Ocean Power Technologies, Inc.

“Making Waves in Power”

OCEAN POWER TECHNOLOGIES, INC.

Annual Report

For Year Ended April 30, 2007

OCEAN POWER TECHNOLOGIES, INC.

Dear Shareholder:

We are pleased to issue the Annual Report of Ocean Power Technologies, Inc. for the year ended
April 30, 2007. We are presenting herewith the Company’s consolidated financial statements and
additional detailed information about our business in the Form 10-K as filed with the US Securities
and Exchange Commission.

Highlights of our results for the year ended April 30, 2007 are as follows:

■ Our revenues increased by 45% in fiscal 2007 to $2.5 million, as compared to $1.7 million in

fiscal 2006. The increase in revenues reflected the following factors:

– Revenues relating to our utility PowerBuoy system increased by approximately

$1.1 million due to three major areas: first, work commenced on the first phase of
construction of a 1.39MW wave power station off the coast of Spain; second, increased
revenues relating to our US Navy project in Hawaii from a higher level of activity; and
third, work began on the design, manufacture and installation of an OPT wave power
station consisting of a PB150 (150kW) PowerBuoy system in Orkney, Scotland.

– Revenues relating to our autonomous PowerBuoy system decreased by approximately

$0.3 million primarily as a result of the completion of a development and construction
contract with Lockheed Martin in the fiscal year ended April 30, 2006. 

■ At April 30, 2007, our contract backlog was $5.2 million, compared to $2.6 million the prior

year end, reflecting new contracts in Spain and the Orkney Islands.

■ Subsequent to April 30, 2007, the Company was awarded a $1.7 million contract from the
US Navy for the use of our autonomous buoy in connection with a deep water ocean
sensing application.

■ Net loss for the year ended April 30, 2007 was $9.6 million, compared to a net loss of

$7.1 million in the prior year. This change was attributable in part to a 47% increase in product
development costs, which included increasing the output of PowerBuoy systems, and a 53%
increase in selling, general and administrative costs. These were partially offset by a $1.5 million
foreign exchange gain in the year ended April 30, 2007, compared to a $1.0 million foreign
exchange loss in the year ended April 30, 2006.

■ Following our US IPO, cash, cash equivalents and certificates of deposit were $115.9 million

at April 30, 2007, compared to $32.4 million at April 30, 2006.

■ In February 2007, the US Federal Energy Regulatory Commission (FERC) granted us a

preliminary permit to evaluate the feasibility of a location off the coast of Reedsport, Oregon
for the construction and operation of a wave power station with a maximum rated output of
50MW, of which up to the first 5MW will be a demonstration wave power station. In February
2007, we signed a cooperative agreement with a utility partner, Pacific Northwest Generating
Cooperative, or PNGC, for the development of the wave power station. In July 2007, we filed
a Pre-Application Document and Notice of Intent with FERC for Reedsport, which provides
notice of our intent to seek a license for the Reedsport wave park and information regarding
the project. We believe this is the first Pre-Application Document and Notice of Intent filed by
a wave power company, and is an important step in the full licensing process for the
Reedsport project. We plan to generate revenue from this demonstration wave power

station in Reedsport by selling electricity to utilities. OPT also has applied for FERC permits to
build two other wave parks off the coast of Oregon. In total, the permit applications submitted
to FERC are to build three wave parks off the coast of Oregon with a total capacity of up to
250MW.

■ The Company continued to make significant investments in its technology over the period and
has achieved substantial progress with the design of 150kW PowerBuoys, the largest system
yet. This progress includes completing the design and testing of the control system to be used
in the 150kW to 500kW PowerBuoy systems.

■ We strengthened our intellectual property assets with six new patent applications filed during

the fiscal year, and three new patents issued.

■ The expansion of the Company’s activities has necessitated the growth and reorganization of
staff. Six new employees have been added at the New Jersey headquarters and at the
headquarters of OPT’s European subsidiary, Ocean Power Technologies Ltd. (“OPT Ltd.”), in
Warwick, England.

■ Subsequent to April 30, 2007, Mark Draper, the chief executive of OPT Ltd. who has been
instrumental in the Company’s success in Europe, has been appointed Chief Operating
Officer of Ocean Power Technologies, Inc.

The twelve months ended April 30, 2007 represented a landmark year in the development of the
Company. OPT achieved significant operational progress and experience during the period towards its
long-term goal of fully commercializing the PowerBuoy wave energy system. We have improved the
technology of the PowerBuoys, strengthened our team and signed contracts with world-class partners.
The completion of the US IPO and listing on Nasdaq, and the approximately $90 million, net raised in
that transaction have given OPT the resources to build on those achievements in fiscal 2008. We
believe the Company is well-positioned to leverage its success to date to capitalize on the growth in
demand for renewable energy in the global markets. We are confident that we will make continued
progress in commercializing our technology in the target markets of North America, Europe, Japan
and Australia.

Seymour S. Preston III
Chairman

Dr. George W. Taylor
Chief Executive Officer

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

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2007

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

to

.

¥

n

Commission File Number 001-33417

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

22-2535818
(I.R.S. Employer
Identification No.)

1590 REED ROAD
PENNINGTON, NJ 08534

(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code (609) 730-0400
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class

Name of Exchange on Which Registered

Common Stock, par value $0.001

The Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant

is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes n

No ¥

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes n

No ¥

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (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 ¥

No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ¥

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See

definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer n

Accelerated Filer n

Non-Accelerated Filer ¥

Indicate by check mark whether
No ¥

Act). Yes n

the registrant

is a shell company (as defined in Rule 12b-2 of

the Exchange

The aggregate market value of the common stock of the registrant held by non-affiliates as of October 31, 2006, the last business day
of the registrant’s most recently completed second fiscal quarter, was $49.5 million based on the closing sale price of the registrant’s
common stock on that date as reported on the AIM market of the London Stock Exchange plc. The registrant’s common stock was not
publicly traded in the United States on that date.

The number of shares outstanding of the registrant’s common stock, as of June 30, 2007 was 10,190,604.

DOCUMENTS INCORPORATED BY REFERENCE

Document

Part of the Form 10-K into Which Incorporated

Proxy Statement for the registrant’s 2007 Annual Meeting of

Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III

OCEAN POWER TECHNOLOGIES, INC.

INDEX TO REPORT ON FORM 10-K

PART I

Item 1:
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A: Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B: Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2:
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3:
Submission of Matters to Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4:

PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations . . .
Item 7A: Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8:
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . .
Item 9:
Item 9A: Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B: Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10: Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11: Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12:
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13: Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14:

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Item 15: Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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PART IV

PowerBuoy» is a registered trademark of Ocean Power Technologies, Inc. The Ocean Power Technologies
logo, CellBuoyTM, Talk on WaterTM and Making Waves in PowerSM are trademarks or service marks of Ocean Power
Technologies, Inc. All other trademarks appearing in this annual report are the property of their respective holders.

Special Note Regarding Forward-Looking Statements

We have made statements in this Annual Report on Form 10-K (the “Annual Report”) in, among other sections,
Item 1 — “Business,” Item 1A — “Risk Factors,” Item 3 — “Legal Proceedings,” and Item 7 — “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” that are forward-looking statements.
Forward-looking statements convey our current expectations or forecasts of future events. Forward-looking
statements include statements regarding our future financial position, business strategy, budgets, projected costs,
plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,”
“plan,” “will,” “believe,” “project,” “expect,” “anticipate” and similar expressions may identify forward-looking
statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

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Any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. We have
based these forward-looking statements largely on our current expectations and projections about future events and
financial trends that we believe may affect our financial condition, results of operations, business strategy and
financial needs. They may be affected by inaccurate assumptions we might make or unknown risks and uncer-
tainties, including the risks, uncertainties and assumptions described in Item 1A — “Risk Factors.” In light of these
risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not
occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-
looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this filing.
Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to
reflect new information or future events or otherwise.

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PART I

ITEM 1. BUSINESS

Overview

We develop and are commercializing proprietary systems that generate electricity by harnessing the renewable
energy of ocean waves. The energy in ocean waves is predictable, and electricity from wave energy can be produced
on a consistent basis at numerous sites located near major population centers worldwide. Wave energy is an
emerging segment of the renewable energy market. Based on our proprietary technology, considerable ocean
experience, existing products and expanding commercial relationships, we believe we are the leading wave energy
company.

We currently offer two products as part of our line of PowerBuoy» systems: a utility PowerBuoy system and an
autonomous PowerBuoy system. Our PowerBuoy system is based on modular, ocean-going buoys, which we have
been ocean testing for nearly a decade. The rising and falling of the waves moves the buoy-like structure creating
mechanical energy that our proprietary technologies convert into electricity. We have tested and developed wave
power generation and control technology using proven equipment and processes in novel applications. Our two
products are designed for the following applications:

(cid:129) Our utility PowerBuoy system is capable of supplying electricity to a local or regional electric power grid.
Our wave power stations will be comprised of a single PowerBuoy system or an integrated array of
PowerBuoy systems, plus the remaining components required to deliver electricity to a power grid. We
intend to sell our utility PowerBuoy system to utilities and other electrical power producers seeking to add
electricity generated by wave energy to their existing electricity supply. Our PowerBuoy interface with the
electrical utility power grid has been certified as compliant with international standards. An independent
laboratory provided testing and evaluation services to certify that the OPT systems comply with designated
national and international standards. The PowerBuoy grid interface will bear the Electrical Testing
Laboratories (ETL) listing mark, and can be connected to the utility grid.

(cid:129) Our autonomous PowerBuoy system is designed to generate power for use independent of the power grid in
remote locations. There are a variety of potential applications for this system, including sonar and radar
surveillance, tsunami warning, oceanographic data collection, offshore platforms and offshore aquaculture.

From October 2005 to October 2006, we operated a demonstration PowerBuoy system with a maximum peak,
or rated, output of 40 kilowatts, or kW, off the coast of New Jersey under a contract with the New Jersey Board of
Public Utilities. This PowerBuoy system was removed from the ocean in October 2006 and underwent planned
maintenance and diagnostic testing of the system. We are currently awaiting delivery of replacement mooring lines
for this PowerBuoy system, after which we plan to immediately redeploy the system.

Our product development and engineering efforts are focused on increasing the maximum rated output of our
utility PowerBuoy system from the current 40kW to 150kW in 2007, then to 250kW in 2008 and ultimately to
500kW in 2010. We believe that by increasing system output, we will be able to decrease the cost per kW of our
PowerBuoy system and the cost per kilowatt hour of the energy generated. We have made substantial progress in the
design, analysis and commencement of fabrication of what we believe to be the first utility-grade underwater
substation, or pod, for wave power. The pod serves as the point at which energy generated by several PowerBuoys is
aggregated and the voltage is increased, prior to transmission ashore and being fed into the power grid. The required
switching and protection circuits for the individual PowerBuoys are also included in the pod. In addition, our
150kW PowerBuoy design effort is well underway. The power conversion and controls system is substantially
complete for the 150kW PowerBuoy system, and we expect to commence ocean testing in 2008.

In addition, we are focusing on expanding our key commercial opportunities for both the utility and the

autonomous PowerBuoy systems. We currently have commercial relationships with the following:

(cid:129) Iberdrola S.A., or Iberdrola, which is a large electric utility company located in Spain and one of the largest
renewable energy producers in the world, Total S.A., or Total, which is one of the world’s largest oil and gas
companies, and two Spanish governmental agencies for the first phase of the construction of a 1.39

4

megawatt, or MW, wave power station off the coast of Santoña, Spain. We currently plan for the initial 40kW
PowerBuoy system for this project to be ready for deployment by late 2007.

(cid:129) Total and Iberdrola to evaluate the development of a wave power station off the coast of France.

(cid:129) The United States Navy to develop and build wave power systems at the US Marine Corps Base in Oahu.
One PowerBuoy system was installed in connection with this project for a total of eight months over a two-
year period. Another PowerBuoy system was deployed in June 2007. After four weeks of initial testing and
operation, the system was returned to shore for diagnostic analysis and repair. Work is currently in progress
on the design and construction of a third PowerBuoy system, which is expected to be ready for deployment at
the Marine Corps Base in Oahu by the end of 2007.

(cid:129) Lockheed Martin Corporation to market cooperatively with us our autonomous PowerBuoy system for use
with Lockheed Martin equipment. Lockheed Martin successfully completed an ocean test of an autonomous
PowerBuoy system in September 2004.

As part of our marketing efforts, we use demonstration wave power stations to establish the feasibility of wave
power generation. In addition to the demonstration PowerBuoy system operated off the coast of New Jersey, we plan
to develop and operate two additional demonstration wave power stations. Unlike the New Jersey power system,
these demonstration wave power stations will, if approved and constructed as planned, be connected to the local
power grids.

In February 2006, we received approval from the South West of England Regional Development Agency to

install a 5MW demonstration wave power station off the coast of Cornwall, England.

In February 2007, the US Federal Energy Regulatory Commission granted us a preliminary permit to evaluate
the feasibility of a location off the coast of Reedsport, Oregon for the proposed construction and operation of a wave
power station with an anticipated maximum rated output of 50MW, of which up to the first 5MW will be a
demonstration wave power station. In February 2007, we signed a cooperative agreement with a utility partner,
Pacific Northwest Generating Cooperative, or PNGC, for the development of a wave power station. In July 2007, we
filed a Pre-Application Document and Notice of Intent with the US Federal Energy Regulatory Commission for
Reedsport, which provides notice of our intent to seek a license for the Reedsport wave park and information
regarding the project. We believe this is the first Pre-Application Document and Notice of Intent filed by a wave
power company, and is an important step in the full licensing process for the Reedsport project.

We plan to generate revenue from the demonstration wave power stations in Cornwall and Reedsport by selling

electricity to utilities.

In March 2007, we were awarded funding from the Scottish Ministers’ Wave and Tidal Energy Support
Scheme, managed by the Scottish Executive. This funding is to support the design, manufacture and installation of a
single 150kW PowerBuoy system in Orkney, Scotland.

In January 2007, we filed applications with the US Federal Energy Regulatory Commission for preliminary
permits to evaluate the feasibility of two locations, off the coasts of Coos Bay, Oregon and Newport, Oregon, for the
proposed construction and operation of wave power stations, each with an anticipated maximum rated output of
100MW.

In June 2007, we received a $1.7 million contract from the US Navy to provide our PowerBuoy technology to a
unique program for ocean data gathering. Under this 18-month program, the Navy will conduct an ocean test of our
autonomous PowerBuoy as the power source for the Navy’s Deep Water Acoustic Detection System.

We were incorporated under the laws of the State of New Jersey in April 1984 and began commercial
operations in 1994. On April 23, 2007, we reincorporated in Delaware. Our principal executive offices are located at
1590 Reed Road, Pennington, New Jersey 08534, and our telephone number is (609) 730-0400. Our website address
is www.oceanpowertechnologies.com. The information on our website is not a part of this Annual Report. Our
common stock has been listed on the AIM market of the London Stock Exchange plc since October 2003 and on the
NASDAQ Global Market since April 24, 2007, the date on which we commenced our initial public offering in the

5

United States. In that offering, we sold 5,000,000 shares of our common stock at a price to the public of $20.00 per
share.

Our Market

Global demand for electric power is expected to increase from 14.8 trillion kilowatt hours in 2003 to 30.1
trillion kilowatt hours by 2030, according to the Energy Information Administration, or the EIA. To meet this
demand, the International Energy Agency, or the IEA, estimates that investments in new generating capacity will
exceed $4 trillion in the period from 2003 to 2030, of which $1.6 trillion will be for new renewable energy
generation equipment.

According to the IEA, fossil fuels such as coal, oil and natural gas generated over 60% of the world’s electricity
in 2002. However, a variety of factors are contributing to the increasing development of renewable energy systems
that capture energy from replenishable natural resources, including ocean waves, flowing water, wind and sunlight,
and convert it into electricity.

(cid:129) Rising cost of fossil fuels. The cost of fossil fuel used to generate electricity has been rising. From 2000 to
2005 in the United States, the cost of coal used for electricity generation increased by 28%, the cost of
natural gas used for electricity generation increased by 91% and the cost of oil used for electricity generation
increased by 64%.

(cid:129) Dependence on energy from foreign sources. Many countries, including the United States, Japan and much
of Europe, depend on foreign resources for a majority of their domestic energy needs. Concerns over
political and economic instability in some of the leading energy producing regions of the world are
encouraging consuming countries to diversify their sources of energy.

(cid:129) Environmental concerns. Environmental concerns regarding the by-products of fossil fuels have led many
countries and several US states to agree to reduce emissions of carbon dioxide and other gases associated
with the use of fossil fuels and to adopt policies promoting the development of cleaner technologies.

(cid:129) Government incentives. Many countries have adopted policies to provide incentives for the development
and use of renewable energy sources, such as subsidies to encourage the commercialization of renewable
energy power generation.

(cid:129) Infrastructure constraints.

In many parts of the world, the existing electricity infrastructure is insufficient
to meet projected, and in some places existing, demand. Expansion of generating capacity from existing
energy sources is frequently hindered by significant regulatory, political and economic constraints.

As a result of these and other factors, the EIA projects that grid-connected generating capacity fueled by

renewable energy resources will continue to grow over the next 25 years.

Wave Energy

The energy in ocean waves is a form of renewable energy that can be harnessed to generate electricity. Ocean
waves are created when wind moves across the ocean surface. The interaction between the wind and the ocean
surface causes energy to be exchanged. At first, small waves occur on the ocean surface. As this process continues,
the waves become larger and the distance between the tops of the waves becomes longer. The size of the waves, and
the amount of energy contained in the waves, depends on the wind speed, the time the wind blows over the waves
and the distance covered. The rising and falling of the waves moves our PowerBuoy system creating mechanical
energy that our proprietary technologies convert into usable electricity.

There are a variety of benefits to using wave energy for electricity generation.

(cid:129) Scalability within a small site area. Due to the tremendous energy in ocean waves, wave power stations
with high capacity — 50MW and above — can be installed in a relatively small area. We estimate that, upon
completion of the development of our 500kW PowerBuoy system, we would be able to construct a wave
power station that would occupy less than one-tenth of the ocean surface occupied by an offshore wind
power station of equivalent capacity.

6

(cid:129) Predictability. The supply of electricity from wave energy can be forecasted in advance. The amount of
energy a wave thousands of miles away will have when it arrives at a wave power station days later can be
calculated based on satellite images and meteorological data with a high degree of accuracy. Customers can
use this information to develop sourcing plans to meet their short-term electricity needs.

(cid:129) Constant Source of Energy. The annual flow of waves at specific sites can be relatively constant. Based on
our studies and analysis of our target sites, we believe our wave power stations will be able to produce usable
electricity for approximately 90% of all hours during a year.

There are currently several approaches, in different stages of development, for capturing wave energy and
converting it into electricity. Methods for generating electricity from wave energy can be divided into two general
categories: onshore systems and offshore systems. Our PowerBuoy system is an offshore system. Offshore systems
are typically located one to five miles offshore and in water depths of between 100 and 200 feet. The system can be
above, on or below the ocean surface. Many offshore systems utilize a floatation device to harness wave energy. The
heaving or pitching of the floatation device due to the force of the waves creates mechanical energy, which is
converted into electricity by various technologies. Onshore systems are located at the edge of the shore, often on a
sea cliff or a breakwater, and typically must concentrate the wave energy first before using it to drive an electrical
generator. Although maintenance costs of onshore systems may be less than those associated with offshore systems,
there are a variety of disadvantages with these systems. As waves approach the shore, the energy in the waves
decreases; therefore, onshore wave power stations do not take full advantage of the amount of energy that waves in
deeper water produce. In addition, there are a limited number of suitable sites for onshore systems and there are
environmental and possible aesthetic issues with these wave power stations due to their size and location on the
seashore.

The scalability, predictability, constancy and limited environmental impact of offshore wave energy systems

such as ours compare favorably with many other renewable energy technologies.

(cid:129) Hydroelectric power generates electricity by capturing energy from flowing waters typically stored in and
then released from reservoirs. The expansion of hydroelectric power may be limited due to the environ-
mental and ecological impact of hydroelectric power stations.

(cid:129) Wind power generates electricity by using wind turbines to harness the energy produced as a result of the
wind’s motion and to convert it into electricity. Wind turbine structures, which can be over 300 feet high and
have blades with a span over 200 feet wide, require locations with plenty of open space and high average
wind speeds. Due to the perceived aesthetic impact of wind turbines, some local governments have zoning
restrictions prohibiting the installation of wind farms. In addition, because they are often close to the shore,
offshore wind farms share some of the same perceived aesthetic challenges as onshore wind farms.

(cid:129) Solar (photo-voltaic) power generates electricity from sunlight. Since the sun’s energy is not always
available and is widely scattered, current solar power technology is not scalable to create a large power
station for supplying power to the grid.

(cid:129) Tidal power captures energy contained in moving water due to tides and water current power captures energy
contained in ocean and river flows and non-tidal currents. Both of these technologies require specific
geographic characteristics for installation, which limits the availability of suitable sites.

Our Competitive Advantages

We believe that our technology for generating electricity from wave energy and our commercial relationships

give us several potential competitive advantages in the renewable energy market.

(cid:129) Our PowerBuoy system uses an ocean-tested technology to generate electricity.

(cid:129) We have been conducting ocean tests for a decade in order to prove the viability of our technology. We
initiated our first ocean installation in 1997 and have had several deployments of our systems for testing
and operation since then, the longest of which has lasted 12 months. Our PowerBuoy systems have
survived several hurricanes and winter storms while installed in the ocean.

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(cid:129) We had an operational demonstration PowerBuoy system off the coast of New Jersey from October 2005
until October 2006 when the system was removed from the ocean for planned maintenance and diagnostic
testing. We currently plan to build and deploy two additional demonstration wave power stations that,
unlike the PowerBuoy system in New Jersey, will provide electricity to the local power grids. In February
2006, we received approval from the South West of England Regional Development Agency to install a
demonstration wave power station off the coast of Cornwall, England and in February 2007, the US
Federal Energy Regulatory Commission granted us a preliminary permit to evaluate the feasibility of a
wave power station off the coast of Reedsport, Oregon, a portion of which will be for demonstration
purposes.

