Technologies,  a development stage company, working on exactly what
its name  describes.  This  company  had no sales in the time Mr.  Campbell  was
running it.

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.

While at  Watkins-Johnson  Co. from 1966 to 1983 Mr.  Campbell  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), did 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 -  Secretary/Treasurer.  Mr.  Hopper  joined the  Company 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 - Senior Vice  President & General  Counsel.  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  1997 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.

Blair Aiken - Senior Vice President Business Development. Mr. Aiken joined Ocean
Power Corporation, New York Office on January 1, 2001, from Hydrogen Performance
Technologies,  or HyPerTec.  Mr. Aiken has 10 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  in 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  under  advisory  included:  defense  contractors,  content,
computer security, power generation and fuel cells. Working closely in 1999 with
MIT Media Lab start up, which designed the new generation of wearable  computers
and medical  devices.  In late 1999,  this work lead to the founding of Hydrogen
Performance Technologies.

From 1995 until 2001,  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.


                                       95
<PAGE>

Philip M. Johnson -Vice President,  International  Operation. Mr. Johnson joined
the Company in September,  2000 as the Company's Vice-President  responsible for
International  Operations.  Philip joined Ocean Power from Innogy,  and prior to
that,  National Power.  Immediately prior to Ocean Power, from 1997, 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.
Philip  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  business  development  and  policy,  corporate
strategy,  economics,  finance,  regulation,  institutional  development,  power
production, transmission, distribution and sales.

A Coopers & Lybrand-trained management consultant, Philip 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.

SIGNIFICANT EMPLOYEES:

Robert Zhao, Ph.D., Director Of Fuel Cell Technology

Dr. Robert Zhao has 17 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 the
Company's  fuel  cell  technology,  he  oversees  the  development  of fuel cell
components and low temperature fuel processors.

Before he joined the Company, Dr. Zhao was the program manager of high power PEM
fuel cells and a member of the company's strategic planning committee at H Power
Corporation.  He was with H Power for two months  before  accepting  his present
position with the Company 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 (DARPA)
projects at CCES (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  (DMFC).  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 the Company 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,  Randy 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.

He has extensive  management  training,  including  courses at Aerojet,  Eastman
Kodak  and Xerox  Corporations,  UC Davis,  and Cal Tech.  He 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.


                                       96
<PAGE>

B.       Section 16(a) Beneficial Ownership Reporting Compliance

The Company has been informed by J. Michael Hopper,  Secretary/Treasurer  of the
Company  during the fiscal year 2000,  that his Form 5 due on February  15, 2001
reporting  a grant of  options  by the  Company  during  2000 was filed with the
Commission on March 29, 2001.

ITEM 10.     EXECUTIVE COMPENSATION




                           SUMMARY COMPENSATION TABLE


The table below sets forth a summary of the compensation paid by the Company for
the  last  three  fiscal  years  to the  Chief  Executive  Officer  and  the two
additional most highly compensated  persons serving as executive officers of the
Company  at the end of fiscal  year  2000.  No other  employees  of the  Company
received compensation of $100,000 or more during fiscal year 2000.

<TABLE>
<CAPTION>

                                                     Annual Compensation          Long-Term Compensation


            Awards
           Name and                                                           Other Annual    Restricted     Securities
           --------                                                           ------------    -----------    ----------
      Principal Position            Year         Salary          Bonus        Compensation    Stock Awards   Underlying
      ------------------            ----         ------          -----        ------------    ------------   ----------
                                                                                                               Options
<S>                                <C>             <C>            <C>             <C>             <C>            <C>
                                                   ($)            ($)                             ($)
                                                                                                                 (#)
Joseph P. Maceda ...................2000.          191,400(1)     N/A             N/A             N/A            N/A
     President                      1999           186,368(1)     N/A             N/A             N/A            N/A
                                    1998           182,000(1)     N/A             N/A             N/A            N/A

Robert L. Campbell .................2000.          191,400(2)     N/A             N/A             N/A            N/A
     Vice President                 1999           186,368(2)     N/A             N/A             N/A            N/A
                                    1998           182,000(2)     N/A             N/A             N/A            N/A

J. Michael Hopper ..................2000.          136,714(3)    37,500           N/A             N/A          598,680
     Secretary/Treasurer            1999           133,120(3)     N/A             N/A             N/A            N/A
                                    1998           130,000(3)     N/A             N/A             N/A            N/A
</TABLE>