(cid:129) Our PowerBuoy system’s grid connection has been certified.

(cid:129) On July 2, 2007, we announced that our PowerBuoy grid connection system had been certified as
compliant with designated national and international standards. This qualifies our technology for
integration into utility grid systems.

(cid:129) Our PowerBuoy system is efficient in harnessing wave energy.

(cid:129) Our PowerBuoy system is designed to efficiently convert wave energy into electricity by using onboard
sensors to detect actual wave conditions and then to automatically adjust the performance of the generator
using our proprietary electrical and electronics-based control systems in response to that information.

(cid:129) One measure of the efficiency of an electric power generation system is load factor. The load factor is the
percent of kilowatt hours produced by a system in a given period as compared to the maximum kilowatt
hours that could be produced by the system in that period. A high load factor indicates a high degree of
utilization of the capacity of the system and provides a means to compare the efficiencies of different
energy sources to produce equivalent power outputs (without taking into account the relative costs of
constructing such systems). Since we have not yet operated a wave power station, we do not have a
measured load factor. However, based on our research and analysis, we believe the load factor for a
PowerBuoy wave power station located at most of our targeted sites would be in the range of 30% to 45%.

(cid:129) Our PowerBuoy system takes advantage of time-tested and well-known technology.

(cid:129) Our PowerBuoy system is designed to combine features of ocean-going buoys with advanced electrical
and electronics-based systems. Since standard ocean-going buoys have been deployed in maritime
applications for decades, their survival and risk profiles are known and proven. By using electrical, rather
than mechanical, engineering solutions whenever possible, we are able to control materials, construction
and other capital costs while maintaining reliability.

(cid:129) Our PowerBuoy system can be built using easily sourced components supplied by third parties. Due to the
PowerBuoy system’s modular design, total construction time is minimized as multiple components can be
built simultaneously, and generating capacity can be scaled up or down by incrementally adding or
subtracting groups of PowerBuoy units. In addition, our PowerBuoy system can be deployed using
common maritime techniques.

(cid:129) Numerous potential sites for our wave power stations are located near major population centers worldwide.

(cid:129) Our systems are designed to work in sites with average annual wave energy of at least 20kW per meter of
wave front, which can be found in many coastal locations around the world. In particular, we are targeting
coastal North America, the west coast of Europe, the coasts of Australia and the east coast of Japan. These
potential sites not only have appropriate natural resources for harnessing wave energy, but they are also
located near large population centers with significant and increasing electricity requirements.

(cid:129) We have significant commercial relationships.

(cid:129) Our current projects with Iberdrola and Total provide us with an initial opportunity to sell our wave power
stations to utilities. By collaborating with leaders in renewable energy development, we believe we are
able to accelerate both our in-house knowledge of the utility power generation market and our reputation
as a credible renewable energy equipment supplier. If these projects are successful, we intend to leverage

8

our experiences with the Spain and France projects to add wave power stations, new customers and
complementary revenue streams from operations and maintenance contracts similar to the agreement we
have in connection with the Spain project.

(cid:129) For certain customers in need of electricity solutions independent of the grid in defense and related
markets, our marketing relationship with Lockheed Martin will enable us to offer a complete solution —
both equipment and power generation for that equipment — thereby maximizing the marketability of our
autonomous PowerBuoy system for these remote applications.

(cid:129) With the funding from the US Navy, we have been able to refine our PowerBuoy system while
simultaneously preparing for commercial deployment to address a particular customer need. If we are
able to successfully deploy PowerBuoy systems for the US Navy, we believe our market visibility will be
significantly enhanced.

(cid:129) Our PowerBuoy system has the potential to offer a cost competitive renewable energy power generation

solution.

(cid:129) Our product development and engineering efforts are focused on increasing the maximum rated output of
our utility PowerBuoy system from the current 40kW to 150kW in 2007, then to 250kW in 2008 and
ultimately to 500kW in 2010. Assuming we are able to reach manufacturing levels of at least 300 units of
500kW PowerBuoy systems per year, we believe, based upon our research and analysis, that the
economies of scale we would have with our fabricators would allow us to offer a renewable electricity
solution that competes on a non-subsidized basis with the price of wholesale electricity in key markets.
We expect to complete development of our 500kW PowerBuoy system in 2010.

(cid:129) Prior to achieving full production levels of the 500kW PowerBuoy system, if we achieve economies of
scale for our 150kW or 250kW PowerBuoy systems, we expect to be able to offer a renewable electricity
solution that competes with the price of electricity from traditional sources in certain local markets where
the current retail price of electricity is relatively high or where sufficient subsidies are available.

(cid:129) Our systems are environmentally benign and aesthetically non-intrusive.

(cid:129) We believe that our PowerBuoy system does not present significant risks to marine life and does not emit
significant levels of pollutants. In connection with our project at the US Marine Corps Base in Hawaii, our
customer, the US Navy, obtained an independent environmental assessment of our PowerBuoy system
prior to installation, as required by the National Environmental Policy Act. Although our project for the
US Navy only contemplates an array of up to six PowerBuoy systems in Hawaii, we believe that
PowerBuoy systems deployed in other geographic locations, including larger PowerBuoy systems under
development and multiple-system wave power stations, would have minimal environmental impact due to
the physical similarities with the tested system.

(cid:129) Since our PowerBuoy systems are typically located one to five miles offshore, PowerBuoy wave power
stations are usually not visible from the shore. Visual impact is often cited as one of the reasons that many
communities have opposed plans to develop power stations. Our PowerBuoy system has the distinct
advantage of having only a minimal visual profile. Only a small portion of the unit is visible at close range,
with the bulk of the unit hidden below the water.

Our Business Strategy

Our goal is to strengthen our leadership in developing wave energy technologies and commercializing wave
power stations and related services. In order to achieve this goal, we are pursuing the following business strategies:

(cid:129) Concentrate sales and marketing efforts on four geographic markets. We are focusing our sales and
marketing efforts over the next three years on coastal North America, the west coast of Europe, the coasts of
Australia and the east coast of Japan. We believe that each of these areas represents a strong potential market
for our PowerBuoy wave power stations because they combine appropriate wave conditions, political and
economic stability, large population centers, high levels of industrialization and significant and increasing
electricity requirements.

9

(cid:129) Continue to increase PowerBuoy system output. Our product development and engineering efforts are
focused on increasing the output of our PowerBuoy systems from 40kW to 500kW. We plan to increase the
rated output of our PowerBuoy system to 150kW in 2007, to 250kW in 2008 and ultimately to 500kW in
2010. The key to increasing the rated output of the PowerBuoy system is to increase the system’s efficiency
as well as its diameter. If we increase the size of a PowerBuoy system, we will be able to increase the amount
of wave energy the system can capture and, in turn, increase the output of the system. For example, if we
double the size of the unit’s diameter, we will approximately quadruple its power capacity. We believe that
by increasing system output, we will be able to decrease the cost per kW of our PowerBuoy system and the
cost per kilowatt hour of the energy generated.

(cid:129) Construct demonstration wave power stations to encourage market adoption of our wave power stations.

Our demonstration wave power stations are intended to allow us to prove the viability of our PowerBuoy
systems in a particular region. By enabling customers to experience our technology first-hand, we believe we
will be able to facilitate our entry into our target markets. In addition, demonstration wave power stations
provide us with the opportunity to test and refine our technology in actual operating conditions. In February
2006, we were approved by the South West of England Regional Development Agency to install a 5MW
demonstration wave power station off the coast of Cornwall, England. In February 2007, the US Federal
Energy Regulatory Commission granted us a preliminary permit to evaluate the feasibility of a location off
the coast of Reedsport, Oregon for the proposed construction and operation of a wave power station with a
maximum rated output of 50MW, of which up to the first 5MW will be a demonstration wave power station.
We have also filed in July 2007 with the US Federal Energy Regulatory Commission for the Reedsport
project what we believe to be the first Pre-Application Document and Notice of Intent filed by a wave power
company. This filing provides notice to the US Federal Energy Regulatory Commission of our intent to seek
a license for the Reedsport wave park, and provides information regarding the project. The Cornwall and
Reedsport power stations will, if approved and constructed as planned, be connected to local power grids.

(cid:129) Leverage customer relationships to enhance the commercial acceptance of our utility PowerBuoy system.

We currently have commercial relationships with Iberdrola and Total for two projects. We are in the first
phase of the construction of a 1.39MW wave power station off the coast of Santoña, Spain, which phase is to
be completed by June 30, 2008. We, along with affiliates of Iberdrola and Total, are currently assessing the
viability of a 2 to 5MW power station off the coast of France. In addition, we believe that our project at the
US Marine Corps Base in Oahu, Hawaii will serve as a prototype wave power station for the installation of
wave power stations at other US Navy bases. We intend to build on these existing commercial relationships
both by expanding the number and size of projects we have with our current customers and by entering into
new alliances and commercial relationships with other utilities and independent power producers.

(cid:129) Expand revenue streams from our autonomous PowerBuoy system. The autonomous PowerBuoy system
addresses specific power generation needs of customers requiring off-grid electricity generation in remote
locations in the open ocean. Since our PowerBuoy systems are well suited for many of these uses, we do not
expect that they will require subsidies or other price incentives for commercial acceptance. This equipment
might be used for powering sonar and radar surveillance, tsunami warning, oceanographic data collection,
offshore platforms and offshore aquaculture. We have entered into a marketing cooperation agreement with
Lockheed Martin to identify marketing opportunities for use of our autonomous PowerBuoy system to
power Lockheed Martin equipment in remote locations.

(cid:129) Maximize revenue opportunities with existing customers.

In January 2007, we entered into an agreement
under which we are responsible for the monitoring, operation and maintenance of the 40kW PowerBuoy
system and the ocean-based substation and infrastructure to be manufactured and deployed in connection
with the first phase of the Spain project. Under this agreement, we will be paid a fixed fee for scheduled
maintenance, ongoing operations and other routine services and fees to be negotiated for unscheduled
repairs. We plan to pursue similar operations and maintenance contracts with future customers, including for
our France project, in order to provide us with ongoing revenue streams.

10

Our Products

We offer two types of PowerBuoy systems: our utility PowerBuoy system, which is designed to supply
electricity to a local or regional electric power grid, and our autonomous PowerBuoy system, which is designed to
generate power for use independent of the power grid in remote locations. Both products use the same PowerBuoy
technology.

Pictured below is our 40kW utility PowerBuoy system at our facilities in New Jersey and installed in the ocean

off the coast of New Jersey.

Our PowerBuoy system consists of a floating buoy-like device that is loosely moored to the seabed so that it
can freely move up and down in response to the rising and falling of the waves, as well as a power take off device, an
electrical generator, a power electronics system and our control system, all of which are sealed in the unit.

The power take off device converts the mechanical stroking created by the movement of the unit caused by
ocean waves into rotational mechanical energy, which, in turn, drives the electrical generator. The power electronics
system then conditions the output from the generator into usable electricity. The operation of the PowerBuoy system
is controlled by our customized control system.

The control system uses sophisticated sensors and an onboard computer to continuously monitor the
PowerBuoy subsystems as well as the height, frequency and shape of the waves interacting with the PowerBuoy
system. The control system collects data from the sensors and uses proprietary algorithms to electrically adjust the
performance of the PowerBuoy system in real-time and on a wave-by-wave basis. By making these electrical
adjustments automatically, the PowerBuoy system is able to maximize the amount of usable electricity generated
from each wave. We believe that this ability to optimize the performance of the PowerBuoy system in real-time is a
significant advantage of our product.

In the event of storm waves larger than 23 feet, the control system automatically locks down the PowerBuoy
system and electricity generation is suspended. When the wave heights return to a normal operating range of 23 feet
or less, the control system automatically unlocks the PowerBuoy system and electricity generation and transmission
recommences. This safety feature prevents the PowerBuoy system from being damaged by the increased amount of
energy in storm waves.

Our 40kW PowerBuoy system has a maximum diameter of 12 feet near the surface, and is 52 feet long, with
approximately 13 feet of the PowerBuoy system protruding above the surface of the ocean. Larger PowerBuoy
systems will be longer and have a larger diameter. For example, our 500kW PowerBuoy system, once developed and
manufactured, is expected to have a maximum diameter of approximately 62 feet and be approximately 128 feet
long with approximately 26 feet protruding above the ocean surface.

11

Utility PowerBuoy System

The utility PowerBuoy system is designed to transmit electricity to shore by an underwater power cable, which
would then be connected to a power grid. Our utility PowerBuoy system presently has a capacity of 40kW, which we
are working to increase to 150kW in 2007, to 250kW in 2008 and ultimately to 500kW in 2010. The utility
PowerBuoy system is designed to be positioned in water with a depth of 100 to 200 feet, which can usually be found
one to five miles offshore. This depth allows the system to capture meaningful amounts of energy from the waves,
since decreasing water depth depletes the energy in the waves.

The mooring system for keeping a utility PowerBuoy system in position connects it by slack lines to three
floats that, in turn, are connected by slack lines to three anchors. This is a well-established mooring system, referred
to as three-point mooring, which we have improved upon with various technologies that reduce cost and
deployment time.

We refer to the entire utility power generation system at one location as a wave power station, which can either
be comprised of a single PowerBuoy system or an integrated array of PowerBuoy systems connected to an
underwater cable to transmit the electricity to shore. Our system is designed to be scalable as multiple PowerBuoy
units can be integrated to create a wave power station with a larger output capacity. An array of PowerBuoy systems
would typically be arranged in three staggered rows parallel to the incoming wave front to form a long rectangle.
This staggered arrangement would maximize the level of wave energy that the wave power station can capture. For
example, to create the planned 1.39MW station off the coast of Santoña, Spain, we intend to use an array of one
40kW PowerBuoy system and nine 150kW PowerBuoy systems arranged in three staggered parallel rows of two or
four PowerBuoy systems each.

We are also exploring the use of our utility PowerBuoy systems for applications that include generating
electricity for desalination of water, hydrogen production, water treatment and natural resource processing. In these
instances, the power generated by the utility PowerBuoy system would bypass the grid and be delivered directly to
the point of electricity consumption for these special applications.

Status of Utility PowerBuoy Systems

We have made substantial progress in the design, analysis and commencement of fabrication of what we
believe to be the first utility-grade underwater substation, or pod, for wave power. The pod serves as the point at
which energy generated by several PowerBuoys is aggregated and the voltage is increased, prior to transmission
ashore and being fed into the power grid. The required switching and protection circuits for the individual
PowerBuoys are also included in the pod.

In addition, our 150kW PowerBuoy design effort is well underway. The power conversion and controls system
is substantially complete for the 150kW PowerBuoy system, and we expect to commence ocean testing in 2008.

Our PowerBuoy interface with the electrical utility power grid has been certified as compliant with inter-
national standards. An independent laboratory provided testing and evaluation services to certify that the OPT
systems comply with designated national and international standards. The PowerBuoy grid interface will bear the
ETL listing mark, and can be connected to the utility grid.

Our projects in Spain, France and Hawaii are being conducted in conjunction with third-party customers. We
have completed the planning phase for the wave power station to be located at Santoña, Spain and currently have
begun construction of a 40kW PowerBuoy system and the underwater infrastructure for the wave power station.
This infrastructure includes the underwater substation (pod) designed by us and the undersea transmission cables
that allow the power station to be connected to the grid. We are paid in connection with this project as we complete
milestones, which include deployment of a 40kW PowerBuoy system. Under our agreement for this first phase of
construction, our revenues are limited to reimbursement for our construction costs without any mark-up and we are
required to bear the first A0.5 million, or approximately $0.7 million, of any cost overruns and to absorb certain
other costs as set forth in the agreement. As of April 30, 2007, we had recognized an anticipated loss of
approximately $1.3 million under this contract, which includes costs incurred to date and our current estimate of
other amounts we may be required to bear under the agreement. Consistent with our revenue recognition policies,
each quarter we evaluate if additional loss amounts need to be recognized. In addition, the second phase of this

12

project contemplates deployment of nine additional 150kW PowerBuoy systems and connection of the ten total
PowerBuoy systems in an integrated array. The economic and other terms relating to the second phase of the project
have not been negotiated. We currently plan for the initial 40kW PowerBuoy system for this project to be ready for
deployment by late 2007 and we expect the remainder of the PowerBuoy systems to be deployed during the summer
of 2009.

The wave power station to be located off the west coast of France is in the planning and development phase. We
currently anticipate extending the current development contract until June 2008. Before we begin construction of
this wave power station, we must enter into an additional agreement with affiliates of Total and Iberdrola. We
currently plan to enter into an agreement for the construction of a wave power station prior to the expiration of any
extension of the current agreement in June 2008.

At the Marine Corps Base in Oahu, Hawaii, we had installed a wave power system for a total of eight months
over a two-year period. Another PowerBuoy system was deployed in June 2007. After four weeks of initial testing
and operation, the system was returned to shore for diagnostic analysis and repair. Work is currently in progress on
the design and construction of a third PowerBuoy system, which is expected to be ready for deployment at the
Marine Corps Base in Oahu by the end of 2007. The US Navy reimburses us for our costs and pays us a fixed fee in
connection with this project. Our current contract with the US Navy expires in April 2008.

In February 2006, we received approval from the South West of England Regional Development Agency to
install a wave power station off the coast of Cornwall, England, and this project is currently being funded solely by
us. We are currently in the planning and development stage. This wave power station will serve as a demonstration
wave power station, which we intend to operate as an independent power producer. We plan to collect revenue from
the sale of power to electrical utilities.

In February 2007, the US Federal Energy Regulatory Commission granted us a preliminary permit to evaluate
the feasibility of a location off the coast of Reedsport, Oregon for the proposed construction and operation of a wave
power station with anticipated capacity of 50MW. We plan to operate up to the first 5MW as an independent
producer, whereby we would collect revenue from the sale of power to electrical utilities. However, we currently do
not have any revenue-generating contracts in place for the sale of energy with respect to this project. We plan to
construct the additional 45MW under a supply contract with a third-party customer who, in turn, would own and
operate the wave power station. We have begun the planning and development phase of the initial wave power
station and have signed a cooperative agreement with PNGC. We have also filed in July 2007 with the US Federal
Energy Regulatory Commission a Pre-Application Document and Notice of Intent for Reedsport, which provides
notice of our intent to seek a license for the Reedsport wave park, and provides information regarding the project.
This is an important step in the full licensing process for the Reedsport project.

Also, in March 2007, we were awarded funding from the Scottish Ministers’ Wave and Tidal Energy Support
Scheme, managed by the Scottish Executive. This funding is to support the design, manufacture and installation of a
150kW PowerBuoy system in Orkney, Scotland.

Autonomous PowerBuoy System

The autonomous PowerBuoy system is based on the same technology as the utility PowerBuoy system but is
designed for electricity generation of relatively low amounts of power for use independent of the power grid in
remote locations. The autonomous PowerBuoy system currently has a maximum rated output ranging from 300
watts to 40kW, depending on the application. Our autonomous PowerBuoy system is designed to operate anywhere
in the ocean and in any depth of water.

We expect that autonomous PowerBuoy systems will generally be suitable for use on a stand-alone basis for
providing power for specific applications, including sonar and radar surveillance, tsunami warning, oceanographic
data collection, offshore platforms and offshore aquaculture.

Status of Autonomous PowerBuoy Systems

Our PowerBuoy system off the coast of New Jersey was deployed from October 2005 to October 2006 when it
was removed from the ocean for planned maintenance. We have conducted extensive diagnostic tests on the system,

13

providing us with information about the effects of ocean deployments, that will help us implement improvements in
future PowerBuoy systems. We have discovered no significant problems with the system, and the system has
required only routine maintenance. This system was not designed to supply electricity to the power grid, but rather
to provide us with operational data and marketing opportunities. We are awaiting delivery of new mooring lines for
this PowerBuoy system, after which we plan to immediately redeploy the system. We were partially funded for the
construction of this PowerBuoy system by the New Jersey Board of Public Utilities. We do not anticipate
recognizing any additional revenue in connection with this project, nor do we expect to incur significant additional
investment.

In June 2007, we received a $1.7 million contract from the US Navy to provide our PowerBuoy technology to a
unique program for ocean data gathering. Under this 18-month program, the Navy will conduct an ocean test of our
autonomous PowerBuoy as the power source for the Navy’s Deep Water Acoustic Detection System.

In September 2004, Lockheed Martin completed testing of a PowerBuoy system with a maximum rated output
of 1kW for distributed power use on location. Subsequently, we entered into a marketing arrangement with
Lockheed Martin whereby we have agreed to market cooperatively our autonomous PowerBuoy system. We expect
to generate revenue after entering into agreements with new customers.

Marketing and Sales

We are developing our sales capabilities and have begun commercial marketing and selling of our PowerBuoy
systems. Our marketing and sales efforts are currently led and coordinated by Dr. George W. Taylor, our chief
executive officer, and Mr. Mark R. Draper, our chief operating officer and the chief executive of Ocean Power
Technologies Limited, our wholly-owned subsidiary located in the United Kingdom. Because our products use a
new commercial technology, the decision process of a customer requires substantial educational efforts, in which
many of our employees may participate. We are currently seeking to hire a vice president of business development
and marketing.

In addition to our own direct sales, we will continue to enter into development agreements and strategic
alliances with regional utility and energy companies committed to providing electricity from renewable energy
sources. We plan to leverage these relationships to sell and market our PowerBuoy wave power stations to these
companies and their affiliates and to other customers in the region. We plan to expand our relationships by entering
into long-term operations and maintenance contracts to support completed wave power stations. For example, in
January 2007, we entered into an agreement for the monitoring, operation and maintenance of the 40kW
PowerBuoy system and the ocean-based substation and infrastructure to be manufactured and deployed in
connection with the first phase of the Spain project. Under this operations and maintenance agreement, we are
required to provide services for two years following provisional acceptance of the PowerBuoy system and
substation and infrastructure. We are to be paid a fixed fee for scheduled maintenance, ongoing operations and
other routine services, subject to adjustment for unscheduled repairs.

In order to penetrate certain international markets, we plan to implement marketing strategies that respond to
local market demands. In particular markets, we may grant licenses to local businesses, including independent
power producers, to sell, manufacture or operate PowerBuoy wave power stations.

Utility PowerBuoy System Marketing

We plan to market our utility PowerBuoy systems to utilities and independent power producers interested in
adding electricity generated from renewable sources to their existing electricity supply. We are currently targeting
customers in coastal North America, the west coast of Europe, the coasts of Australia and the east coast of Japan. In
addition, we are exploring the use of our utility PowerBuoy systems for applications that include desalination of
water, hydrogen production, water treatment and natural resource processing. In these instances, the power
generated by the utility PowerBuoy system would bypass the grid and be delivered directly to the point of electricity
consumption for these special applications.

14

Subsidies and Incentives

Countries in Europe and Asia and several states in the United States have adopted a variety of government
subsidies to allow renewable sources of electricity to compete with conventional sources of electricity, such as fossil
fuels. Government subsidies and incentives generally focus on grid-connected systems and take several forms,
including tariff subsidies, renewable portfolio standards, rebates, tax incentives and low interest loans. In addition,
the adoption by governments of limits on carbon dioxide emissions and targets for renewable energy production has
spurred a market for trading of surplus carbon credits and renewable energy certificates.

We expect to be able to use the availability of subsidies and other incentives to market the electricity generated
by wave power stations as an alternative to fossil fuel generated electricity. We plan to educate potential customers
on the availability of these incentives and, where appropriate, work with them to prepare and file the necessary
applications, select sites to meet program requirements and take advantage of these incentives.

Demonstration Wave Power Stations

We use demonstration PowerBuoy systems to establish the feasibility of providing wave-generated electricity
to customers. Demonstration wave power stations allow potential customers to see first-hand the viability of wave
energy as a significant source of electricity. From October 2005 through October 2006, we operated a demonstration
PowerBuoy system off the coast of New Jersey, which allowed us to continuously monitor the system and evaluate
its performance in actual wave conditions. This PowerBuoy system was removed from the ocean for maintenance
and diagnostic testing in October 2006. Although the system did not supply electricity to the power grid, it provided
us with valuable operational data as well as important marketing opportunities.

We have identified a site off the coast of the United Kingdom to install a demonstration wave power station of
up to 5MW that will connect to the power grid in Cornwall, England. In connection with the development of this
wave power station, we are planning to take advantage of incentives offered in the United Kingdom to encourage
growth in power derived from renewable sources.

The US Federal Energy Regulatory Commission has granted us a preliminary permit to develop a 50MW
PowerBuoy wave power station off the coast of Oregon that will be connected to the local power grid, the first phase
of which is expected to be a 2 to 5MW demonstration wave power station. In July 2007, we filed with the US Federal
Energy Regulatory Commission a Pre-Application Document and Notice of Intent for the Reedsport project. This
provides notice to the US Federal Energy Regulatory Commission of our intent to seek a license for the Reedsport
wave park, and provides information regarding the project. We will need additional authorization from the US
Federal Energy Regulatory Commission to sell electric power generated from the Oregon wave power station into
the wholesale or retail markets.

Autonomous PowerBuoy System Marketing

There are a variety of potential customers, such as the US Department of Homeland Security, that have specific
needs for off-grid power generation that can be supplied by our autonomous PowerBuoy. Potential applications for
off-grid power supply include sonar and radar surveillance, tsunami warning, oceanographic data collection,
offshore platforms and offshore aquaculture.

In September 2006, we entered into a marketing cooperation agreement with Lockheed Martin under which
Lockheed Martin’s Maritime Systems and Sensory business unit and we will work together to identify marketing
opportunities for our autonomous PowerBuoy system. For each marketing opportunity Lockheed Martin and we
agree to pursue, a subsequent agreement will need to be entered into setting forth the terms of the specific
arrangement. The marketing cooperation agreement terminates in September 2009, and either Lockheed Martin or
we may terminate the agreement earlier upon 30 days’ prior written notice.

15

Customers

The table below shows the percentage of our revenue we derived from significant customers for the periods

indicated:

Customer

Fiscal
2005

Fiscal
2006

Fiscal
2007

US Navy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Jersey Board of Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iberdrola and Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lockheed Martin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57%
7%
4%
32%

54%

61%
5% —
9%
22% —

35%

The US Navy accounted for a substantial portion of our revenue in fiscal 2007, but its relative contribution as a

percentage of revenues is expected to decrease in future years.

Our potential customer base for our utility PowerBuoy systems consists of public utilities, independent power
producers and other governmental entities and agencies. Our potential customer base for our autonomous
PowerBuoy systems consists of different public and private entities who use electricity in and near the ocean.
Our efforts to identify new customers are concentrated on four geographic markets: coastal North America, the west
coast of Europe, the coasts of Australia and the east coast of Japan. Our efforts to identify new customers are
currently led and coordinated by Dr. George W. Taylor, our chief executive officer, and Mr. Mark R. Draper, our
chief operating officer and the chief executive of Ocean Power Technologies Ltd., our wholly-owned subsidiary
located in the United Kingdom. We also use consultants and other personnel to assist us in locating potential
customers.

Spain Project

In July 2004, we entered into a development agreement, which we refer to as the Spain development
agreement, with Iberdrola Energias Renovables II, S.A., an affiliate of Iberdrola, Sociedad para el Desarrollo
Regional de Cantabria, S.A., or SODERCAN, which is the industrial development agency of the Spanish region of
Cantabria, and Instituto para la Diversificacion y Ahorro de la Energia, S.A., or IDAE, a Spanish government
agency dedicated to energy conservation and diversification efforts, to jointly study the possibility of developing a
wave power station off the coast of Santoña located in the Cantabria region in northern Spain. Total Eolica S.A., an
affiliate of Total, joined the development agreement in June 2005. In January 2006, we completed the assessment
phase of the project, which included an assessment of wave energy resources at the site, feasibility analysis for
deployment at the site, determination of capacity and design, and an estimation of investments needed for the
project as well as anticipated costs for operation, maintenance and repairs. Expenses associated with this phase were
shared among the parties to the agreement based on agreed upon percentages. As of April 30, 2007, we had invested
less than $0.1 million for our share of the assessment phase funding, and had recognized revenue of approximately
$0.3 million under the assessment phase.

In July 2006, Iberdrola Energias Marinas de Cantabria, S.A., or Iberdrola Cantabria, was formed for the
purpose of constructing and operating a wave power station off the coast of Santoña, Spain. Iberdrola Energias is the
largest shareholder of Iberdrola Cantabria. Total Eolica, SODERCAN, IDAE and we each have minority ownership
positions. Expenses will be shared among the parties to the agreement based on agreed upon percentages. We own
10% of Iberdrola Cantabria.

In July 2006, we entered into a construction agreement with Iberdrola Cantabria, which we refer to as the Spain
construction agreement. Under this agreement, we have agreed to complete the first phase of the construction of a
1.39MW wave power station. This phase of construction includes the manufacturing and deployment of one 40kW
PowerBuoy system, installation of the underwater power transmission cable and the deployment of the underwater
substation required for connecting the 40kW PowerBuoy system with nine additional 150kW PowerBuoy systems
that together are contemplated to constitute the 1.39MW wave power station. Under the Spain construction
agreement, our revenues are limited to reimbursement for our construction costs without any mark-up and we are
required to bear the first A0.5 million of any cost overruns and to absorb certain other costs as set forth in the
agreement. The Spain construction agreement does not cover the terms for the second phase of the 1.39MW wave

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power station project, which encompasses the deployment of the nine additional 150kW PowerBuoy systems. We
will need to agree to the terms for the second phase of this project and enter into a subsequent contract with Iberdrola
Cantabria before we can complete the construction of the full wave power station. We currently plan for the initial
40kW PowerBuoy system for this project to be ready for deployment by late 2007, and, if we can reach agreement as
to the second phase of the project, we plan to deploy the remainder of the PowerBuoy systems during the summer of
2009.

We are paid under the Spain construction agreement as we complete certain milestones for a total potential
payment for the first phase of construction of approximately A2.7 million. As of April 30, 2007, we had recognized
revenue of approximately $0.8 million and an anticipated loss of $1.3 million under the Spain construction
agreement. The loss was recognized based on a change in estimated costs associated with the Spain construction
agreement, which include costs incurred to date and our current estimate of other amounts we may be required to
bear under the agreement. Our estimates of the project’s costs may increase in the future, and we may be required to
seek customer approval for additional increases in the construction budget for the project. If the construction budget
is not increased, we may elect to incur the additional costs and continue the project, to seek other suppliers for the
materials or services related to the cost increases or to terminate the agreement. Any of such outcomes may have a
material adverse effect on our financial condition and results of operations. We have recently requested our
customer to approve an increase in the construction budget for this project beyond the initial A2.7 million value of
the contract.

France Project

In June 2005, we entered into a development agreement, which we refer to as the France development
agreement, with Total Energie Development S.A., an affiliate of Total, and Iberdrola Energias Renovables II, S.A.,
an affiliate of Iberdrola, to study and assess the feasibility of a 2 to 5MW wave power station off the coast of France.
Pursuant to the France development agreement, the parties have agreed to extend the current phase until June 2008.
Expenses are shared among the parties based on agreed upon percentages, which also reflect the parties’ anticipated
ownership interest in the wave power station. Iberdrola Energias has a majority interest, while Total Energie and we
have minority interests, with our interest being 10%.

If upon completion of the feasibility study, Iberdrola Energias, Total Energie and we unanimously conclude
that the operation of a wave power station off the coast of France is economically, technically and financially
feasible, we will meet to discuss whether and how the wave power station should be implemented. If we proceed,
Iberdrola Energias, Total Energie and we will form a company for the purpose of constructing and operating the
wave power station. Each party will be entitled to retain its current percentage interest by making a proportionate
capital investment. Regardless of our participation in the new company, we will supply and install equipment on
market terms so that the new company can operate the wave power station. Specific terms, including price and
schedule, for these supply and installation agreements are not included in the France development agreement.
Iberdrola Energias and Total Energie may withdraw from the France development agreement without any further
obligation. If we withdraw, however, we will remain bound by our supply and installation agreements under the
contract.

As of April 30, 2007, we had contributed approximately $12,500 for expenses and had recognized revenue of

approximately $0.1 million under the France development agreement.

US Navy

Since September 2001, we have entered into a series of contracts with the United States Office of Naval
Research for the development and construction of wave power systems at the Marine Corps Base in Oahu, Hawaii.
Under the contract for the current phase of the project, which was entered into in September 2005 and expires in
April 2008, we are reimbursed for costs and paid a fixed fee for total potential revenue of $2.8 million.

In June 2007, we received a $1.7 million contract from the US Navy to provide our PowerBuoy technology to a
unique program for ocean data gathering. Under this 18-month program, the Navy will conduct an ocean test of our
autonomous PowerBuoy as the power source for the Navy’s Deep Water Acoustic Detection System.

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Backlog

Our contract backlog consists of the aggregate anticipated revenue remaining to be earned at a given time from
the uncompleted portions of our existing customer contracts. As of April 30, 2007, our contract backlog was
$5.2 million as compared to $2.6 million as of April 30, 2006. We anticipate that a majority of our backlog will be
recognized as revenue over the next 12 months.

The amount of contract backlog is not necessarily indicative of future revenue because modifications to or
terminations of present contracts and production delays can provide additional revenue or reduce anticipated
revenue. A substantial majority of our revenue is recognised using the percentage-of-completion method, and
changes in estimates from time to time may have a significant effect on revenue and backlog. Our backlog is also
typically subject to large variations from time to time due to the timing of new awards.

Manufacturing and Deployment

Manufacturing and Raw Materials

We engage in two types of manufacturing activities: the manufacturing of the high value-added components, or
modules, for systems control, power generation and power conversion for each PowerBuoy system, and the
contracting and fabrication of the buoy-like structure, anchoring and mooring, and cabling.

Our core in-house manufacturing activity is the assembly and testing of the power generation and control
modules at our Pennington, New Jersey facility. The power generation and control modules include the critical
electrical and electronic systems that convert the mechanical energy into usable electrical energy. The sensors and
control systems use sophisticated technology to monitor ocean conditions and automatically optimize the perfor-
mance of the PowerBuoy system in response to those changing conditions. We have several patents, including those
that cover our power generation, power conversion and control technologies. Due to the critical and proprietary
nature of these systems, we do not outsource their assembly and testing. After a generator and control module passes
our rigorous quality control procedures, it is transported as a ready-to-install component to the project site. We
currently employ thirteen employees who are responsible for manufacturing and testing our generators and control
systems. In order to meet our growth objectives, we will need to increase our engineering and manufacturing staff by
over 120 people by the end of fiscal 2010. In addition to adding engineers with various specialties, we plan to hire a
manager of our production manufacturing and a manager of our supply chain by the end of fiscal 2008.

We purchase the remaining components of and raw materials for each PowerBuoy system from various
vendors. Currently, we contract for these components on a project-by-project basis. We conduct a bidding process to
select a supplier with the optimal combination of price, delivery terms and quality. Our goal is to develop ongoing
relationships with select vendors centrally located in different regions, which will allow us to reduce unit costs as
our volume increases. We provide specifications to each vendor who is responsible for performing quality analysis
and quality control over the course of construction, subject to our review of the quality test procedures and results.
After each vendor completes testing of the component, it is transported ready-to-install to the project site.

Upon arrival at the project site, the generator and control modules are integrated with the balance of the
components of the PowerBuoy system. We are highly dependent on our third-party suppliers; however, we actively
manage key steps in the supply chain. We act as the general contractor, and retain the ultimate responsibility for
building the PowerBuoy wave power station, and installing, testing and deploying the complete wave power station
at the project site. This process requires significant project and contract management by us. We currently employ
individuals who have experience with all aspects of both the manufacturing and engineering contracting processes,
and demonstrated organizational capabilities in these critical areas.

Deployment

For our existing and currently planned deployments, we purchase from subcontractors the mooring system and
cables needed to install the PowerBuoy system and connect it to either the power grid or a remote power site. The
vendor usually transports these components to the project site.

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Each step in the deployment process for our existing and currently planned deployments is outsourced to
subcontractors located near the project site. First the mooring system, consisting of floats, anchors and chains, are
brought to the wave power station’s ultimate ocean location by workboats. At the same time, the cable to transmit
the generated electricity is laid by a subcontractor. Next, the PowerBuoy system is towed to the ocean location and
fixed to the mooring system. The PowerBuoy system would then be connected to the transmission cable, which
would then be connected to the grid or the distributed power site. At this point, we would have a fully assembled
PowerBuoy wave power station, which, subject to final testing, would be ready for operation. An array of
PowerBuoy systems would be installed using a similar approach.

We expect that the subcontractor services required for deployment of a wave power station will be readily
available in the locations where we currently plan to deploy our systems, although we are dependent on third parties
for the entire process. We actively manage each step with personnel who have significant project management and
deployment experience.

Research and Development

Our research and development team consists of employees with a broad range of experience in mechanical
engineering, electrical engineering, hydrodynamics and systems engineering. We engage in extensive research and
development efforts to improve PowerBuoy efficiency and power output and to reduce manufacturing cost and
complexity. Our research and development efforts are currently focused on product development, in particular
increasing the output of our utility PowerBuoy system. We are also conducting research on improvements to our
current technology, including alternative power generation and power take off systems.

Research and development expenses are reflected on our consolidated statements of operations as product
development costs. Our company-sponsored research and development expenses were approximately $0.9 million
for fiscal 2005, $4.2 million for fiscal 2006 and $6.2 million for fiscal 2007. In addition, while we have in the past
self-funded the majority of our research and development expenditures, we also have customer-sponsored research
and development expenses of approximately $0.2 million for fiscal 2005, $0.1 million for fiscal 2006 and
$0.1 million for fiscal 2007.

We currently plan to increase the maximum rated output of our utility PowerBuoy system to 150kW in 2007, to
250kW in 2008 and ultimately to 500kW in 2010. The key to increasing the rated output of the PowerBuoy system is
to increase the system’s efficiency as well as its diameter. If we increase the size of a PowerBuoy system, we will be
able to increase the amount of wave energy the system can capture and, in turn, increase the output of the system.
For example, if we double the size of the unit’s diameter, we will approximately quadruple its power capacity. We
believe that we will be able to increase the output capacity of the PowerBuoy system using technology that we have
already developed, so our focus is on the design, manufacture, testing and deployment of the higher capacity
systems. We are exploring design and construction techniques that will enable the larger PowerBuoy systems to be
deployed cost effectively and without damage. For example, our 40kW PowerBuoy systems are transported to the
onshore deployment sites using standard flatbed trucks. However, the assembled 150kW PowerBuoy systems will
be too large for these trucks and will need to be transported in modules and assembled on-site. In addition, we may
need to adjust the mooring system to account for the larger-sized PowerBuoy systems.

We have made substantial progress in the design, analysis and commencement of fabrication of what we
believe to be the first utility-grade underwater substation, or pod, for wave power. The pod serves as the point at
which energy generated by several PowerBuoys is aggregated and the voltage is increased, prior to transmission
ashore and being fed into the power grid. The required switching and protection circuits for the individual
PowerBuoys are also included in the pod. In addition, our 150kW PowerBuoy design effort is well underway. The
power conversion and controls system is substantially complete for the 150kW PowerBuoy system, and we expect
to commence ocean testing in 2008.

We also plan to continue our technology development of specific applications for our PowerBuoy systems to
expand our growth opportunities. For example, we are exploring applications that include desalination of water,
hydrogen production, water treatment and natural resource processing.

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We expect our research and development expenses to continue to rise in the next several years, with our

product development expenses increasing more rapidly than our research expenses.

Intellectual Property

We believe that our technology differentiates us from other providers of wave and other renewable energy
technologies. As a result, our success depends in part on our ability to obtain and maintain proprietary protection for
our products, technology and know-how, to operate without infringing the proprietary rights of others and to prevent
others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among
other methods, filing United States and foreign patent applications related to our proprietary technology, inventions
and improvements that are important to the development of our business. We also rely on trade secrets, know-how,
and continuing technological innovation and may rely on in-licensing opportunities to develop and maintain our
proprietary position.

As of April 30, 2007, we owned a total of 31 issued United States patents and 16 United States patent
applications. We have pending foreign counterparts to nine of our issued patents and 11 of our pending non-
provisional patent applications.

Our patent portfolio includes patents and patent applications with claims directed to:

(cid:129) system design;

(cid:129) control systems;

(cid:129) power conversion;

(cid:129) anchoring and mooring; and

(cid:129) wave farm architecture.

The expiration dates for our issued United States patents range from 2015 to 2023. We do not consider any
single patent or patent application that we hold to be material to our business. The patent positions of companies like
ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify
our proprietary position for our technology will depend on our success in obtaining effective patent claims and
enforcing those claims once granted. In addition, certain technologies that we developed with US federal
government funding are subject to certain government rights as described in “Risk Factors — Risks Relating to
Our Business.”

We use trademarks on nearly all of our products and believe that having distinctive marks is an important factor
in marketing our products. We have registered our PowerBuoy» mark and filed applications to register our
CellBuoyTM and Talk on WaterTM marks for a cellular telephone service application of our autonomous PowerBuoy
system and our Making Waves in PowerSM service mark in the United States.

Competition

We compete and will compete with power generation equipment suppliers in all segments of the electric power
industry, including wave energy, other forms of renewable energy and traditional fossil fuel. The renewable energy
industry is both highly competitive and continually evolving as participants strive to distinguish themselves within
their markets and compete within the larger electric power industry. Many of our competitors in certain of these
segments have established a stronger market position than ours and have greater resources and name recognition
than we have. In addition, there are many companies, including some of the largest multinational energy companies,
that are developing or sponsoring innovative technologies for renewable energy production. Accordingly, our
success depends in part on developing and demonstrating the commercial viability of wave energy solutions and
identifying markets for and applications of our PowerBuoy systems and technology.

Although the market for equipment that generates electricity from wave energy is in its early stage of
commercial development, there are a number of private companies, some with institutional funding, developing
technologies to generate electricity from wave energy, and we compete or will compete with them. We believe there
are 20 to 30 companies worldwide developing wave energy technologies. Most of these companies are located in the

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United Kingdom, continental Europe, the United States and Australia, and almost all are focused on offshore
systems. Only a few of these companies have conducted ocean testing of their systems, which is the critical factor in
proving the survivability and performance of any wave energy system.

Sixteen companies expressed an interest to the South West of England Regional Development Agency in
participating in the development of a new Wave Hub power station project off the coast of Cornwall, England. Four
companies were ultimately selected: Ocean Prospect Ltd., a subsidiary of the Wind Prospect group, Fred.Olsen
Ltd., Oceanlinx and us.

Ocean Prospect Ltd. has stated that it will deploy the Pelamis device developed by Ocean Power Delivery at the
Cornwall site. The Pelamis system is a semi-submerged, articulated structure composed of cylindrical sections
linked by hinged joints. The wave-induced motion of these cylinders relative to each other is used to pump hydraulic
power take off systems, providing the mechanical power to turn the generators to produce electricity. Fred.Olsen, a
ship and offshore platform builder, intends to deploy a multiple point-absorber system comprised of a number of
floating buoys attached to a stable floating platform. Oceanlinx intends to deploy a large floating system which is
based on an oscillating water column and proprietary turbine. Additional competitors may enter the market, and we
are likely to compete with new companies in the future.