(1) The amounts set forth above  represent the salary  payable by the Company to
Mr.  Maceda.  In 1998 and 1999,  the  Company did not pay any cash salary to Mr.
Maceda  but the  amounts  shown in the  table  were due  under  the terms of Mr.
Maceda's  employment  agreement  with the Company.  On December  31,  1998,  the
Company  issued an unsecured  note, due on demand,  bearing  interest at 10% per
annum in an amount  equal to his  salary  for 1998 and 1997  (which had also not
been paid).  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
the Company to pay such  amount  remained an  uncertificated  obligation  of the
Company. In 2000, the Company paid Mr. Maceda $182,000 of his salary in cash and
assumed  an   uncertificated   obligation   to  pay  Mr.  Maceda  the  remaining
approximately $9,400 due under his employment agreement.  Additionally, in 2000,
the Company paid Mr. Maceda  $87,500 in respect of the amount owing for his 1999
salary.

(2) The amounts set forth above  represent the salary  payable by the Company to
Mr.  Campbell.  In 1998,  1999 and 2000,  the  Company  paid cash  salary to Mr.
Campbell in the amount of $88,846, $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 the Company. On December 31, 1998, the Company issued
an unsecured note, due on demand, bearing interest at 10% per annum in an amount
equal to the  salary  due to him for 1998 and 1997  (which had also not all been
paid).  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
the  Company  to pay  $119,733  remained  an  uncertificated  obligation  of the
Company.  In 2000, the Company paid Mr. Campbell  $182,000 of his salary in cash
and assumed an  uncertificated  obligation  to pay Mr.  Campbell  the  remaining
approximately $9,400 due under his employment agreement.  Additionally, in 2000,
the Company  paid Mr.  Campbell  $87,500 in respect of the amount  owing for his
1999 salary.

(3) The amounts set forth above  represent the salary  payable by the Company to
Mr. Hopper. In 1998, the Company paid cash salary to Mr. Hopper in the amount of
$58,000 and issued an unsecured note, due on demand, bearing interest at 10% per
annum in with principal  amount of $72,000.  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 the  company to pay  $85,120  remained an
uncertificated  obligation of the Company.  In 1000, the Company paid Mr. Hopper
$130,000 of his salary in cash and assumed an  uncertificated  obligation to pay
Mr.  Hopper  the  remaining   approximately  $6,714  due  under  his  employment
agreement. Additionally, in 2000, the Company paid Mr. Hopper $82,000 in respect
of the note issued for his 1999 salary.

                                       97
<PAGE>

Management  Incentive Option Plan: The Company's 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.

                        OPTION GRANTS IN LAST FISCAL YEAR

The table below sets forth the options to purchase  common  stock of the Company
issued to J. Michael  Hopper during fiscal year 2000.  The Company did not issue
options to any other named executive during fiscal year 2000.


<TABLE>
<CAPTION>

                                Number Of               Percent Of
                                Securities        Total Options Granted        Exercise Or
                                Underlying             To Employees            Base Price
          Name             Options Granted (#)        In Fiscal Year             ($/SH)              Expiration Date
          ----             -------------------        --------------             ------              ---------------

<S>                         <C>                       <C>                        <C>                  <C>
J. Michael Hopper                598,680                   100%                   1.50             January 1, 2003(1)
</TABLE>

(1) On May 26, 2000, the Company's Board of Directors authorized the issuance of
the above  options to J. Michael  Hopper for the life of his current  employment
agreement with the Company.  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 the Company.  Mr.  Hopper's  employment
agreement as currently in effect will terminate on January 1, 2003.

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

The table  below sets forth  information  regarding  the  exercise of options to
purchase  common  stock of the  Company  by J.  Michael  Hopper and the value on
December 31, 2000 of all unexercised  options held by Mr. Hopper. No other named
executive owns options to purchase common stock of the Company.

<TABLE>
<CAPTION>

                                                                                                      Value of
                               Shares                            Number of Securities              Unexercisable
                              Acquired                                Underlying                    In-The-Money
                                 On                Value          Unexercised Options                 Options
                              Exercise           Realized         At Fiscal Year-End             At Fiscal Year-End
          Name                   (#)                ($)                   (#)                           ($)
<S>                           <C>                <C>           <C>                 <C>     <C>                     <C>

                                                                                             Exercisable Unexercisable
                                                                      Exercisable
                                                                     Unexercisable
J. Michael Hopper                 0                  0          598,680             0     $1,137,492.00(1)         0
</TABLE>

(1) The  value  of  unexercised  in-the-money  options  at  fiscal  year  end is
calculated using the last sale price of $3.40 per share as of December 29, 2000,
the last  trading  day of fiscal  year 2000 as  reported  on the OTC Market pink
sheets.