To compete effectively, we have to demonstrate that our PowerBuoy systems are attractive, compared to other
wave energy systems and other renewable energy systems, by differentiating our systems on the basis of
performance, survivability in operation and storm wave conditions, cost effectiveness and the operations and
maintenance services that we provide. We believe that we perform favorably to our competition with respect to each
of these factors.

Government Regulation

The electric power industry is subject to extensive regulation, which varies by jurisdiction. For example, the
electricity industry in the United States is governed by both federal and state laws and regulations, with the federal
government having jurisdiction over the sale and transmission of electricity at the wholesale level in interstate
commerce, and the states having jurisdiction over the sale and distribution of electricity at the retail level. The
electricity industry in the European Union, or the EU, is primarily governed by national law, but a number of EU-
level regulations impose obligations on member states, notably with respect to the liberalization of the electricity
markets.

The renewable energy industry has also been subject to increasing regulation, however none of the countries in
which we are currently marketing our PowerBuoy systems have comprehensive regulatory schemes tailored to
wave energy. As the renewable energy industry continues to evolve and as the wave energy industry in particular
develops, we anticipate that wave energy technology and our PowerBuoy systems and their deployment will be
subject to increased oversight and regulation in accordance with international, national and local regulations
relating to safety, sites, environmental protection, utility interconnection and metering and related matters.

Our PowerBuoy wave power stations currently face regulation in the US and in foreign jurisdictions
concerning, among other areas, the sale and transmission of electricity, site approval and environmental approval
and compliance. In order to encourage the adoption of renewable energy systems, many governments offer
subsidies and other financial incentives and have mandated renewable energy targets. These subsidies, incentives
and targets may not be applicable to our wave energy technology and therefore may not be available for us or our
customers.

Sale and Transmission of Electricity

The US government regulates the electricity wholesale and transmission business through the Federal Energy
Regulatory Commission, or FERC. FERC regulates the rates and terms for sales of electricity at the wholesale level,
and the organization, governance and financing of the companies engaged in electricity sales. As a result, FERC
regulates the rates charged for sales of electric power from a wave power station into the wholesale market, although
it is possible to obtain an exemption from FERC that would allow those sales to occur at market-based rates. FERC
also regulates the construction, operation and maintenance of any dam, water conduit, reservoir or powerhouse

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along or in any of the navigable waters of the United States for the purpose of generating electric power. As a result,
the construction and operation of a wave power station in the United States requires the issuance of a license by
FERC. We have been granted a preliminary permit by FERC to evaluate the feasibility of a 50MW wave power
station off the coast of Oregon. An application to FERC was not required for the current project in New Jersey
because the system is not grid-connected and is for demonstration purposes.

Under Spanish law, each of the Spanish Autonomous Regions, including the Cantabria region, has the power to
issue administrative authorizations for the construction and exploitation of installations for the production of
renewable energy, including installations that use the energy of waves.

Site Approval

Generally, we expect that we will deploy our PowerBuoy systems in the range of one to five miles from the
shore, subject to water depth and overall wave heights. Although regulations regarding the use of ocean space vary
around the world, we do not expect significant delay in obtaining site approvals, as governments have to date
encouraged the use of renewable energy sources. Our customers for the Spain and France projects and the South
West of England Regional Development Agency for the Cornwall, England project are responsible for obtaining the
necessary siting permits for their projects.

In the United States, federal agencies regulate the siting of renewable energy and related-uses located on the
outer continental shelf, which is generally more than three miles offshore. For projects located within three miles of
the US shore, the adjacent state would be responsible for issuing a lease and other required authorizations for the
location of the project. In either case an assessment of the potential environmental impact of the project would be
conducted in addition to other requirements. In Spain, the owner of the wave power station will be required to pay
rent to the Spanish government, which will be negotiated prior to installation.

Environmental Approval and Compliance

We are subject to various foreign, federal, state and local environmental protection and health and safety laws
and regulations governing, among other things: the generation, storage, handling, use and transportation of
hazardous materials; the emission and discharge of hazardous materials into the ground, air or water; and the health
and safety of our employees. In addition, in the United States, the construction and operation of a power system
offshore would require permits and approvals from FERC, the Coast Guard, the Army Corps of Engineers and other
governmental authorities. These required permits and approvals evaluate, among other things, whether the proposed
project is in the public interest and ensure that the project would not create a hazard to navigation. Other foreign and
international laws may require similar approvals. Each PowerBuoy system installed within Spanish territorial
waters must be approved and authorized by the Spanish Ministry of Environment. In addition, we anticipate that our
PowerBuoy systems will be subject to EU law on the protection of the environment and environmental assessments
of development projects including the Environmental Impact Assessment and Strategic Environmental Assessment
Directives.

We believe that a significant advantage of our PowerBuoy systems is that they do not present significant
environmental risks when compared to traditional power generation technologies, as there is no significant visual or
audible impact and such systems have not been shown to have a significant negative effect on fish or sea mammals.
We are not aware of any liabilities in connection with compliance with such laws, regulations, permits and approvals
that would have a material adverse effect on our financial position, results of operations or cash flows.

Subsidies and Incentives

Several governments have enacted subsidies and incentives designed to encourage the development of
renewable energy resources. Because of the relative novelty of wave energy generation, these government
programs generally do not apply specifically to wave energy generation, and so these programs may not be
available to our customers or us in all cases.

Under a tariff subsidy, the government sets price subsidies to be paid to electricity producers for renewable
electricity generated by them. The prices are set above market rates and may be differentiated based on system size

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or application. Under a renewable portfolio standard, the government requires regulated utilities to supply a portion
of their total electricity in the form of renewable electricity. Some programs further specify that a portion of the
renewable energy quota must be from a particular renewable energy source, although none have specific quotas for
wave energy.

Tax incentive programs for renewable energy exist in the United States at both the federal and state level and
can take the form of investment tax credits, accelerated depreciation and property tax exemptions. Several
governments also facilitate low interest loans for renewable energy systems, either through direct lending, credit
enhancement or other programs.

Each of the member states of the EU has a country-specific target for the level of consumption of electricity
from renewable sources that it should attain by 2010. The United Kingdom Renewables Obligation of April 2002
included a target of 10% of electricity generation to come from renewable sources by 2010 and 15% by 2016, which
will continue until 2027. Electricity suppliers that are unable to otherwise meet their renewables obligation have to
pay a buy-out price (currently £0.033 per kilowatt hour) or purchase Renewables Obligation Certificates from
companies that generate electricity from renewable resources. The United Kingdom Department of Trade and
Industry has established a £50 million Marine Renewables Deployment Fund of which £42 million is allocated to
provide a maximum seven-year benefit to any one marine power technology of £9 million, in the form of a 25%
capital grant and a tariff supplement of £0.10 per kilowatt-hour generated.

Many countries and other local jurisdictions have established limits on carbon dioxide emissions. In particular,
a key component of the Kyoto Protocol is the commitments made by certain countries to reduce carbon dioxide
emissions. The country, locality or companies within the jurisdiction are given carbon emission allowances, or
carbon credits, which represent the right to emit a specific amount of carbon dioxide. A country, locality or
company having emissions that exceed its allocated carbon credits may purchase unused carbon credits from a
country, locality or company that has reduced its emissions beyond its requirements to do so. The carbon dioxide
emissions from a PowerBuoy wave power station are far lower than the emissions from a fossil fuel power station of
the same capacity. Therefore, a PowerBuoy wave power station may generate carbon credits that could be used and
sold.

In 2000, we entered into an agreement with Woodside Sustainable Energy Solutions Pty. Ltd., or Woodside,
under which we received $0.6 million in exchange for granting Woodside an option to purchase, at a 30% discount
from the then-prevailing market rate, up to 500,000 metric tons of carbon emission credits we generate during the
years 2008 through 2012. If by December 31, 2012 we do not sell to Woodside the full amount of emission credits
covered by the option, we may be obligated to return all or a portion of the option fee and, in certain circumstances,
pay additional amounts to Woodside.

Employees

As of April 30, 2007, we had 37 employees, including 13 employees in manufacturing, 14 in research,
development and engineering functions and ten employees in selling, general and administrative functions. Of these
employees, 30 are located in Pennington, New Jersey and seven are located in Warwick, UK. We believe that our
future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our
employees is represented by a labor union, and we believe our employee relations are good.

In order to meet our short-term goals, we plan to add approximately 15 employees, including a vice president
of business development and engineers with varying levels and areas of expertise by the end of 2007. By the end of
fiscal 2010, we will need to increase our staff by nearly six times in order to meet our current manufacturing targets.
The majority of our new hires will be engineers with varying levels and areas of expertise, project managers and
manufacturing personnel.

Product Insurance

We currently have a property and liability insurance policy underwritten by Lloyd’s Underwriters that covers
our PowerBuoy systems in Hawaii and New Jersey, and that can be expanded to cover our PowerBuoy systems to be

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deployed off the coasts of Santoña, Spain, Cornwall, England and France. We have not claimed any losses under this
policy.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below with all of the other information included in this
Annual Report before deciding to invest in our common stock. If any of the following risks actually occur, they may
materially harm our business and our financial condition and results of operations. In this event, the market price of
our common stock could decline and your investment could be lost.

Risks Relating to Our Business

We have a history of operating losses and may never achieve or maintain profitability.

We have incurred net losses since we began operations in 1994, including net losses of $0.4 million in fiscal
2005, $7.1 million in fiscal 2006 and $9.6 million in fiscal 2007. As of April 30, 2007, we had an accumulated
deficit of approximately $38.3 million. These losses have resulted primarily from costs incurred in our research and
development programs and from our selling, general and administrative costs. We expect to increase our operating
expenses significantly as we continue to expand our infrastructure, research and development programs and
commercialization activities. As a result, we will need to generate significant revenues to cover these costs and
achieve profitability.

We have entered into an agreement for the first phase of construction of a wave power station off the coast of
Santoña, Spain, as well as an operations and maintenance contract for the equipment to be installed in this first
phase. Under both contracts, our potential profitability is limited. Under the construction contract, our revenues are
limited to reimbursement for our construction costs without any mark-up and we are required to bear the first
A0.5 million of any cost overruns and to absorb certain other costs as set forth in the agreement. Our estimates of the
project’s costs may increase in the future, and we may be required to seek customer approval for additional increases
in the construction budget for the project. If the construction budget is not increased, we may elect to incur the
additional costs and continue the project, to seek other suppliers for the materials or services related to the cost
increases or to terminate the agreement. Any of such outcomes may have a material adverse effect on our financial
condition and results of operations. We have recently requested our customer to approve an increase in the
construction budget for this project beyond the intitial A2.7 million value of the contract. Under the operations and
maintenance contract, we are paid a fixed fee for scheduled maintenance, the profits on which are required to be
refunded to cover any unscheduled maintenance fees we receive during the term of the agreement.

We do not know whether or when we will become profitable because of the significant uncertainties with
respect to our ability to successfully commercialize our PowerBuoy systems in the emerging renewable energy
market. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or
annual basis. If we are unable to achieve and then maintain profitability, the market value of our common stock may
decline.

Wave energy technology may not gain broad commercial acceptance, and therefore our revenues may not
increase, and we may be unable to achieve and then sustain profitability.

Wave energy technology is at an early stage of development, and the extent to which wave energy power
generation will be commercially viable is uncertain. Many factors may affect the commercial acceptance of wave
energy technology, including the following:

(cid:129) performance, reliability and cost-effectiveness of wave energy technology compared to conventional and

other renewable energy sources and products;

(cid:129) developments relating to other renewable energy generation technologies;

(cid:129) fluctuations in economic and market conditions that affect the cost or viability of conventional and

renewable energy sources, such as increases or decreases in the prices of oil and other fossil fuels;

(cid:129) overall growth in the renewable energy equipment market;

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(cid:129) availability and terms of government subsidies and incentives to support the development of renewable

energy sources, including wave energy;

(cid:129) fluctuations in capital expenditures by utilities and independent power producers, which tend to decrease

when the economy slows and interest rates increase; and

(cid:129) the development of new and profitable applications requiring the type of remote electric power provided by

our autonomous wave energy systems.

If wave energy technology does not gain broad commercial acceptance, our business will be materially harmed

and we may need to curtail or cease operations.

If sufficient demand for our PowerBuoy systems does not develop or takes longer to develop than we
anticipate, our revenues may decline, and we may be unable to achieve and then sustain profitability.

Even if wave energy technology achieves broad commercial acceptance, our PowerBuoy systems may not
prove to be a commercially viable technology for generating electricity from ocean waves. We have invested a
significant portion of our time and financial resources since our inception in the development of our PowerBuoy
systems. To date, we have not yet manufactured and deployed any PowerBuoy systems for commercial use. As we
begin to manufacture, market, sell and deploy our PowerBuoy systems in greater quantities, unforeseen hurdles may
be encountered that would limit the commercial viability of our PowerBuoy systems, including unanticipated
manufacturing, deployment, operating, maintenance and other costs. Our target customers and we may also
encounter technical obstacles to deploying, operating and maintaining PowerBuoy systems in quantities necessary
to generate competitively-priced electricity.

If demand for our PowerBuoy systems fails to develop sufficiently, we may be unable to grow our business or
generate sufficient revenues to achieve and then sustain profitability. In addition, demand for PowerBuoy systems in
our presently targeted markets, including coastal North America, the west coast of Europe, the coasts of Australia
and the east coast of Japan, may not develop or may develop to a lesser extent than we anticipate.

If we are not successful in commercializing our PowerBuoy system, or are significantly delayed in doing so,

our business, financial condition and results of operations could be adversely affected.

The reduction or elimination of government subsidies and economic incentives for renewable energy
sources could prevent demand for our PowerBuoy systems from developing, which in turn would
adversely affect our business, financial condition and results of operations.

Federal, state and local governmental bodies in many countries, most notably France, Spain,
the
United Kingdom, Australia, Japan and the United States, have provided subsidies in the form of tariff subsidies,
rebates, tax credits and other incentives to utilities, power generators and distributors using renewable energy.
However, these incentives and subsidies generally decline over time, and many incentive and subsidy programs
have specific expiration dates. Moreover, because the market for electricity generated from wave energy is at an
early stage of development, some of the programs may not include wave energy as a renewable energy source
eligible for the incentives and subsidies.

Currently, the cost of electricity generated from wave energy, without the benefit of subsidies or other
economic incentives, substantially exceeds the price of electricity in most significant markets in the world. As a
result, the near-term growth of the market for our utility PowerBuoy systems, which are designed to feed electricity
into a local or regional power grid, depends significantly on the availability and size of government incentives and
subsidies for wave energy. As renewable energy becomes more of a competitive threat to conventional energy
providers, companies active in the conventional energy business may increase their lobbying efforts in order to
encourage governments to stop providing subsidies for renewable energy, including wave energy. We cannot predict
the level of any such efforts, or how governments may react to such efforts. The reduction, elimination or expiration
of government incentives and subsidies, or the exclusion of wave energy technology from those incentives and
subsidies, may result in the diminished competitiveness of wave energy relative to conventional and non-wave
energy renewable sources of energy. Such diminished competitiveness could materially and adversely affect the

25

growth of the wave energy industry, which could in turn adversely affect our business, financial condition and
results of operations.

In 2000, we entered into an agreement with Woodside, under which we received $0.6 million in exchange for
granting Woodside an option to purchase, at a 30% discount from the then-prevailing market rate, up to 500,000
metric tons of carbon emission credits we generate during the years 2008 through 2012. However, if by
December 31, 2012 we do not become entitled under applicable laws to the full amount of emission credits
covered by the option, we are obligated to return the option fee of $0.6 million, less the aggregate discount on any
emission credits sold to Woodside prior to such date. If we receive emission credits under applicable laws and fail to
sell to Woodside the credits up to the full amount of emission credits covered by the option, Woodside is entitled to
liquidated damages equal to 30% of the aggregate market value of the shortfall in emission credits (subject to a limit
on the market price of emission credits).

Our product development costs have been steadily increasing and are likely to increase significantly over
the next several years.

Our product development costs primarily relate to our efforts to increase the maximum rated output of our
current 40kW utility PowerBuoy system in successive stages to 500kW in 2010. Our product development costs
were $0.9 million in fiscal 2005 as compared to $4.2 million in fiscal 2006 and $6.2 million in fiscal 2007. We
anticipate that our product development costs related to the planned increase in the output of our utility PowerBuoy
system will increase significantly over the next several years.

We have invested, and will continue to invest, funds to construct demonstration wave power stations that
may generate little or no direct revenue.

We have constructed, and plan to construct in the future, demonstration wave power stations to establish the
feasibility of wave energy technology and to encourage the market adoption of our wave power stations.
Demonstration wave power stations allow potential customers to see first-hand the viability of wave energy
technology as a source of electricity. We incur significant costs in constructing and maintaining these demonstration
wave power stations, and we may generate little or no direct revenue from them.

Our PowerBuoy systems do not have a sufficient operating history to confirm how they will perform over
their estimated 30-year useful life.

We began developing and testing wave energy technology ten years ago. However, to date we have only
manufactured nine PowerBuoy systems for use in testing and development. The longest continuous in-ocean
deployment of our PowerBuoy system has been for 12 months. As a result, our PowerBuoy systems do not have a
sufficient operating history to confirm how they will perform over their estimated 30-year useful life. Our
technology has not been deployed commercially and we have not yet demonstrated that our engineering and test
results can be duplicated in commercial production. We have conducted and plan to continue to conduct practical
testing of our PowerBuoy system. If our PowerBuoy system ultimately proves ineffective or unfeasible, we may not
be able to engage in commercial production of our products or we may become liable to our customers for quantities
we are obligated but are unable to produce. If our PowerBuoy systems perform below expectations, we could lose
customers and face substantial repair and replacement expense which could in turn adversely affect our business,
financial condition and results of operations.

Our future success depends on our ability to increase the maximum rated power output of our utility
PowerBuoy system. If we are unable to increase the maximum rated output of our utility PowerBuoy
system, the commercial prospects for our utility PowerBuoy system would be adversely affected.

One of our goals is to increase the maximum rated output of our utility PowerBuoy system, which is currently
40kW, to 150kW in 2007, then to 250kW in 2008 and ultimately to 500kW in 2010. Our success in meeting this
objective depends on our ability to significantly increase the power output of our PowerBuoy system in a cost-
effective and timely manner and our ability to overcome the engineering and deployment hurdles that we face,
including developing design and construction techniques that will enable the larger PowerBuoy systems to be

26

deployed cost effectively and without damage, and developing adjustments to the mooring system to account for the
larger-sized PowerBuoy systems. We have experienced delays in the development and deployment of our
PowerBuoy system in the past, and could experience similar delays or other difficulties in the future. If we
cannot increase the power output of the PowerBuoy system, or if it takes us longer to do so than we anticipate, we
may be unable to expand our business, maintain our competitive position, satisfy our contractual obligations or
become profitable. In addition, if the cost associated with these development efforts exceeds our projections, our
results of operations will be adversely affected.

If we do not reach full commercial scale, we may not be able to offer a cost competitive power station
and the commercial prospects of our utility PowerBuoy system would be adversely affected.

Unless we reach full commercial scale, which we estimate to be manufacturing levels of at least 300 units of
500kW PowerBuoy systems per year, we may not be able to offer an electricity solution that competes on a non-
subsidized basis with today’s price of wholesale electricity in key markets in the United States, Europe, Japan and
Australia. If we do not reach full commercial scale, the commercial prospects for our utility PowerBuoy system
would be adversely affected.

We have not yet deployed a wave power station consisting of an array of two or more PowerBuoy systems.
If we are unable to deploy a multiple-system wave power station, our revenues may not increase, and we
may be unable to achieve and then maintain profitability.

We have not yet deployed a wave power station consisting of an array of two or more PowerBuoy systems. Our
success in developing and deploying a wave power station consisting of an array of two or more PowerBuoy systems
is contingent upon, among other things, receipt of required governmental permits, obtaining adequate financing,
successful array design implementation and finally, successful deployment and connection of the PowerBuoy
systems.

We have not conducted ocean testing or otherwise installed in the ocean a multiple-system wave power station.
In particular, unlike single-system wave power stations, multiple-system wave power stations require use of an
underwater substation to connect the cables from, and collect the electricity generated by, each PowerBuoy system
in the array. If our underwater substation does not work as we anticipate, we will need to design an alternative
system, which could delay our business plans. In addition, unanticipated issues may arise with the logistics and
mechanics of deploying and maintaining multiple PowerBuoy systems at a single site and the additional equipment
associated with these multiple-system wave power stations.

We may be unsuccessful in accomplishing any of these tasks or doing so on a timely basis. The development
and deployment of an array of PowerBuoy systems may require us to incur significant expenses for preliminary
engineering, permitting and legal and other expenses before we can determine whether a project is feasible,
economically attractive or capable of being financed.

If we are unable to deploy larger PowerBuoy systems cost effectively and without damage to the systems,
we may be unable to compete effectively.

We will need to build larger buoys in order to increase the output of our current PowerBuoy systems. The larger
buoys will be more difficult than our current buoys to deploy cost effectively and without damage. Our current
deployment methodologies, including transportation to the installation site and the mooring of the PowerBuoy
systems, will need to be revised for PowerBuoy systems with greater output. If we cannot develop cost effective
methodologies for deployment of the larger PowerBuoy systems, or if it takes us longer to do so than we anticipate,
we may not be able to deploy such systems in the time we anticipate or at all. Therefore, even if we succeed in
increasing the output of our PowerBuoy systems above 40kW, if we are unable to deploy these larger PowerBuoy
systems or encounter problems in doing so, we may be unable to expand our business, maintain our competitive
position, satisfy our contractual obligations or become profitable.

27

If we are not successful in completing the development of wave power stations in Spain or France, it
would materially harm our business, financial condition and results of operations.

In July 2006, we entered into an agreement for the first phase of the construction of a wave power station off the
coast of Santoña, Spain, with our customer, Iberdrola Energias Marinas de Cantabria, S.A., or Iberdrola Cantabria.
We refer to this agreement as the Spain construction agreement. Iberdrola Cantabria was formed by affiliates of
Iberdrola and Total, two Spanish governmental agencies and us for the purpose of constructing and operating a wave
power station off the coast of Spain. Under the Spain construction agreement, we have agreed to manufacture and
deploy by no later than December 31, 2009 one 40kW PowerBuoy system and the ocean-based substation and
infrastructure required to connect nine additional 150kW PowerBuoy systems that together are contemplated to
constitute a 1.39MW wave power station. Under the terms of the agreement, our revenues are limited to
reimbursement for our construction costs without any mark-up. In addition, we are required to bear the first
A0.5 million of any cost overruns and to absorb certain other costs as set forth in the agreement. Our estimates of the
project’s costs may increase in the future, and we may be required to seek customer approval for additional increases
in the construction budget for the project. If the construction budget is not increased, we may elect to incur the
additional costs and continue the project, to seek other suppliers for the materials or services related to the cost
increases or to terminate the agreement. Any of such outcomes may have a material adverse effect on our financial
condition and results of operations. We have recently requested our customer to approve an increase in the
construction budget for this project beyond the intitial A2.7 million value of the contract. As of April 30, 2007, we
had recognized an anticipated loss of $1.3 million under the Spain construction agreement, which includes costs
incurred to date and our current estimate of other amounts we may be required to bear under the agreement.

In addition, because the Spain construction agreement does not cover the terms for deployment of all ten
PowerBuoy units, we will need to enter into a subsequent contract with Iberdrola Cantabria before we complete
construction of the full wave power station. If we are unable to successfully manufacture all ten PowerBuoy units or
meet the terms of the Spain construction agreement, or if we are not able to successfully negotiate a subsequent
contract with Iberdrola Cantabria for the deployment of the nine additional PowerBuoy units, we may lose a
material component of our current and anticipated revenue stream. Iberdrola Cantabria has the right to terminate the
agreement if we interrupt our services for more than 180 days and do not resume within a 30-day period or if the first
phase of construction is not complete by December 31, 2009 for reasons attributable to us, or for a serious and
repeated breach of a major obligation that is not cured within a 30-day period after we receive notice of the breach.
If Iberdrola Cantabria were to terminate the Spain construction agreement for any of these reasons, we may not be
able to find another company to fund development of the wave power station. In addition, we have made guarantees
to Iberdrola Cantabria associated with the first phase of construction in respect of the quality, repair and
replacement of the 40kW PowerBuoy system and ocean-based substation and the level of power output of the
40kW PowerBuoy system.

Under our agreement with affiliates of Iberdrola and Total to study and assess the feasibility of a wave power
station off the coast of France, either of Iberdrola or Total may withdraw without further obligation. In addition, in
order to proceed with development of the France wave power station, all three parties must conclude that
development is feasible. If we proceed, Iberdrola, Total and we will form a new company for the purpose of
constructing and operating the wave power station. If either Iberdrola or Total withdraws or does not agree that
development of the wave power station is feasible, we may not be able to proceed with development of the wave
power station. In addition, if we withdraw from the France project, we will remain obligated to supply and install
equipment and provide the new company with assistance and information so that a new company can operate the
wave power station. In addition, pursuant to the France development agreement, we are restricted from developing
or building, or supplying equipment for use in, a PowerBuoy system to any other customer in France until December
2008.

If either of the Spain or France projects were cancelled or otherwise interrupted, it would adversely affect our

business, financial condition and results of operations.

28

If we are unable to successfully negotiate and enter into operations and maintenance contracts with our
customers on terms that are acceptable to us, our ability to diversify our revenue stream will be impaired.

An important element of our business strategy is to maximize our revenue opportunities with our existing and
future customers by seeking to enter into operations and maintenance contracts with them under which we would be
paid fees for operating and maintaining wave power stations that they have purchased from us. Even if customers
purchase our PowerBuoy systems, they may not enter into operations and maintenance contracts with us. We may
not be able to negotiate operations and maintenance contracts that provide us with any profit opportunities. Even if
we successfully negotiate and enter into such operations and maintenance contracts, our customers may terminate
them prematurely or they may not be profitable for a variety of reasons, including the presence of unforeseen
hurdles or costs. In addition, our inability to perform adequately under such operations and maintenance contracts
could impair our efforts to successfully market the PowerBuoy systems. Any one of these outcomes could have a
material adverse effect on our business, financial condition and results of operations.

If we are unable to fulfill our obligations under our current operations and maintenance contract in a
cost effective manner, our financial condition and results of operations could be adversely affected.

In January 2007, we entered into an agreement with Iberdrola Cantabria for the monitoring, operation and
maintenance of the 40kW PowerBuoy system and the ocean-based substation and infrastructure to be manufactured
and deployed under the Spain construction agreement. Under this operations and maintenance agreement, we are
required to provide services for two years following provisional acceptance of the PowerBuoy system and
substation and infrastructure. We are to be paid a fixed fee for scheduled maintenance, ongoing operations and
other routine services. In connection with any unscheduled repairs we perform under the operations and main-
tenance agreement, Iberdrola Cantabria and we will agree on the fees, if any, and timing, for those services. To the
extent we would otherwise have profits from the fixed fee at the end of the two-year initial term of the agreement, we
are obligated to reimburse Iberdrola Cantabria for any fees paid to us for unscheduled repairs. If the costs we
actually incur in connection with providing services under the operations and maintenance agreement exceed the
fees we receive, we will incur a loss in connection with these services, which could adversely affect our financial
condition and results of operations.

Our inability to effectively manage our growth could adversely affect our business and operations.

The scope of our operations to date has been limited, and we do not have experience operating on the scale that
we believe will be necessary to achieve profitable operations. Our current personnel, facilities, systems and internal
procedures and controls are not adequate to support our future growth. We plan to add sales, marketing and
engineering offices in additional locations, including Australia, Japan, continental Europe and the west coast of the
United States. We currently estimate that we will need to add approximately 90,000 square feet of leased space by
the end of fiscal 2010 for sales, marketing, engineering, assembly and testing in order to meet our current
manufacturing targets.

To manage the expansion of our operations, we will be required to improve our operational and financial
systems, procedures and controls, increase our manufacturing capacity and throughput and expand, train and
manage our employee base, which must increase significantly if we are to be able to fulfill our current manu-
facturing and growth plans. Our management will also be required to maintain and expand our relationships with
customers, suppliers and other third parties, as well as attract new customers and suppliers. If we do not meet these
challenges, we may be unable to take advantage of market opportunities, execute our business strategies or respond
to competitive pressures.

Problems with the quality or performance of our PowerBuoy systems could adversely affect our business,
financial condition and results of operations.

Our agreements with customers will generally include guarantees with respect to the quality and performance
of our PowerBuoy systems. For example, our agreement to complete the first phase of the construction of a 1.39MW
wave power station off the coast of Santoña, Spain contains guarantees associated with this first phase regarding the

29

quality, replacement and repair of the 40kW PowerBuoy system and ocean-based substation and the level of power
output of the 40kW PowerBuoy system.

Because of the limited operating history of our PowerBuoy systems, we have been required to make
assumptions regarding the durability, reliability and performance of the systems, and we cannot predict whether
and to what extent we may be required to perform under the guarantees that we expect to give our customers. Our
assumptions could prove to be materially different from the actual performance of our PowerBuoy systems, causing
us to incur substantial expense to repair or replace defective systems in the future. We will bear the risk of claims
long after we have sold our PowerBuoy systems and recognized revenue. Moreover, any widespread product
failures could adversely affect our business, financial condition and results of operations.

We currently depend on a limited number of customers for substantially all of our revenues. The loss of,
or a significant reduction in revenues from, any of these customers could significantly reduce our
revenues and harm our operating results.

In fiscal 2007, we generated substantially all of our revenues from three entities. The US Navy, our largest
customer, accounted for approximately 54% of our revenues during fiscal 2007, while Iberdrola and Total
accounted for 35% of our revenues. In fiscal 2006, revenues from the US Navy accounted for approximately
61% of our total revenues. Our current contract with the US Navy expires in April 2008. We will be required to enter
into additional contracts with the US Navy, which will require appropriation by the US Congress and the US Navy
in order to receive additional funding. Additional funding for our project with the US Navy may not be approved or
we may not be able to negotiate future agreements with the US Navy on acceptable terms, if at all.

Generally, we recognize revenue on the percentage-of-completion method based on the ratio of costs incurred
to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified
milestones or other performance criteria may be recognized only when our customer acknowledges that such
criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed-
price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to
completion.

Because we currently have a small number of customers and contracts, problems with a single contract can
adversely affect our business, financial condition and results of operations. For example, our revenues in fiscal 2006
decreased significantly from fiscal 2005 primarily as a result of unanticipated delays in our contract with the US
Navy.

Historically, we have relied on a small group of customers for substantially all of our revenue, and such
concentration will continue for the foreseeable future. The loss of any of our customers or their default in payment
could adversely affect our business, financial condition and results of operations.

Our relationships with our alliance partners may not be successful and we may not be successful in
establishing additional relationships, which could adversely affect our ability to commercialize our
products and services.

An important element of our business strategy is to enter into development agreements and strategic alliances
with regional utility and energy companies committed to providing electricity from renewable energy sources. If we
are unable to reach agreements with suitable alliance partners, we may fail to meet our business objectives for the
commercialization of our PowerBuoy system. We may face significant competition in seeking appropriate alliance
partners. Moreover, these development agreements and strategic alliances are complex to negotiate and time
consuming to document. We may not be successful in our efforts to establish additional strategic relationships or
other alternative arrangements. The terms of any additional strategic relationships or other arrangements that we
establish may not be favorable to us. In addition, these relationships may not be successful, and we may be unable to
sell and market our PowerBuoy systems to these companies and their affiliates and customers in the future, or
growth opportunities may not materialize, any of which could adversely affect our business, financial condition and
results of operations.

30

Our investments in joint ventures could be adversely affected by our lack of sole decision-making
authority, our reliance on a co-venturer’s financial condition and disputes between us and our
co-venturers.

It is part of our strategy to co-invest in wave power projects with third parties through joint ventures by
acquiring non-controlling interests in special purpose entities. In these situations, we will not be in a position to
exercise sole decision-making authority regarding the joint venture. Investments in joint ventures involve risks that
would not be present were a third party not involved, including the possibility that our co-venturers might become
bankrupt or fail to fund their share of required capital contributions. Our co-venturers may have economic or other
business interests or goals that are inconsistent with our business interests or goals, and may be in a position to take
actions that are contrary to our policies or objectives. Disputes between us and our co-venturers may result in
litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing
their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might
result in subjecting wave power projects undertaken by the joint venture to additional risk.

Our targeted markets are highly competitive. We compete with other renewable energy companies and
may have to compete with larger companies that enter into the renewable energy business. If we are
unable to compete effectively, we may be unable to increase our revenues and achieve or maintain
profitability.

The renewable energy industry, particularly in our targeted markets of coastal North America, the west coast of
Europe, the coasts of Australia and the east coast of Japan, is highly competitive and continually evolving as
participants strive to distinguish themselves and compete with the larger electric power industry. Competition in the
renewable energy industry is likely to continue to increase with the advent of several renewable energy technol-
ogies, including tidal and ocean current technologies. If we are not successful in manufacturing systems that
generate competitively priced electricity, we will not be able to respond effectively to competitive pressures from
other renewable energy technologies.

Moreover, the success of renewable energy generation technologies may cause larger electric utility and other
energy companies with substantial financial resources to enter into the renewable energy industry. These com-
panies, due to their greater capital resources and substantial technical expertise, may be better positioned to develop
new technologies.

Our inability to respond effectively to such competition could adversely affect our business, financial

condition and results of operations.

We have limited manufacturing experience. If we are unable to increase our manufacturing capacity in a
cost-effective manner, our business will be materially harmed.

We plan to manufacture key components of our PowerBuoy systems, including the advanced control and
generation systems. However, we have only manufactured our PowerBuoy systems in limited quantities for use in
development and testing and have little commercial manufacturing experience. Our future success depends on our
ability to significantly increase both our manufacturing capacity and production throughput in a cost-effective and
efficient manner. In order to meet our growth objectives, we will need to increase our engineering and manu-
facturing staff by over 120 people by the end of fiscal 2010. There is intense competition for hiring qualified
technical and engineering personnel, and we may not be able to hire a sufficient number of qualified engineers to
allow us to meet our growth objectives.

We may be unable to develop efficient, low-cost manufacturing capabilities and processes that will enable us to
meet the quality, price, engineering, design and production standards or production volumes necessary to
successfully commercialize our PowerBuoy systems. If we cannot do so, we may be unable to expand our
business, satisfy our contractual obligations or become profitable. Even if we are successful in developing our
manufacturing capabilities and processes, we may not be able to do so in time to meet our commercialization
schedule or satisfy the requirements of our customers.

31

Failure by third parties to supply or manufacture components of our products or to deploy our systems
timely or properly could adversely affect our business, financial condition and results of operations.

We are highly dependent on third parties to supply or manufacture components of our PowerBuoy systems. If,
for any reason, our third-party manufacturers or vendors are not willing or able to provide us with components or
supplies in a timely fashion, or at all, our ability to manufacture and sell many of our products could be impaired.

We do not have long-term contracts with our third-party manufacturers or vendors. If we do not develop
ongoing relationships with vendors located in different regions, we may not be successful at controlling unit costs as
our manufacturing volume increases. We may not be able to negotiate new arrangements with these third parties on
acceptable terms, if at all.

In addition, we rely on third parties, under our oversight, for the deployment and mooring of our PowerBuoy
systems. We have utilized several different deployment methods, including towing the PowerBuoy system to the
deployment location, and transporting the PowerBuoy system to the deployment location by barge or ocean
workboat. If these third parties do not properly deploy our systems, cannot effectively deploy the PowerBuoy
system on a large, commercial scale or otherwise do not perform adequately, or if we fail to recruit and retain third
parties to deploy our systems in particular geographic areas, our business, financial condition and results of
operations could be adversely affected.

Business activities conducted by our third-party contractors and us involve the use of hazardous
materials, which require compliance with environmental and occupational safety laws regulating the use
of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other
adverse consequences.

Our manufacturing operations, in particular some of the activities undertaken by our third-party suppliers and
manufacturers, involve the controlled use of hazardous materials. Accordingly, our third-party contractors and we
are subject to foreign, federal, state and local laws governing the protection of the environment and human health
and safety, including those relating to the use, handling and disposal of these materials. We cannot completely
eliminate the risk of accidental contamination or injury from these hazardous materials. In the event of an accident
or failure to comply with environmental or health and safety laws and regulations, we could be held liable for
resulting damages, including damages to natural resources, fines and penalties, and any such liability could
adversely affect our business, financial condition and results of operations.

Environmental laws and regulations are complex, change frequently and have tended to become more stringent
over time. While we have budgeted for future capital and operating expenditures to maintain compliance, we cannot
assure you that environmental laws and regulations will not change or become more stringent in the future.
Therefore, we cannot assure you that our costs of complying with current and future environmental and health and
safety laws, and any liabilities arising from past or future releases of, or exposure to, hazardous substances will not
adversely affect our business, financial condition or results of operations.

If we become ineligible for or are otherwise unable to replace any contract with the US federal
government that is not extended or is terminated, our business, financial condition and results of
operations will be adversely affected.

We derive a significant portion of our revenue from US federal government contracts, which are subject to
special funding restrictions, regulatory requirements and eligibility standards and which the government may
terminate at any time or determine not to extend after their scheduled expiration. During fiscal 2006 and fiscal 2007,
we derived approximately 61% and 54%, respectively, of our total revenue from contracts with the US Navy.

US federal government contracts are also subject to contractual and regulatory requirements that may increase
our costs of doing business and could expose us to substantial contractual damages, civil fines and criminal
penalties for noncompliance. These requirements include business ethics, equal employment opportunity, envi-
ronmental, foreign purchasing, most-favored pricing and accounting provisions, among others. Payments that we
receive under US federal government contracts are subject to audit and potential refunds for at least three years after
the final contract payment is received.

32

The loss of federal funding designed to promote innovative research by small businesses may adversely
affect our research and development costs and revenues.

Most of our federal contracts were awarded through a special US government program called Small Business
Innovation Research, or SBIR, that is designed to promote innovative research by small businesses. The SBIR
program provides funds to qualified small businesses to further their technological research and development
activities and provides incentives to these companies to profit from commercialization of their technology. SBIR
funding represents both revenues and outside research and development investment dollars for companies that
receive it. The program is open to companies that are majority owned and controlled by individual US citizens or
permanent resident aliens, or by a parent entity that meets this standard. Our revenues from the SBIR program were
approximately $1.1 million for fiscal 2006 and approximately $1.5 million for fiscal 2007.

As a result of the increased institutional, corporate and foreign ownership following our recent initial public
offering in the US, we are no longer eligible for the SBIR program, which may adversely affect our ability to win
future government contracts. We intend to continue to seek research and development funding from other sources,
including funding from existing government customers under non-SBIR programs. Our inability to replace SBIR
contracts with funds from other sources could result in reduced revenues and higher internal research and
development costs, and therefore adversely affect our operating results.

We market and sell, and plan to market and sell, our products in numerous international markets. If we
are unable to manage our international operations effectively, our business, financial condition and
results of operations could be adversely affected.

We market and sell, and plan to market and sell, our products in a number of foreign countries, including
France, Spain, the United Kingdom, Australia and Japan, and we are therefore subject to risks associated with
having international operations. International customers accounted for 4% of our revenues in fiscal 2005, 9% of our
revenues in fiscal 2006 and 41% of our revenues in fiscal 2007. Risks inherent in international operations include,
but are not limited to, the following:

(cid:129) changes in general economic and political conditions in the countries in which we operate;

(cid:129) unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to

renewable energy, environmental protection, permitting, export duties and quotas;

(cid:129) trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could

increase the prices of our PowerBuoy systems and make us less competitive in some countries;

(cid:129) fluctuations in exchange rates may affect demand for our PowerBuoy systems and may adversely affect our
profitability in US dollars to the extent the price of our PowerBuoy systems and cost of raw materials and
labor are denominated in a foreign currency;

(cid:129) difficulty with staffing and managing widespread operations;

(cid:129) difficulty of, and costs relating to compliance with, the different commercial and legal requirements of the

overseas markets in which we offer and sell our PowerBuoy systems;

(cid:129) inability to obtain, maintain or enforce intellectual property rights; and

(cid:129) difficulty in enforcing agreements in foreign legal systems.

Our business in foreign markets requires us to respond to rapid changes in market conditions in these countries.
Our overall success as a global business depends, in part, on our ability to succeed in differing legal, regulatory,
economic, social and political conditions. We may not be able to develop and implement policies and strategies that
will be effective in each location where we do business, which in turn could adversely affect our business, financial
condition and results of operations.

33

We may not be able to raise sufficient capital to grow our business.

We have in the past needed to raise funds to operate our business, and we may need to raise additional funds to
manufacture our PowerBuoy systems in commercial quantities. If we are unable to raise additional funds when
needed, our ability to operate and grow our business could be impaired. We do not know whether we will be able to
secure additional funding or funding on terms favorable to us. Our ability to obtain additional funding will be
subject to a number of factors, including market conditions, our operating performance and investor sentiment.
These factors may make the timing, amount, terms and conditions of additional funding unattractive. If we issue
additional equity securities, our existing stockholders may experience dilution or be subordinated to any rights,
preferences or privileges granted to the new equity holders.

Our financial results may fluctuate from quarter to quarter, which may make it difficult to predict our
future performance.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control.
For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and you
should not rely on our past results as an indication of our future performance. Our future quarterly and annual
expenses as a percentage of our revenues may be significantly different from those we have recorded in the past or
which we expect for the future. Our financial results in some quarters may fall below expectations. Any of these
events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, including the
following factors, may adversely affect our business, financial condition and results of operations:

(cid:129) delays in permitting or acquiring necessary regulatory consents;

(cid:129) delays in the timing of contract awards and determinations of work scope;

(cid:129) delays in funding for or deployment of wave energy projects;

(cid:129) changes in cost estimates relating to wave energy project completion, which under percentage of completion
accounting principles could lead to significant changes to previously recognized revenue or to changes in the
timing of our recognition of revenue from those projects;

(cid:129) delays in meeting specified contractual milestones or other performance criteria under project contracts or in
completing project contracts that could delay the recognition of revenue that would otherwise be earned;

(cid:129) reductions in the availability or level of subsidies and incentives for renewable energy sources;

(cid:129) decisions made by parties with whom we have commercial relationships not to proceed with anticipated

projects;

(cid:129) increases in the length of our sales cycle; and

(cid:129) reductions in the efficiency of our manufacturing processes.

Currency translation and transaction risk may adversely affect our business, financial condition and
results of operations.

Our reporting currency is the US dollar, and we conduct our business and incur costs in the local currency of
most countries in which we operate. As a result, we are subject to currency translation risk. In fiscal 2006,
approximately 9% of our revenues were generated from customers outside the United States and denominated in
Euros and in fiscal 2007, 35% of our revenues were generated from customers outside the United States and
denominated in Euros, 4% of our revenues were generated from customers outside the United States and
denominated in British pounds sterling and 2% of our revenues were generated from customers outside the
United States and denominated in Australian dollars. We expect a large percentage of our revenues to be generated
outside the United States and denominated in foreign currencies in the future. Changes in exchange rates between
foreign currencies and the US dollar could affect our revenues and cost of revenues, and could result in exchange
losses. In addition, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a
purchase or a sales transaction using a different currency from our reporting currency. For example, our agreement
with Iberdrola Cantabria for the first phase of the construction of a wave power station off the coast of Santoña,

34

Spain is denominated in Euros, and we expect that we will enter into a number of purchase and supply contracts with
local Spanish companies also denominated in Euros in connection with the project. We cannot accurately predict
the impact of future exchange rate fluctuations on our results of operations. Currently, we do not engage in any
exchange rate hedging activities and, as a result, any volatility in currency exchange rates may have an immediate
adverse effect on our business, results of operations and financial condition.