Compensation of Directors

There are no standard  arrangements  pursuant to which the Company directors are
compensated  for  services  provided as a director.  No  additional  amounts are
payable  to the  Company's  directors  for  committee  participation  or special
assignments.

Employment Contracts

The Company has executed contracts with Joseph P. Maceda, Robert L. Campbell and
J. Michael Hopper.


                                       98
<PAGE>

         Joseph Maceda

         The Company 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 the Company 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 the Company 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  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 life insurance  benefits,  under the agreement,  the Company
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 the Company'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 the Company, except that he
may (i) invest his personal assets in businesses  which may be competitive  with
the  Company 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 the
Company,  participate in conferences,  teach or publish written works. Under the
agreement,  the Company owns all  intellectual  property  created by Mr.  Maceda
relating to the Company's business,  and Mr. Maceda must disclose to the Company
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 the
Company'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

         The Company and Robert Campbell are parties to an employment  agreement
dated June 1, 1998 which has been  assumed by the  Company  pursuant to its June
22, 1999 merger with 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 the Company
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,  the Company 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 the Company'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 the Company, except that he
may (i) invest his personal assets in businesses  which may be competitive  with
the  Company 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 the
Company,  participate in conferences,  teach or publish written works. Under the
agreement,  the Company owns all  intellectual  property created by Mr. Campbell
relating  to the  Company's  business,  and Mr.  Campbell  must  disclose to the
Company 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
the  Company'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

         The  Company  and  J.  Michael  Hopper  are  parties  to an  employment
agreement  pursuant  to which Mr.  Hopper  serves as an officer of the  Company,
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 the Company
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


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<PAGE>

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 as detailed above in this Item 6. 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 the Company, except that he
may (i) invest his personal assets in businesses  which may be competitive  with
the  Company 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 the
Company,  participate in conferences,  teach or publish written works. Under the
agreement,  the Company owns all  intellectual  property  created by Mr.  Hopper
relating to the Company's business,  and Mr. Hopper must disclose to the Company
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 the
Company'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.



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<PAGE>

ITEM 11.     SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND
             PRINCIPAL STOCKHOLDERS

The  following  table  sets  forth  certain  information   regarding  beneficial
ownership  of the  Company's  Common  Stock  as of  March  29,  2000 by (i) each
stockholder  known by the Company to be the  beneficial  owner of more than five
percent (5%) of the outstanding Common Stock, (ii) each director of the Company,
(iii)  each  executive  officer  of the  Company,  and  (iv) all  directors  and
executive officers as a group.

<TABLE>
<CAPTION>

                                                                                                      Percentage
                                                Name and Address Of Beneficial       Percentage      Beneficially
              Title of Class                                Owner                    Number of         Owned (1)
              ---------------                               ------                   ----------        ---------
                                                                                      Shares
<S>                                           <C>                                     <C>                 <C>
Common....................................    Joseph P.Maceda*                        10,641,579          27.9%
                                              5019 Susan Oaks Drive
                                              Fair Oaks, CA 95628
Common....................................    Robert L. Campbell*                      6,980,341          18.3%
                                              15009 Rio Circle
                                              Rancho Murieta, CA 95683
Common....................................    Gloria Rose Ott*                         2,620,000           6.8%
                                              20250 Edgewood Farm Lane
                                              Purcellville, VA 20132
Common....................................    J. Michael Hopper*                       1,500,000 (2)       3.9%
                                              2803 Belhaven Place
                                              Davis, CA 95616
Common....................................    Algonquin Capital Management             4,587,000 (3)      12.0%
                                              440 Main Street
                                              Ridgefield, CT 06877

Common....................................    Officers and Directors                  21,731,920 (4)      57.0%
                                              as a group (7 persons)
</TABLE>

*Indicates directors and/or executive officers.

(1) Based upon 38,149,942  shares of common stock outstanding on March 29, 2001.
The Company has been  advised  that each person above has sole voting power over
the shares indicated above.

(2) Includes  options to purchase  598,680 shares of common stock at an exercise
price of $1.50 per share.

(3) Of the number of shares of our common stock listed here  4,376,000  are held
by  Algonquin  Capital  Management  LLC  ("Algonquin").   Such  amount  includes
2,688,000  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 the shares and (ii) the power to  dispose or direct  disposition  of
all the shares.  Of the number of shares of our common stock listed here 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
the  shares  and (ii) the  power to  dispose  or direct  disposition  of all the
shares.  The principal  business address of Mr. Lockwood is the same as that set
forth for Algonquin above.