Existing regulations and policies and changes to these or new regulations and policies may present
technical, regulatory and economic barriers to the use of wave energy technology, which may
significantly reduce demand for our PowerBuoy systems.

The market for electricity generation equipment is heavily influenced by foreign, federal, state and local
government regulations and policies concerning the electric utility industry, as well as policies promulgated by
electric utilities. These regulations and policies often relate to electricity pricing and connection to the power grid.
In the United States and in a number of other countries, these regulations and policies currently are being modified
and may be modified again in the future. Utility company and independent power producer purchases of, or further
investment in the research and development of, alternative energy sources, including wave energy technology, could
be deterred by these regulations and policies, which could result in a significant reduction in the potential demand
for our PowerBuoy systems.

As the renewable energy industry continues to develop and as the generation of power from wave energy in
particular achieves commercial acceptance, we anticipate that wave energy technology and our PowerBuoy systems
and their deployment will be subject to increased oversight and regulation. We are unable to predict the nature or
extent of regulations that may be imposed or adopted. Any new government regulations or utility policies pertaining
to wave energy or our PowerBuoy systems may result in significant additional expenses to us and our customers
and, as a result, could adversely affect our business, financial condition and results of operations.

If we are unable to obtain all necessary regulatory permits and approvals, we will not be able to
implement our planned projects.

Offshore development of electric power generating facilities is heavily regulated. Each of our planned projects
is subject to multiple permitting and approval requirements. With respect to our projects in Spain and France, we are
dependent upon our customers to obtain any necessary permits and approvals, and with respect to our project in
Cornwall, England, we are dependent on a regional government agency for such permits and approvals. Due to the
unique nature of large scale commercial wave power stations, we would expect our projects to receive close scrutiny
by permitting agencies, approval authorities and the public, which could result in substantial delay in the permitting
process. Successful challenges by any parties opposed to our planned projects could result in conditions limiting the
project size or in the denial of necessary permits and approvals.

If we are unable to obtain necessary permits and approvals in connection with any or all of our projects, those
projects would not be implemented and our business, financial condition and results of operations would be
adversely affected. Further, we cannot assure you that we have been or will be at all times in complete compliance
with all such permits and approvals. If we violate or fail to comply with these permits and approvals, we could be
fined or otherwise sanctioned by regulators.

We face hurricane- and storm-related risks and other risks typical of a marine environment which could
adversely affect our business, financial condition and results of operations.

Our PowerBuoy systems are deployed in the ocean where they are subject to many hazards including severe
storms and hurricanes, which could damage them and result in service interruptions. Our systems are also subject to
more frequent lock-downs caused by higher waves during winter storm and hurricane seasons, which will reduce
annual energy output. We cannot predict whether we will be able to recover from our insurance providers the
additional costs that we may incur due to damage caused to our PowerBuoy systems, or whether we will continue to
be able to obtain insurance for hurricane- and storm-related damages or, if obtainable and carried, whether this
insurance will be adequate to cover our liabilities. Any future hurricane- or storm-related costs could adversely
affect our business, financial condition and results of operations.

35

Since our PowerBuoy systems can only be deployed in certain geographic locations, our ability to grow
our business could be adversely affected.

Our systems are designed to work in sites with average annual wave energy of at least 20kW per meter of wave
front. Not all coastal areas worldwide have appropriate natural resources for our PowerBuoy systems to harness
wave energy. Seasonal and local variations, water depth and the effect of particular locations of islands and other
geographical features may limit our ability to deploy our PowerBuoy systems in coastal areas. If we are unable to
identify and deploy PowerBuoy systems at sufficient sites near major population centers, our ability to grow our
business could be adversely affected.

If we are unable to attract and retain management and other qualified personnel, we may not be able to
achieve our business objectives.

Our success depends on the skills, experience and efforts of our senior management and other key devel-
opment, manufacturing, and sales and marketing employees. We cannot be certain that we will be able to attract,
retain and motivate such employees. The loss of the services of one or more of these employees could have a
material adverse effect on our business. There is a risk that we will not be able to retain or replace these key
employees. We have entered into employment agreements with Dr. George Taylor, our chief executive officer,
Charles Dunleavy, our senior vice president and chief financial officer, Mark Draper, our chief operating officer and
the chief executive officer of our UK subsidiary, and John Baylouny, our senior vice president, engineering;
however, the agreements permit the employees to terminate their employment with little notice. Implementation of
our expansion plans will be highly dependent upon our ability to hire and retain additional senior executives.

In addition, our anticipated growth will require us to hire a significant number of qualified technical,
commercial and administrative personnel. In order to meet our short-term goals, we plan to add approximately
15 employees, including a vice president of business development by the end of 2007. The remainder will primarily
be engineers with varying areas of expertise. By the end of fiscal 2010, we will need to increase our staff by nearly
six times in order to meet our current manufacturing targets. The majority of our new hires will be engineers with
varying levels and areas of expertise, project managers and manufacturing personnel. There is intense competition
from other companies and research and academic institutions for qualified personnel in the areas of our activities. If
we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued
development of our business, we may not be able to sustain our operations or grow at a competitive pace.

Any acquisitions that we make or joint venture agreements that we enter into, or any failure to identify
appropriate acquisition or joint venture candidates, could adversely affect our business, financial
condition and results of operations.

From time to time, we evaluate potential strategic acquisitions of complementary businesses, products or
technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify
appropriate acquisition candidates or strategic partners, or successfully negotiate, finance or integrate any
businesses, products or technologies that we acquire. We do not have any experience with acquiring companies
or products. Any acquisition we pursue could diminish the capital resources otherwise available to us for other uses
or be dilutive to our stockholders, and could divert management’s time and resources from our core operations.

Strategic acquisitions, investments and alliances with third parties could subject us to a number of risks,
including risks associated with sharing proprietary information and loss of control of operations that are material to
our business. In addition, strategic acquisitions, investments and alliances may be expensive to implement. For
example, under the France project, our entitlement to retain our current percentage interest is subject to our ability to
make a proportionate capital investment, which we may be unable to finance. Moreover, strategic acquisitions,
investments and alliances subject us to the risk of non-performance by a counterparty, which may in turn lead to
monetary losses that materially and adversely affect our business, financial condition and results of operations.

36

Section 404 of the Sarbanes-Oxley Act of 2002 will require us to document and assess our internal
control over financial reporting for fiscal 2008 and beyond and will require an independent registered
public accounting firm to report on the effectiveness of these controls. Any delays or difficulty in
satisfying these requirements could adversely affect our future results of operations and our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 will require us to document and assess the effectiveness of our
internal control over financial reporting in accordance with an established internal control framework and to report
on our conclusion as to the effectiveness of our internal controls. It will also require an independent registered
public accounting firm to test our internal control over financial reporting and report on the effectiveness of such
controls for our fiscal year ending April 30, 2008 and subsequent years. In addition, we are required under the
Securities Exchange Act of 1934 to maintain disclosure controls and procedures and internal control over financial
reporting. Moreover, it may cost us more than we expect to comply with these control- and procedure-related
requirements.

We may in the future discover areas of our internal controls that need improvement, particularly with respect to
businesses that we may acquire. We cannot be certain that any remedial measures we take will ensure that we
implement and maintain adequate internal controls over our financial processes and reporting in the future. Any
failure to implement required new or improved controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we
have effective internal control over financial reporting, or if our independent registered public accounting firm is
unable to provide us with an unqualified opinion regarding the effectiveness of our internal control over financial
reporting as of April 30, 2008 and in future periods as required by Section 404, investors could lose confidence in
the reliability of our consolidated financial statements, which could result in a decrease in the value of our common
stock. Failure to comply with Section 404 could potentially subject us to sanctions or investigations by the SEC, The
Nasdaq Stock Market or other regulatory authorities.

Risks Related to Intellectual Property

If we are unable to obtain or maintain intellectual property rights relating to our technology and
products, the commercial value of our technology and products may be adversely affected, which could in
turn adversely affect our business, financial condition and results of operations.

Our success and ability to compete depends in part upon our ability to obtain protection in the United States
and other countries for our products by establishing and maintaining intellectual property rights relating to or
incorporated into our technology and products. We own a variety of patents and patent applications in the
United States and corresponding patents and patent applications in several foreign jurisdictions. However, we have
not obtained patent protection in each market in which we plan to compete. In addition, we do not know how
successful we would be should we choose to assert our patents against suspected infringers. Our pending and future
patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us.
Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to
stop competitors from marketing similar products or limit the length of term of patent protection we may have for
our products. Changes in either patent laws or in interpretations of patent laws in the United States and other
countries may diminish the value of our intellectual property or narrow the scope of our patent protection, which
could in turn adversely affect our business, financial condition and results of operations.

Our contracts with the government could negatively affect our intellectual property rights, and our ability
to commercialize our products could be impaired.

Our agreements with the US Navy help fund research and development of our PowerBuoy system. When new
technologies are developed with US federal government funding, the government obtains certain rights in any
resulting patents, technical data and software, generally including, at a minimum, a nonexclusive license autho-
rizing the government to use the invention, technical data or software for non-commercial purposes. These rights
may permit the government to disclose our confidential information to third parties and to exercise “march-in”
rights. March-in rights refer to the right of the US government to require us to grant a license to the technology to a
responsible applicant or, if we refuse, the government may grant the license itself. US government-funded

37

inventions must be reported to the government. US government funding must be disclosed in any resulting patent
applications, and our rights in such inventions will normally be subject to government license rights, periodic post-
contract utilization reporting, foreign manufacturing restrictions and march-in rights.

The government can exercise its march-in rights if it determines that action is necessary because we fail to
achieve practical application of the technology or because action is necessary to alleviate health or safety needs, to
meet requirements of federal regulations or to give preference to US industry. Our government-sponsored research
contracts are subject to audit and require that we provide regular written technical updates on a monthly, quarterly or
annual basis, and, at the conclusion of the research contract, a final report on the results of our technical research.
Because these reports are generally available to the public, third parties may obtain some aspects of our sensitive
confidential information. Moreover, if we fail to provide these reports or to provide accurate or complete reports, the
government may obtain rights to any intellectual property arising from the related research. Funding from
government contracts also may limit when and how we can deploy our technology developed under those contracts.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of
our technology and products could be adversely affected, which could in turn adversely affect our
business, financial condition and results of operations.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how,
particularly with respect to our PowerBuoy control and electricity generating systems. We generally seek to protect
this information in part by confidentiality agreements with our employees, consultants and third parties. These
agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade
secrets may otherwise become known or be independently developed by competitors.

If we infringe or are alleged to infringe intellectual property rights of third parties, our business,
financial condition and results of operations could be adversely affected.

Our products may infringe, or be claimed to infringe, patents or patent applications under which we do not hold
licenses or other rights. Third parties may own or control these patents and patent applications in the United States
and abroad. From time to time, we receive correspondence from third parties offering to license patents to us.
Correspondence of this nature might be used to establish that we received notice of certain patents in the event of
subsequent patent infringement litigation. Third parties could bring claims against us that would cause us to incur
substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a
patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the
product or component that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to
seek a license from the third party and be required to pay license fees or royalties or both. These licenses may not be
available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive,
which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be
forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement
claims, we are unable to enter into licenses on acceptable terms. This could significantly and adversely affect our
business, financial condition and results of operations.

In addition to infringement claims against us, we may become a party to other types of patent litigation and
other proceedings, including interference proceedings declared by the United States Patent and Trademark Office
and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our
products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor,
could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more
effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and
continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete
in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

38

Risks Related to our Common Stock

Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by
our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

As a result of our reincorporation in Delaware in April 2007, provisions of our certificate of incorporation and
bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may
consider favorable, including transactions in which our stockholders might otherwise receive a premium for their
shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our
management. These provisions include:

(cid:129) advance notice requirements for stockholder proposals and nominations;

(cid:129) the inability of stockholders to act by written consent or to call special meetings; and

(cid:129) the ability of our board of directors to designate the terms of and issue new series of preferred stock without
stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock
ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by
our board of directors.

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to
amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of
directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested stockholder, which is generally a person
which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period
of three years after the date of the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or
prevent a change in control of our company.

We have never paid cash dividends on our common stock, and we do not anticipate paying any cash
dividends in the foreseeable future.

We have not paid any cash dividends on our common stock to date. We currently intend to retain our future
earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt
agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock
will be the sole source of gain for our stockholders for the foreseeable future.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Pennington, New Jersey, where we occupy approximately
22,000 square feet under a lease expiring on April 30, 2013. We use these facilities for administration, research
and development, as well as assembly and testing of the generators and control models.

We also have an office in Warwick, United Kingdom, where we occupy 1,390 square feet under a lease
expiring on January 1, 2009. Seven employees, all members of the executive, engineering, administration and
business development teams, operate out of this office, which serves as a hub for our European presence.

We plan to add sales, marketing and engineering offices in additional locations, including Australia, Japan,
continental Europe and the west coast of the United States. We currently estimate that we will need to add
approximately 90,000 square feet of leased space by the end of fiscal 2010 for sales, marketing, engineering,
assembly and testing in order to meet our current manufacturing targets.

39

ITEM 3. LEGAL PROCEEDINGS

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the
outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these
matters will have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Price Information and Stockholders

Our common stock has been listed on the Nasdaq Global Market since April 24, 2007 under the symbol
“OPTT” and on the AIM market of the London Stock Exchange since October 2003 under the symbol “OPT.” As of
June 30, 2007, there were 611 registered holders of our common stock.

The following table sets forth the high and the low sale prices of our common stock as quoted by the Nasdaq

Global Market for the period indicated.

Year Ended April 30, 2007

Nasdaq Global
Market

High

Low

Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.00

$14.25

The following table sets forth, for the periods indicated, the high and low closing sale prices for our common
stock on the AIM market as reported by the London Stock Exchange. The sales prices have been adjusted to give
effect to a one-for-ten reverse stock split of our common stock that was effected on April 20, 2007. The sales prices
for our shares of common stock on the AIM market are quoted in pound sterling (£), the lawful currency of the
United Kingdom. The following table also shows the high and low closing sales price of our common stock (as
adjusted to give effect to a one-for-ten reverse split that was effected on April 20, 2007) expressed in dollars based
upon the average noon buying rate for pound sterling for the periods indicated.

AIM Market

High

Low

High

Low

Year ended April 30, 2006
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended April 30, 2007
First quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

£ 8.45
£10.75
£ 9.25
£10.70

£10.00
£ 8.90
£ 9.05
£12.35

£6.55
£7.75
£7.15
£6.80

£6.60
£6.15
£5.35
£8.05

$15.29
$19.24
$16.19
$18.73

$18.50
$16.82
$17.56
$24.21

$11.86
$13.87
$12.51
$11.90

$12.21
$11.62
$10.38
$15.78

40

The following table sets forth, for the periods indicated, the high, low, average and period end noon buying rate
for pound sterling, expressed in dollars per pound sterling in New York City as certified for customs purposes by the
Federal Reserve Bank of New York.

High

Low

Average

Period End

Year ended April 30, 2006
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended April 30, 2007
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1.90
$1.84
$1.79
$1.82

$1.89
$1.91
$1.98
$2.01

$1.73
$1.75
$1.71
$1.73

$1.81
$1.85
$1.89
$1.92

$1.81
$1.79
$1.75
$1.75

$1.85
$1.89
$1.94
$1.96

$1.76
$1.77
$1.78
$1.82

$1.87
$1.91
$1.96
$2.00

Dividend Policy

We have never declared or paid any cash dividends on our common stock, and we do not currently anticipate
declaring or paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all
of our future earnings, if any, to finance the growth and development of our business. Any future determination
relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number
of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual
restrictions and covenants and other factors that our board of directors may deem relevant.

Recent Sales of Unregistered Securities

Set forth below is information regarding shares of common stock issued, and options granted, by us since
May 1, 2006 that were not registered under the Securities Act. Also included is the consideration, if any, we received
for such shares and options and information relating to the section of the Securities Act, or rule of the SEC, under
which exemption from registration was claimed. The share numbers below reflect the one-for-ten reverse stock split
of our common stock, which was effected on April 20, 2007.

1. From the period beginning May 1, 2006 through April 30, 2007, we granted stock options under our stock
option plans for an aggregate of 196,120 shares of common stock (net of exercises, expirations and cancellations) at
exercise prices ranging from $13.00 to $13.80 per share. Options to purchase 22,600 shares of common stock
granted under our stock option plans were exercised during that same time period. The consideration for the
exercise of these options was approximately $66,000 in cash and the tendering of 7,456 shares valued at $128,000,
which such shares were previously held by one individual who exercised options.

2. From the period beginning May 1, 2006 through April 30, 2007, we did not grant stock options outside our

stock option plans, nor were there any exercises.

No general solicitation was made in the United States by us or any person acting on our behalf; the securities
sold are subject to transfer restrictions; and certificates for the shares contain appropriate legends stating that such
securities have not been registered under the Securities Act and may not be offered or sold absent registration or
pursuant to an exemption therefrom. The securities described in paragraphs 1 and 2 above were issued in
transactions that were exempt from registration pursuant to Section 4(2) of the Securities Act or Regulation S
promulgated thereunder with respect to the securities offered and sold outside the United States to investors who
were neither citizens nor residents of the United States.

Use of Proceeds

On April 30, 2007, we sold 5,000,000 shares of our common stock in our initial public offering in the
United States at a price of $20.00 per share, pursuant to a registration statement on Form S-1 (File No. 333-138595),

41

which was declared effective by the SEC on April 24, 2007. The managing underwriters in the offering were UBS
Securities LLC, Banc of America Securities LLC, and Bear, Stearns & Co., Inc. The underwriting discounts and
commissions and offering expenses payable by us aggregated $10.1 million, resulting in net proceeds to us of
$89.9 million.

The net proceeds are being used to construct demonstration wave power stations and to fund minority
investments in wave station projects to encourage market adoption of our wave power stations; to fund the
continued development and commercialization of our PowerBuoy system, including increases in system output; to
expand our international sales and marketing capabilities; and for working capital and general corporate purposes,
including potential acquisitions of complementary businesses, products or technologies. We intend to use the net
proceeds of the offering as follows:

(cid:129) approximately $25.0 million to construct demonstration wave power stations and approximately
$25.0 million to fund minority investments in wave station projects to encourage market adoption of
our wave power stations;

(cid:129) approximately $10.5 million to fund the continued development and commercialization of our PowerBuoy

system, including increases in system output;

(cid:129) approximately $7.5 million to fund the expansion of assembly, test and field service facilities;

(cid:129) approximately $4.0 million to expand our international sales and marketing capabilities; and

(cid:129) the balance for working capital and other general corporate purposes.

We may also use a portion of the net proceeds of the offering to acquire complementary products, technologies
or businesses, although we currently have no agreements or commitments with respect to any such transactions.

The amounts and timing of our actual expenditures may vary significantly from our expectations depending
upon numerous factors, including our development and commercialization efforts, our operating costs and capital
expenditures, our future revenues and cash generated by operations. Accordingly, we will retain broad discretion to
allocate our capital resources among the identified uses described above, and we reserve the right to change the
allocation of our capital resources.

42

ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected consolidated financial data in conjunction with our consolidated
financial statements and the related notes appearing at the end of this Annual Report and the “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report. The
selected consolidated financial data have been derived from our audited consolidated financial statements which are
included elsewhere in this Annual Report, or from audited consolidated financial statements not included in this
Annual Report.

2003

2004

2005

2006

2007

Fiscal Years Ended April 30,

Consolidated Statement of

Operations Data:

Revenues . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . .

$ 2,548,294 $ 4,713,202
4,319,850

2,555,267

$ 5,365,235 $ 1,747,715 $ 2,531,315
3,983,742
2,059,318

5,170,521

Gross profit (loss) . . . . . . . . . . . . . . .

(6,973)

393,352

194,714

(311,603)

(1,452,427)

Operating expenses:
Product development costs . . . . . . . . .
Selling, general and administrative

180,403

255,958

904,618

4,224,997

6,219,893

costs . . . . . . . . . . . . . . . . . . . . . . .

818,596

1,745,955

2,553,911

3,190,687

4,893,580

Total operating expenses . . . . . . . .

998,999

2,001,913

3,458,529

7,415,684

11,113,473

Operating loss . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest income, net . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . .

(1,005,972)

(1,608,561)

(3,263,815)

(7,727,287)

(12,565,900)

555,717
(3,500,096)(1)

38,441
473
— 1,585,345

1,297,156
1,545
1,507,145

1,408,361
74,294
(978,242)

1,389,702
13,906
1,523,527

Loss before incomes taxes . . . . . . . . .
Income tax benefit. . . . . . . . . . . . . . .

(967,058)
146,853

(2,967,595)
118,119

(457,969)
29,335

(7,222,874)
143,963

(9,638,765)
—

Net loss . . . . . . . . . . . . . . . . . . . . . .

$ (820,205) $(2,849,476)

$ (428,634) $(7,078,911) $ (9,638,765)

Basic and diluted net loss per share . .

$

(0.27) $

(0.71)

$

(0.08) $

(1.37) $

(1.83)

Basic and diluted weighted average

shares outstanding . . . . . . . . . . . . .

3,017,422

4,037,501

5,135,550

5,162,340

5,260,794

2003

2004

As of April 30,
2005

2006

2007

Consolidated Balance

Sheet Data:

Cash, cash equivalents and

certificates of deposit. . . .
Working capital. . . . . . . . . .
Total assets . . . . . . . . . . . . .
Long-term debt, net of

current portion. . . . . . . . .
Accumulated deficit . . . . . .
Total stockholders’ equity . .

$ 2,246,175
1,177,789
2,878,947

$ 39,565,574(2) $ 38,787,176
37,903,207
41,596,387

38,422,395
40,747,479

$ 32,439,365
30,886,029
33,996,138

$115,895,619(3)
111,187,195
119,711,546

250,000
(18,275,132)
490,785

250,000
(21,124,608)
37,853,246

245,844
(21,553,242)
37,836,531

233,959
(28,632,153)
31,066,704

231,585
(38,270,918)
112,541,209

(1) Other expense in fiscal 2004 resulted from a one time charge incurred at the time of our stock offering on the

AIM market in October 2003 relating to a 1999 agreement between us and Tyco Electronics Corp.

43

(2) On October 31, 2003, we completed our offering on the AIM market resulting in net proceeds to us of

$38.3 million.

(3) On April 30, 2007, we completed our initial public offering in the United States resulting in net proceeds to us of

$89.9 million.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations
together with our consolidated financial statements and the related notes and other financial information included
elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth
elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and
related financing, includes forward-looking statements that involve risks and uncertainties. You should review the
“Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to
differ materially from the results described in or implied by the forward-looking statements contained in the
following discussion and analysis.

Overview

We develop and are commercializing proprietary systems that generate electricity by harnessing the renewable
energy of ocean waves. Our PowerBuoy systems use proprietary technologies to convert the mechanical energy
created by the rising and falling of ocean waves into electricity. We currently offer two PowerBuoy products, which
consist of our utility PowerBuoy system and our autonomous PowerBuoy system.

We market our utility PowerBuoy system, which is designed to supply electricity to a local or regional power
grid, to utilities and other electrical power producers seeking to add electricity generated by wave energy to their
existing electricity supply. We market our autonomous PowerBuoy system, which is designed to generate power for
use independent of the power grid, to customers that require electricity in remote locations. We believe there are a
variety of potential applications for our autonomous PowerBuoy system, including sonar and radar surveillance,
tsunami warning, oceanographic data collection, offshore platforms and offshore aquaculture. We also offer our
customers operations and maintenance services for our PowerBuoy systems, which are expected to provide a source
of recurring revenues.

We were incorporated in New Jersey in April 1984, began commercial operations in 1994, and were re-
incorporated in Delaware in 2007. We currently have five wholly owned subsidiaries, which include Ocean Power
Technologies Ltd., Reedsport OPT Wave Park LLC, Oregon Wave Energy Partners I, LLC, Oregon Wave Energy
Partners II, LLC and Fairhaven OPT Ocean Power LLC, and we own approximately 88% of the ordinary shares of
Ocean Power Technologies (Australasia) Pty Ltd. Our revenues have been generated from research contracts and
development and construction contracts relating to our wave energy technology. The development of our tech-
nology has been funded by capital we raised and by development engineering contracts we received starting in fiscal
1995. In fiscal 1996, we received the first of several research contracts with the US Navy to study the feasibility of
wave energy. As a result of those research contracts, we entered into our first development and construction contract
with the US Navy in fiscal 2002 under a still on-going project for the development and construction of a grid-
connected wave power station at the US Marine Corps Base in Oahu, Hawaii. We generated our first revenue
relating to our autonomous PowerBuoy system from contracts with Lockheed Martin Corporation in fiscal 2003,
and we entered into our first development and construction contract with Lockheed Martin in fiscal 2004 for the
development and construction of a prototype demonstration autonomous PowerBuoy system. In fiscal 2005, we
entered into a development agreement with an affiliate of Iberdrola S.A., a large electric utility company located in
Spain and one of the largest renewable energy producers in the world, and other parties to jointly study the
possibility of developing a wave power station off the coast of northern Spain. An affiliate of Total S.A., which is
one of the world’s largest oil and gas companies, joined the development agreement in June 2005. In January 2006,
we completed the assessment phase of the project, and in July 2006 we entered into an agreement with Iberdrola
Energias Marinas de Cantabria, S.A. to complete the first phase of the construction of a 1.39MW wave power
station. In addition, we have entered into a contract with affiliates of Iberdrola and Total to assess the viability of a 2
to 5MW power station off the coast of France.

44

Our fiscal year ends on April 30. For fiscal 2007, we generated revenues of $2.5 million and incurred a net loss
of $9.6 million, and for fiscal 2006 we generated revenues of $1.7 million and incurred a net loss of $7.1 million. As
of April 30, 2007, our accumulated deficit was $38.3 million. We have not been profitable since inception, and we
do not know whether or when we will become profitable because of the significant uncertainties with respect to our
ability to successfully commercialize our PowerBuoy systems in the emerging renewable energy market. Since
fiscal 2002, the US Navy has accounted for a significant portion of our revenues. We expect that over time, revenues
derived from utilities and other non-government commercial customers will increase more rapidly than sales to
government customers and will, within a few years, represent the majority of our revenues.

Financial Operations Overview

The following describes certain line items in our statement of operations and some of the factors that affect our

operating results.

Revenues

We have historically generated revenues primarily from the development and construction of our PowerBuoy
systems for demonstration purposes and, to a lesser extent, from customer-sponsored research and development.
For both fiscal 2006 and fiscal 2007, we derived approximately 96% of our revenues from government and
commercial development and construction contracts and 4% of our revenues from customer-sponsored research and
development. Generally, we recognize revenue on the percentage-of-completion method based on the ratio of costs
incurred to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified
milestones or other performance criteria may be recognized only when our customer acknowledges that such
criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed-
price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to
completion. Because we have a small number of contracts, revisions to the percentage of completion determination
or delays in meeting performance criteria or in completing projects may have a significant effect on our revenue for
the periods involved. Under our agreement for the first phase of construction of a wave power station off the coast of
Santoña, Spain, our revenues are limited to reimbursement for our construction costs without any mark-up and we
are required to bear the first A0.5 million of any cost overruns and to absorb certain other costs as set forth in the
agreement. We have recently requested our customer to approve an increase in the construction budget for this
project beyond the initial A2.7 million value of the contract.

Our revenues increased in each of fiscal 2003, 2004 and 2005, but decreased significantly in fiscal 2006 as a
result of delays in the timing of contract award and in the approval of the scope of work relating to our project for the
US Navy for the development and construction of a wave power station in Hawaii, and the determination by
Lockheed Martin and some of its subcontractors not to proceed with a project under consideration that would have
utilized our autonomous PowerBuoy system. The increase in revenues in fiscal 2007 reflected a higher level of
activity in connection with our Spain construction contract as well as our US Navy contract for the installation of
PowerBuoys in Hawaii.

The US Navy has been our largest customer since fiscal 2002. The US Navy accounted for approximately 54%
of our revenues in fiscal 2007, approximately 61% of our revenues in fiscal 2006 and approximately 57% of our
revenues in fiscal 2005. We anticipate that, if our commercialization efforts are successful, the relative contribution
of the US Navy to our revenue will decline in the future. Lockheed Martin was also a significant customer in fiscal
2006 and 2005, accounting for approximately 22% of our revenues in fiscal 2006 and approximately 32% of our
revenues in fiscal 2005.

We currently focus our sales and marketing efforts on coastal North America, the west coast of Europe, the
coasts of Australia and the east coast of Japan. In fiscal 2006, we derived 9%, and in fiscal 2007, we derived 41%, of

45

our revenues from outside the United States. The following table provides information regarding the breakdown of
our revenues by geographical location of our customers for fiscal years 2005, 2006 and 2007:

Customer Location

Year Ended
April 30,
2005

Percentage of Revenues
Year Ended
April 30,
2006

Year Ended
April 30,
2007

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

96%
4
—

91%
9
—

59%
39
2

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100%

100%

100%

Cost of revenues

Our cost of revenues consists primarily of material, labor and manufacturing overhead expenses, such as
engineering expense, equipment depreciation and maintenance and facility related expenses, and includes the cost
of PowerBuoy parts and services supplied by third-party suppliers. Cost of revenues also includes PowerBuoy
system delivery and deployment expenses.

In fiscal 2007, we operated at a gross loss of $1.5 million, while in fiscal 2006 we operated at a gross loss of
$0.3 million and in fiscal 2005 we operated at a gross profit of $0.2 million. Our ability to operate at a gross profit
will depend on our success at increasing sales of our PowerBuoy systems and on our ability to manage costs
incurred on fixed price commercial contracts.

Product development costs

Our product development costs consist of salaries and other personnel-related costs and the costs of products,
materials and outside services used in our product development and research activities. Our product development
costs primarily relate to our efforts to increase the output of our current 40kW utility PowerBuoy system to 150kW
in 2007, then to 250kW in 2008 and ultimately to 500kW in 2010 and, to a lesser extent, to our research and
development of new products, product applications and complementary technologies. We expense all of our product
development costs as incurred, except for external patent costs, which we amortize over a 17-year period
commencing with the issuance date of each patent.

Our product development costs increased significantly in each of fiscal 2005, 2006 and 2007 as a result of the
development of our current 40kW utility PowerBuoy system, which was introduced in fiscal 2006, and development
of our 150kW PowerBuoy in 2007. We expect our product development costs to increase in absolute dollars as we
continue to increase the output and efficiency of our PowerBuoy systems.

During fiscal 2006, we refocused many of our engineering and development resources that had previously been
deployed on our commercial research or product development contracts on the development effort for our current
40kW PowerBuoy system, including the development of the buoy structure, the power take off system and the
power grid connection. We introduced our current 40kW PowerBuoy system in fiscal 2006. One system was
deployed off the coast of New Jersey from October 2005 to October 2006, when it was removed from the ocean for
routine maintenance and diagnostic testing. We are currently awaiting delivery of replacement mooring lines for
this PowerBuoy system, after which we plan to immediately redeploy the system. Another system was deployed in
Hawaii for the US Navy project in June 2007. After four weeks of initial testing and operation, the system was
returned to shore for diagnostic analysis and repair. Work is currently in progress on the design and construction of a
third PowerBuoy system, which is expected to be ready for deployment at the Marine Corps Base in Oahu by the end
of 2007. In fiscal 2007, we have accelerated development activity in connection with our 150kW PowerBuoy
system and expect to commence ocean testing of that system in 2008.

Selling, general and administrative costs

Our selling, general and administrative costs consist primarily of salaries and other personnel-related costs for
employees engaged in sales and marketing and support of our PowerBuoy systems, promotional and public

46

relations expenses and management and administration expenses in support of sales and marketing, as well as costs
for executive, accounting and administrative personnel, professional fees and other general corporate expenses.

We expect our selling, general and administrative costs to increase as we expand our sales and marketing
capabilities, including increased headcount, and as a result of our becoming a public company in the United States.

Interest income, net

Interest income, net consists primarily of interest received on cash and cash equivalents and investments in
commercial bank-issued certificates of deposit. Prior to April 30, 2007, most of our cash, cash equivalents and bank-
issued certificates of deposit resulted from the remaining proceeds of our October 2003 offering on the AIM market.
On April 30, 2007, we completed our initial public offering in the United States, which produced net proceeds of
$89.9 million. Total cash, cash equivalents and certificates of deposit were $115.9 million as of April 30, 2007,
$32.4 million as of April 30, 2006 and $38.8 million as of April 30, 2005. We anticipate that our interest income will
increase significantly in the near term as a result of the investment of the proceeds from our United States offering.

Foreign exchange gain (loss)

We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates.
Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may
result in realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in
US dollars and our functional currency is the US dollar, our main foreign exchange exposure, if any, results from
changes in the exchange rate between the US dollar and the British pound sterling, the Euro and the Australian
dollar.

We invest in certificates of deposit and maintain cash accounts that are denominated in British pounds, Euros
and Australian dollars. These foreign denominated certificates of deposit and cash accounts had a balance of
$15.6 million as of April 30, 2007 and $16.7 million as of April 30, 2006, compared to our total certificates of
deposits and cash account balances of $115.9 million as of April 30, 2007 and $32.4 million as of April 30, 2006.
These foreign currency balances are translated at each month end to our functional currency, the US dollar, and any
resulting gain or loss is recognized in our results of operations.

In addition, a portion of our operations is conducted through our subsidiaries in countries other than the
United States, specifically Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of
which is the British pound sterling, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia, the
functional currency of which is the Australian dollar. Both of these subsidiaries have foreign exchange exposure that
results from changes in the exchange rate between their functional currency and other foreign currencies in which
they conduct business. All of our international revenues for the years ended April 30, 2006 and 2007 were recorded
in Euros, British pounds or Australian dollars.

We currently do not hedge our exchange rate exposure. However, we assess the anticipated foreign currency
working capital requirements and capital asset acquisitions of our foreign operations and attempt to maintain a
portion of our cash, cash equivalents and certificates of deposit denominated in foreign currencies sufficient to
satisfy these anticipated requirements. We also assess the need and cost to utilize financial instruments to hedge
currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future.

Income tax benefit

As of April 30, 2007, we had federal research and development tax credits of $0.8 million and federal net
operating losses of $24.2 million to offset future federal taxable income. If not utilized, the credit carryforwards will
expire at various dates through 2027, and the net operating loss carryforwards will expire at various dates through
2027. We may not achieve profitability in time to utilize the tax credit and net operating loss carryforwards in full or
at all. In addition, the future utilization of our net operating loss carryforwards may be limited based upon changes
in ownership, including changes resulting from our United States offering in April 2007 and the AIM offering in
2003, pursuant to regulations promulgated under the Internal Revenue Code. These limitations may result in the
expiration of net operating losses and credits prior to utilization. As discussed in Note 12 to our consolidated

47

financial statements included in this Annual Report, we have established valuation allowances for the full value of
our deferred tax assets, which was $10.1 million as of April 30, 2006 and $13.2 million as of April 30, 2007.

In fiscal 2005 and 2006, we sold a portion of our New Jersey state net operating losses and our New Jersey
research and development credits under a program offered by the State of New Jersey, and recognized income tax
benefits of approximately $29,000 in fiscal 2005 and approximately $0.1 million in fiscal 2006. Because we believe
we are no longer eligible to participate in this program, we did not sell in fiscal 2007 and do not in the future expect
to sell any additional New Jersey state net operating losses or research and development credits.

Results of Operations

Fiscal Years Ended April 30, 2006 and 2007

The following table contains selected statement of operations information, which serves as the basis of the

discussion of our results of operations for the years ended April 30, 2006 and 2007:

Fiscal Year Ended
April 30, 2006

Amount

As a% of
Revenues

Fiscal Year Ended
April 30, 2007

Change 2007 Period
to 2006 Period

Amount

As a% of
Revenues

$ Change % Change

Revenues . . . . . . . . . . . . . . . . . . . . . $ 1,747,715
2,059,318
Cost of revenues . . . . . . . . . . . . . . . .

100% $ 2,531,315
3,983,742
117

100% $
157

783,600
1,924,424

45%
93

Gross loss . . . . . . . . . . . . . . . . . . . . .

(311,603)

(18)

(1,452,427)

(57)

(1,140,824)

366

4,224,997

242

6,219,893

246

1,994,896

Operating expenses:

Product development costs . . . . . . .
Selling, general and administrative
costs . . . . . . . . . . . . . . . . . . . . .

3,190,687

Total operating expenses . . . . . . . . . .

7,415,684

Operating loss . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . .
Foreign exchange (loss) gain . . . . . . .

Loss before income taxes . . . . . . . . .
. . . . . . . . . . . . . .
Income tax benefit

(7,727,287)
1,408,361
74,294
(978,242)

(7,222,874)
143,963

183

425

(442)
81
4
(56)

(413)
8

4,893,580

11,113,473

(12,565,900)
1,389,702
13,906
1,523,527

(9,638,765)
—

193

439

(496)
55
1
60

(380)
—

47

53

50

63
(1)
(81)
256

1,702,893

3,697,789

(4,838,613)
(18,659)
(60,388)
2,501,769

(2,415,891)
(143,963)

33
(100)

Net loss . . . . . . . . . . . . . . . . . . . . . . $(7,078,911)

(405)% $ (9,638,765)

(380)% $(2,559,854)

36

Revenues

Revenues increased by $0.8 million in fiscal 2007, or 45%, to $2.5 million as compared to $1.7 million in fiscal
2006. The increase in revenues was primarily attributable to the following factors:

(cid:129) Revenues relating to our utility PowerBuoy system increased by approximately $1.1 million due to work that
commenced on the first phase of construction of a 1.39MW wave power station off the coast of Spain,
increased revenues relating to our US Navy project in Hawaii from a higher activity level, and work that
commenced on the design, manufacture and installation of an OPT wave power station consisting of a single
PB150 (150kW) PowerBuoy device in Orkney, Scotland.

(cid:129) Revenues relating to our autonomous PowerBuoy system decreased by approximately $0.3 million pri-
marily as a result of the completion of a development and construction contract with Lockheed Martin in the
fiscal year ended April 30, 2006.

48

Cost of revenues

Cost of revenues increased by $1.9 million, or 93%, to $4.0 million in fiscal 2007, as compared to $2.1 million
in fiscal 2006. The decrease in gross profit in fiscal 2007 was primarily due to an anticipated loss of $1.3 million that
was recognized in fiscal 2007 on our contract for a wave power station off the coast of Spain, partially offset by an
increase in gross profit recognized in connection with our US Navy project in Hawaii. The anticipated loss of
$1.3 million was recognized based on a change in estimated costs associated with this contract. In addition,
approximately $0.3 million of compensation expense was recorded as cost of revenues under Statement of Financial
Accounting Standards, or SFAS, No. 123(R), Share-Based Payment, or SFAS 123(R), which requires companies to
recognize compensation expense for all stock-based payments to employees. Because we adopted SFAS 123(R)
effective May 1, 2006, we did not record similar compensation expense in fiscal 2006.

Product development costs

Product development costs increased $2.0 million, or 47%, to $6.2 million in fiscal 2007, as compared to
$4.2 million in fiscal 2006. The substantial increase in product development costs was primarily attributable to our
efforts to increase the power output of our utility PowerBuoy system, including the 150kW PowerBuoy system. In
addition, we recorded approximately $0.3 million of compensation expense as product development costs under
SFAS 123(R). Because we adopted SFAS 123(R) effective May 1, 2006, we did not record similar compensation
expense in fiscal 2006. As a percentage of revenues, product development costs increased slightly to 246% in fiscal
2007 from 242% in fiscal 2006. We anticipate that our product development costs related to the planned increase in
the output of our utility PowerBuoy system will increase significantly over the next several years and that the
amount of these expenditures will not necessarily be affected by the level of revenue generated over that time
period. Accordingly, comparisons of product development costs as a percentage of revenue may not be meaningful.

Selling, general and administrative costs

Selling, general and administrative costs increased $1.7 million, or 53%, to $4.9 million in fiscal 2007, as
compared to $3.2 million in fiscal 2006. The increase was primarily attributable to an increase of $0.4 million
related to additional marketing expenses and consulting costs, $0.3 million in professional fees, $0.5 million in
employee incentive-based compensation and $0.5 million of compensation expense recorded under SFAS 123(R).
Because we adopted SFAS 123(R) effective May 1, 2006, we did not record similar compensation expense in fiscal
2006.

Interest income, net

Interest income, net remained relatively flat at $1.4 million in fiscal 2007, compared to fiscal 2006, due to a
reduction in the balance of our cash, cash equivalents and certificates of deposit between the two periods (before
giving effect to the receipt of the net proceeds of our United States initial public offering on April 30, 2007), offset
by higher interest rates during fiscal 2007.

Foreign exchange (loss) gain

Foreign exchange gain was $1.5 million in fiscal 2007, compared to a foreign exchange loss of $1.0 million in
fiscal 2006. The difference was primarily attributable to the appreciation of the British pound compared to the US
dollar between the two periods.

Income tax benefit

During fiscal 2007, we recorded no income tax benefit, compared to an income tax benefit of $0.1 million
recorded in fiscal 2006. The income tax benefit recorded in fiscal 2006 resulted from our sale of New Jersey state net
operating losses and research and development credits under a program offered by the State of New Jersey. Because
we believe we are no longer eligible to participate in this program, we did not sell any New Jersey state net operating
losses or research and development credits in fiscal 2007, nor do we expect to sell any in the future.

49

Fiscal Years Ended April 30, 2005 and 2006

The following table contains selected statement of operations information, which serves as the basis of the

discussion of our results of operations for the years ended April 30, 2005 and 2006:

Fiscal Year Ended
April 30, 2005

Fiscal Year Ended
April 30, 2006

Change 2006
Period to 2005 Period

Amount

As a% of
Revenues

Amount

As a% of
Revenues

$ Change % Change

Revenues . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . .

$ 5,365,235
5,170,521

100% $ 1,747,715
2,059,318
96

100% $(3,617,520)
(3,111,203)
118

(67)%
(60)

Gross profit (loss) . . . . . . . . . . . . . . . .

194,714

Operating expenses:

Product development costs . . . . . . . .
Selling, general and administrative

904,618

costs . . . . . . . . . . . . . . . . . . . . . .

2,553,911

Total operating expenses . . . . . . . . . . .

3,458,529

Operating loss . . . . . . . . . . . . . . . . . . .
Interest income, net . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . .

Loss before income taxes . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . .

(3,263,815)
1,297,156
1,545
1,507,145

(457,969)
29,335

4

17

48

64

(61)
24
—
28

(9)
1

(311,603)

(18)

(506,317)

(260)

4,224,997

242

3,320,379

367

3,190,687

7,415,684

(7,727,287)
1,408,361
74,294
(978,242)

(7,222,874)
143,963

183

424

(442)
81
4
(56)

(413)
8

636,776

3,957,155

(4,463,472)
111,205
72,749
(2,485,387)

(6,764,905)
114,628

25

114

137
9
4,709
(165)

1,477
58

Net loss . . . . . . . . . . . . . . . . . . . . . . .