(4)  Includes options to purchase  598,680 shares of common stock at an exercise
     price of $1.50 per share held by J. Michael Hopper.

 ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Cash  Advances.  During 1999,  the Company made loans to  employees.  Certain of
these loans were made to the  officers of the Company  identified  below.  These
loans were made by the Company in order to allow its officers  and  employees to
experience  some  access to cash but which the  Company 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


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<PAGE>

additional principal. In 1999 the Company loaned Joseph Maceda,  $137,670. Other
than Mr. Maceda, no officer was loaned more than $60,000 during 1999 or 2000. In
2000, following the Company's payment of past due salary, Mr. Maceda was able to
repay the Company  $149,489 of amounts owed by him to the Company for loans from
the Company made in 1997 and 1998 on the same terms as the loan in 1999.  Mr. J.
Michael  Hopper,  who had taken  loans from the Company on the same terms as Mr.
Maceda  during prior years which were  formalized  in a note dated  December 31,
1998, made full repayment to the Company in 2000, of $63,085.

Loans to  Company.  Throughout  1997,  in order  to fund the  Company's  general
operating  expenses,  Mr.  Maceda  loaned an aggregate  in  principal  amount of
$625,000 to the Company  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 the
Company agreeing to offset this amount with debt to the Company of AB Securities
Corporation,  owned by Mr.  Maceda.  At various  times during 2000,  the Company
repaid an  aggregate  amount in  principal  and accrued  interest on the note of
$318,542.  As of December 31, 2000,  the Company owed  $342,613 in principal and
accrued interest under the note.

HyPerTec.  On  September  10,  2000,  the  Company  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 (PEM) 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
"Item 1. Description of Business--Fuel Cell".


ITEM 13.  Exhibits and Reports on Form 8-K

(a)      Exhibits

Exhibit
Number                                  Description
<TABLE>
<CAPTION>

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


                                       102
<PAGE>
<TABLE>
<CAPTION>

<S>      <C>

--------- -----------------------------------------------------------------------------------------
10.18     Joint Venture Agreement with Apollo Water and Power International, Inc. dated February
          23, 2001*
--------- -----------------------------------------------------------------------------------------
10.19     Joint Venture Agreement with Caribbean Water and Power, Inc. dated February 23, 2001*
--------- -----------------------------------------------------------------------------------------
10.20     Co-operation Agreement between Sigma and Kockums AB dated November 14, 2000
--------- -----------------------------------------------------------------------------------------
21.01     Subsidiaries of the Registrant*
--------- -----------------------------------------------------------------------------------------
23.01     Consent of Independent Auditors***
</TABLE>


    *    Filed herewith.
   **    Incorporated by reference to the Company's Form 10-SB as filed February
         8, 2000.
  ***    Incorporated  by reference to the  Company's  Form 10-SB as amended and
         filed October 23, 2000.
 ****    Incorporated  by reference to the  Company's  Form 10-SB as amended and
         filed February 6, 2001.
*****    Incorporated   by  reference  to  the Company's Form 8-K as amended and
         filed October 19, 2000.

(b)      Reports on Form 8-K.

On October  19,  2000,  the  Company  filed an amended  Form 8-K  reporting  the
purchase  by the  Company of all of the  outstanding  shares of common  stock of
SIGMA  Elektroteknisk,  AS, a Norwegian company ("Sigma").  The above referenced
Form 8-K included audited financial statements of Sigma dated as of December 31,
1999 and unaudited Pro Forma Consolidated  Financial Information for the Company
and Sigma dated as of December 31, 1999. Filed as an exhibit to the Form 8-K was
the Sigma Share Purchase Agreement dated July 25, 2000.


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<PAGE>

                                   SIGNATURES




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


OCEAN POWER CORPORATION
(Registrant)

/s/ Ocean Power Corporation
-------------------------------------
By:   /s/Joseph P. Maceda
      --------------------------
         Joseph P. Maceda

Title:   President and Director
         -----------------------

Date:    September 4, 2001
         -----------------------
In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates specified.



By: /s/ Gloria Rose Ott
-----------------------
        Gloria Rose Ott
Title:  Chairman of the Board and Director
Date:   September 4, 2001



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



By: /s/ Robert L. Campbell
--------------------------
        Robert L. Campbell
Title:  Vice President and Director
Date:   September 4, 2001



By: /s/ J. Michael Hopper
-------------------------
        J. Michael Hopper
Title:  Secretary/Treasurer
Date:   September 4, 2001


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<PAGE>