$ (428,634)

(8)% $(7,078,911)

(405)% $(6,650,277)

1,552

Revenues

Revenues decreased by $3.6 million in fiscal 2006, or 67%, to $1.7 million as compared to $5.4 million in

fiscal 2005. The decrease in revenues was primarily attributable to the following factors:

(cid:129) Revenues from our US Navy wave power station project in Hawaii decreased by approximately $1.8 million
as a result of delays in the timing of contract award and in the approval of the scope of development and
construction of the wave power station.

(cid:129) Revenues related to our autonomous PowerBuoy system decreased by approximately $1.3 million as a result
of the completion of a development and construction contract with Lockheed Martin in the first quarter of
fiscal 2006, and the determination by Lockheed Martin and some of its subcontractors not to proceed with an
anticipated defense application project that would have utilized our autonomous PowerBuoy system,
partially offset by revenues of approximately $61,000 from a contract with the US Department of Homeland
Security to design and study an autonomous PowerBuoy system for offshore marine surveillance.

(cid:129) Revenues decreased by approximately $0.3 million as a result of the completion early in fiscal 2006 of the
demonstration wave power station that was deployed off the coast of New Jersey under a contract with the
New Jersey Board of Public Utilities.

Cost of revenues

Cost of revenues decreased by $3.1 million, or 60%, to $2.1 million in fiscal 2006 as compared to $5.2 million
in fiscal 2005. The decrease in the cost of revenues was primarily attributable to the reduction in revenue during
fiscal 2006. Gross loss on revenues in fiscal 2006 primarily reflected discretionary costs incurred by us in
connection with the deployment of the first PowerBuoy system in Hawaii that were not reimbursed under our
agreement with the US Navy.

50

Product development costs

Product development costs increased $3.3 million, or 367%, to $4.2 million in fiscal 2006, as compared to
$0.9 million in fiscal 2005. The substantial increase in product development costs was primarily attributable to the
development of our current 40kW PowerBuoy system, which was deployed in October 2005 off the coast of
New Jersey.

As discussed above, in fiscal 2006 we experienced a reduction in revenues from $5.4 million in fiscal 2005 to
$1.7 million in fiscal 2006. In response to this reduction in revenues, during fiscal 2006 we refocused many of our
engineering and development resources that had previously been deployed on our commercial research or
development contracts on the product development effort for our current 40kW PowerBuoy system, including
the development of the buoy structure, the power take off system and the power grid connection. We also began our
efforts to increase the maximum rated output of our utility PowerBuoy system to 150kW.

Selling, general and administrative costs

Selling, general and administrative costs increased $0.6 million, or 25%, to $3.2 million in fiscal 2006, as
compared to $2.6 million in fiscal 2005. The increase was primarily attributable to a $0.5 million increase in
marketing expenses, including additional marketing personnel, and to increased professional fees.

Interest income, net

Interest income, net increased $0.1 million, or 9%, to $1.4 million in fiscal 2006, as compared to $1.3 million
in fiscal 2005. The increase was attributable to higher interest rates in fiscal 2006, which were partially offset by a
reduction of our cash, cash equivalents and bank-issued certificates of deposit balances between the two periods of
$6.3 million.

Other income

Other income in fiscal 2006 included the recognition of a one-time payment of $0.1 million in fiscal 2006 in
connection with the termination of a license development agreement entered into in April 2003. See Note 8 to our
consolidated financial statements appearing elsewhere in this Annual Report.

Foreign exchange gain (loss)

In fiscal 2006, we had a foreign exchange loss of $1.0 million, as compared to a foreign exchange gain of
$1.5 million in fiscal 2005. The difference was primarily attributable to the appreciation of the US dollar compared
to the British pound between the two periods.

Income tax benefit

During fiscal 2006, we recorded an income tax benefit of approximately $0.1 million compared to an income
tax benefit of approximately $29,000 recorded in fiscal 2005. The income tax benefit recorded in both periods
resulted from our sale of New Jersey state net operating losses under a program offered by the State of New Jersey,
and the increase from fiscal 2005 to fiscal 2006 reflected the sale of more state net operating losses in fiscal 2006
than in fiscal 2005. Because we believe we are no longer eligible to participate in this program, we do not expect to
sell any additional New Jersey state net operating losses or research and development credits in the future.

Liquidity and Capital Resources

Since our inception, the cash flows from customer revenues have not been sufficient to fund our operations and
provide the capital resources for the planned growth of our business. For the three years ended April 30, 2007, our
revenues were $9.6 million, our net losses were $17.1 million and our net cash used in operating activities was
$13.5 million. Over that same period, we raised $90.3 million in financing activities, including $89.9 million from
the closing of our United States initial public offering on April 30, 2007.

51

At April 30, 2007, our total cash, cash equivalents and certificates of deposit were $115.9 million. Our cash and
cash equivalents are highly liquid investments with maturities of three months or less at the date of purchase and
consist primarily of time deposits with large commercial banks and an investment in a money market fund. Our
certificates of deposit as of April 30, 2007 are denominated in British pounds. The certificates of deposit generally
have a fixed maturity date of more than 90 days but less than one year from the date of purchase.

The primary drivers of our cash flows have been our ability to generate revenues and decrease losses related to
our contracts, as well as our ability to obtain and invest the capital resources needed to fund our development.

Net cash used in operating activities was $7.5 million for fiscal 2007. This primarily resulted from a net loss for
the period of $9.6 million, decreased by a $1.2 million increase in our accounts payable, a $2.1 million increase in
our accrued expenses and non-cash charges of $0.3 million in depreciation and amortization and $1.2 million of
compensation expense related to stock option grants. This was partially offset by a $0.9 million increase in our
accounts receivable and unbilled receivables and a non-cash foreign exchange gain of $1.5 million. The increase in
receivables was due to the increase in our revenues in the fourth quarter of fiscal 2007 compared to the fourth quarter
of fiscal 2006. The non-cash foreign exchange gain reflected our significant holdings of sterling-denominated
certificates of deposit, which were impacted by the depreciation of the dollar against the British pound during fiscal
2007. Increases in accounts payable and accrued expenses in fiscal 2007 resulted from increases in the loss reserve
for a contract and accruals for incentive payments to employees. Net cash used in investing activities was
$9.3 million for fiscal 2007 resulting primarily from $55.2 million in purchases of certificates of deposit, partially
offset by $47.3 million in maturities of certificates of deposit, a $1.0 million restricted cash balance related to a bank
credit facility for Ocean Power Technologies Limited and $0.3 million in purchases of equipment and patent costs,
as we invested in expanding our assembly and test facilities and developed several new patent applications as part of
our ongoing investment in technology development. Net cash provided by financing activities was $90.8 million for
fiscal 2007 resulting primarily from our initial public offering in the United States.

We expect to devote substantial resources to continue our development efforts for our PowerBuoy systems and
to expand our sales, marketing and manufacturing programs associated with the commercialization of the
PowerBuoy system. Our future capital requirements will depend on a number of factors, including:

(cid:129) the success of our commercial relationships with Iberdrola, Total, the US Navy and Lockheed Martin;

(cid:129) the cost of manufacturing activities;

(cid:129) the cost of commercialization activities, including demonstration projects, product marketing and sales;

(cid:129) our ability to establish and maintain additional commercial relationships;

(cid:129) the implementation of our expansion plans, including the hiring of new employees;

(cid:129) potential acquisitions of other products or technologies; and

(cid:129) the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other

patent-related costs.

We believe that our current cash and cash equivalents and certificates of deposit will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures at least through fiscal 2008. If existing resources
are insufficient to satisfy our liquidity requirements or if we acquire or license rights to additional product
technologies, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional
equity or convertible securities could result in dilution to our stockholders. If additional funds are raised through the
issuance of debt securities, these securities could have rights senior to those associated with our common stock and
could contain covenants that would restrict our operations. Financing may not be available in amounts or on terms
acceptable to us. If we are unable to obtain required financing, we may be required to reduce the scope of our planned
product development and marketing efforts, which could harm our financial condition and operating results.

52

Contractual Obligations

Our major outstanding contractual obligations relate to our facilities leases. We have summarized in the table

below our fixed contractual cash obligations as of April 30, 2007.

Payments Due by Period
One to
Three Years

Less than
One Year

Four to
Five Years

More than
Five Years

Total

Long-term debt . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . .

$ 234,000
$1,324,000

$
2,000
$257,000

(1)
$447,000

(1)
$414,000

(1)
$206,000

(1) Our long-term debt consists of an interest-free loan from the New Jersey Commission on Science and
Technology. The amounts to be repaid each year are determined as a percentage of revenues we receive in that
year from our customer contracts that meet criteria specified in the loan agreement, with any remaining amount
due on January 15, 2012.

Off-Balance Sheet Arrangements

Since inception we have not engaged in any off-balance sheet financing activities.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our
consolidated financial statements, which have been prepared in accordance with US generally accepted accounting
principles. The preparation of these consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our
estimates and judgments, including those described below. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. These estimates and
assumptions form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.

We believe the following accounting policies require significant judgment and estimates by us in the

preparation of our consolidated financial statements.

Revenue recognition and unearned revenues

Generally, we recognize revenue on the percentage-of-completion method based on the ratio of costs incurred
to total estimated costs at completion. In certain circumstances, revenue under contracts that have specified
milestones or other performance criteria may be recognized only when our customer acknowledges that such
criteria have been satisfied. In addition, recognition of revenue (and the related costs) may be deferred for fixed-
price contracts until contract completion if we are unable to reasonably estimate the total costs of the project prior to
completion. Because we have a small number of contracts, revisions to the percentage of completion estimate or
delays in meeting performance criteria or in completing projects may have a significant effect on our revenue for the
periods involved.

Upon anticipating a loss on a contract, we recognize the full amount of the anticipated loss in the current
period. We had loss reserves of $1.8 million as of April 30, 2007 related to two contracts and $0.8 million as of
April 30, 2006 related to one contract. In fiscal 2007, we recognized a loss of $1.3 million on our contract for a wave
power station off the coast of Spain, due to a change in estimated costs.

Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed.
Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded
as a reduction in unbilled receivables, and to the extent that those billings exceed costs incurred plus applicable
profit margin, they are recorded as unearned revenues.

53

Stock-based compensation

In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS 123(R), which requires
companies to recognize compensation expense for all stock-based payments to employees, including grants of
employee stock options, in their statement of operations based on the fair value of the awards. We adopted
SFAS 123(R) effective May 1, 2006 using the modified prospective method. Under this method, compensation cost
is recognized for all share-based payments granted subsequent to April 30, 2006, awards modified after April 30,
2006, and the remaining portion of the fair value of unvested awards at April 30, 2006. Prior to May 1, 2006, we
used the intrinsic value method to determine values used in our pro forma stock-based compensation disclosures.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which provides guidance
regarding the implementation of SFAS 123(R). In particular, SAB 107 provides guidance regarding calculating
assumptions used in stock-based compensation valuation models, the classification of stock-based compensation
expense, the capitalization of stock-based compensation costs and disclosures in filings with the SEC.

Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the date
of grant using any valuation model requires judgment. We use the Black-Scholes option pricing model to estimate
the fair value of employee stock options, as permitted by the provisions of SFAS 123(R). Option pricing models,
including the Black-Scholes model, require the use of input assumptions, including expected volatility, expected
term and the expected dividend rate. Because our stock has been publicly traded in the United States only since
April 2007, we do not have an observable share-price volatility for the United States capital markets; therefore, we
estimate our expected volatility based on that of what we consider to be similar publicly-traded companies and
expect to continue to do so until such time as we have adequate historical data from our traded share price in the
United States. We did not estimate our expected volatility based on the price of our common stock on the AIM
market of the London Stock Exchange on which our shares have traded since October 2003, because we do not
believe, based on the historically low trading volume of our shares on that market, that the volatility of our common
stock on the AIM market is an appropriate indicator of the expected volatility of our common stock. Prior to fiscal
2007, we estimated the expected term of our options using our best estimate of the period of time from the grant date
that we expect the options to remain outstanding. Beginning in fiscal 2007, we estimate the expected term using the
average midpoint between the vesting terms and the contractual terms of our options as permitted by SAB 107. If we
determine another method to estimate expected volatility or expected term is more reasonable than our current
methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the
fair value calculated for future stock-based awards could change significantly. Higher volatility and longer expected
terms have a significant impact on the value of stock-based compensation determined at the date of grant. The
expected dividend rate is not as significant to the calculation of fair value of our stock-based awards.

In addition, SFAS 123(R) requires us to develop an estimate of the number of stock-based awards that will be
forfeited due to employee turnover. Quarterly changes in the estimated forfeiture rate can have a significant effect
on reported stock-based compensation. If the actual forfeiture rate is higher than the estimated forfeiture rate, then
an adjustment is made to increase the estimated forfeiture rate, which will result in a decrease to the expense
recognized in the consolidated financial statements during the quarter of the change. If the actual forfeiture rate is
lower than the estimated forfeiture rate, then an adjustment is made to decrease the estimated forfeiture rate, which
will result in an increase to the expense recognized in the consolidated financial statements. These adjustments
affect our cost of revenues, product development costs and selling, general and administrative costs. Through the
year ended April 30, 2007, the effect of forfeiture adjustments on our consolidated financial statements has been
insignificant. The expense we recognize in future periods could differ significantly from the current period and/or
our forecasts due to adjustments in the assumed forfeiture rates.

As a result of the adoption of SFAS 123(R), we recorded stock compensation expense of $1.1 million in fiscal

2007.

Income taxes

We account for income taxes in accordance with SFAS No. 109, Accounting for Income, or SFAS 109. Under
this method, we determine deferred tax assets and liabilities based upon the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities, as well as credit and net operating loss

54

carryforwards, using enacted tax rates in effect for the year in which such items are expected to affect taxable
income. The tax consequences of most events recognized in the current year’s financial statements are included in
determining income taxes currently payable. However, because tax laws and financial accounting standards differ in
their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences
arise between the amount of taxable income and pretax financial income for a year and between the tax bases of
assets or liabilities and their reported amounts in the financial statements. Because we assume that the reported
amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an
asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some
future years when the related liabilities are settled or the reported amounts of the assets are recovered, giving rise to
a deferred tax asset or deferred tax liability. We then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a
valuation allowance. As discussed in Note 12 to our consolidated financial statements included in this Annual
Report, we have established valuation allowances for the full value of our net deferred tax assets, which were
$10.1 million as of April 30, 2006 and $13.2 million as of April 30, 2007.

Recent Accounting Pronouncements

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, or SFAS 154,
which requires entities that voluntarily make a change in accounting principle to apply that change retrospectively
to prior periods’ financial statements, unless this would be impracticable. SFAS 154 supersedes Accounting
Principles Board Opinion No. 20, Accounting Changes, which previously required that most voluntary changes in
accounting principles be recognized by including the cumulative effect of changing to the new accounting principle
in the current period’s net income or loss. SFAS 154 also makes a distinction between “retrospective application” of
an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another
significant change in practice under SFAS 154 will be that if an entity changes its method of depreciation,
amortization or depletion for long-lived, non-financial assets, the change must be accounted for as a change in
accounting estimate. Under Accounting Principles Board Opinion No. 20, such a change would have been reported
as a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Adoption of SFAS 154 did not have any effect on our financial
position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or
FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises’ financial
statements in accordance with SFAS 109. FIN 48 prescribes a recognition and measurement method for tax
positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We are currently analyzing the effects of FIN 48 but do not
expect it to have a material effect on our financial position or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108
provides guidance on how prior year misstatements should be taken into consideration when quantifying
misstatements in current year financial statements for purposes of determining whether the current year’s financial
statements are materially misstated. SAB 108 was effective for our year ended April 30, 2007. The adoption of
SAB 108 did not have any impact on our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary exposure to market risk is currently confined to our cash, cash equivalents and certificates of deposit.
None of these items that we hold have maturities that exceed one year. We currently do not hedge interest rate exposure.
We have not used derivative financial instruments for speculative or trading purposes. Because the maturities of our cash
equivalents and certificates of deposit do not exceed one year, we do not believe that a change in market rates would have
any significant impact on the realized value of our investments. We do not have market risk exposure on our long-term
debt because it consists of an interest-free loan from the New Jersey Board of Public Utilities.

55

Management estimates that had the average yield on our cash, cash equivalents and certificates of deposit
decreased by 100 basis points, our interest income for the year ended April 30, 2007 would have decreased by
approximately $0.3 million. This estimate assumes that the decrease occurred on the first day of fiscal 2007 and
reduced the yield of each investment by 100 basis points. The impact on our future interest income of future changes in
investment yields will depend largely on the gross amount of our cash, cash equivalents, and investments.

We transact business in various countries and have exposure to fluctuations in foreign currency exchange rates.
Foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities, which may
result in realized and unrealized gains or losses from exchange rate fluctuations. Since we conduct our business in US
dollars and our functional currency is the US dollar, our main foreign exchange exposure, if any, results from changes
in the exchange rate between the US dollar and the British pound sterling, the Euro and the Australian dollar.

We invest in certificates of deposit and maintain cash accounts that are denominated in British pounds, Euros
and Australian dollars. These foreign denominated certificates of deposit and cash accounts had a balance of
$15.6 million as of April 30, 2007 and $16.7 million as of April 30, 2006, compared to our total certificates of
deposits and cash account balances of $115.9 million as of April 30, 2007 and $32.4 million as of April 30, 2006.
These foreign currency balances are translated at each month end to our functional currency, the US dollar, and any
resulting gain or loss is recognized in our results of operations.

In addition, a portion of our operations is conducted through our subsidiaries in countries other than the
United States, specifically Ocean Power Technologies Ltd. in the United Kingdom, the functional currency of
which is the British pound sterling, and Ocean Power Technologies (Australasia) Pty Ltd. in Australia, the
functional currency of which is the Australian dollar. Both of these subsidiaries have foreign exchange exposure that
results from changes in the exchange rate between their functional currency and other foreign currencies in which
they conduct business. All of our international revenues for the year ended April 30, 2007 were recorded in Euros,
British pounds or Australian dollars. If the foreign currency exchange rates had fluctuated by 10% as of April 30,
2007, our foreign exchange gain would have changed by approximately $1.7 million.

We currently do not hedge exchange rate exposure. However, we assess the anticipated foreign currency
working capital requirements and capital asset acquisitions of our foreign operations and attempt to maintain a
portion of our cash, cash equivalents and certificates of deposit denominated in foreign currencies sufficient to
satisfy these anticipated requirements. We also assess the need and cost to utilize financial instruments to hedge
currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this item are listed in Item 15 — “Exhibits and

Financial Statement Schedules” of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of
1934, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act

56

Rule 13a-15(b). Based upon that evaluation, as of April 30, 2007, our Chief Executive Officer along with the Chief
Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to
material information relating to the company required to be included in our periodic SEC filings.

This Annual Report does not include a report of management’s assessment regarding internal control over
financial reporting or an attestation report of our independent registered public accounting firm due to a transition
period established by the rules of the SEC for newly public companies.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth in the Proxy Statement for the 2007 Annual Meeting of Stockholders, or the Proxy
Statement, is incorporated herein by reference. The Proxy Statement will be filed with the SEC within 120 days
after the end of the fiscal year covered by this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth in the Proxy Statement is incorporated herein by reference. The Proxy Statement will

be filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

The information set forth in the Proxy Statement is incorporated herein by reference. The Proxy Statement will

be filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The information set forth in the Proxy Statement is incorporated herein by reference. The Proxy Statement will

be filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information set forth in the Proxy Statement is incorporated herein by reference. The Proxy Statement will

be filed with the SEC within 120 days after the end of the fiscal year covered by this Form 10-K.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements: See Index to Consolidated Financial Statements on page F-1.

(3) Exhibits: See Exhibits Index on pages 59 to 60.

57

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has

duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

Date: July 27, 2007

OCEAN POWER TECHNOLOGIES,
INCORPORATED

By: /s/ GEORGE W. TAYLOR

George W. Taylor
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the

following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature

Title

Date

/s/

/s/

/s/

/s/

/s/

GEORGE W. TAYLOR
George W. Taylor

SEYMOUR S. PRESTON III
Seymour S. Preston III

CHARLES F. DUNLEAVY
Charles F. Dunleavy

ERIC A. ASH
Eric A. Ash

THOMAS J. MEANEY
Thomas J. Meaney

Director, Chief Executive Officer
(Principal Executive Officer)

July 27, 2007

Chairman of the Board of Directors

July 27, 2007

Director, Chief Financial Officer,
Senior Vice President, Treasurer and
Secretary (Principal Financial Officer
and Principal Accounting Officer)

Director

Director

July 27, 2007

July 27, 2007

July 27, 2007

58

Exhibit
Number

3.1

3.2

3.3
3.4

4.1

10.1+

10.2+

10.3+

10.4

10.5
10.6

10.7
10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

Exhibits Index

Description

Certificate of Incorporation of the Registrant, as amended (incorporated by reference from Exhibit 3.1 to
Form S-1 filed November 13, 2006)
Form of Restated Certificate of Incorporation of the Registrant which became effective prior to the initial
public offering (incorporated by reference from Exhibit 3.2 to Form S-1/A filed March 19, 2007)
Bylaws of the Registrant (incorporated by reference from Exhibit 3.3 to Form S-1 filed November 13, 2006)
Form of Amended and Restated Bylaws of the Registrant, which became effective prior to the closing of
the initial public offering (incorporated by reference from Exhibit 3.4 to Form S-1/A filed March 19,
2007)
Specimen certificate of common stock (incorporated by reference from Exhibit 4.1 to Form S-1/A filed
March 19, 2007)
Engineering, Procurement and Construction of a Wave Energy Power Plant at “Punta del Pescador”
(Santoña, Spain), dated July 27, 2006, between Iberdrola Energias Marinas de Cantabria, S.A. and Ocean
Powers Technologies Limited (incorporated by reference from Exhibit 10.1 to Form S-1 filed
November 13, 2006)
Contract Number N00014-05-C-0384, dated September 20, 2005, between the Office of Naval Research,
U.S. Navy and Ocean Power Technologies, Inc., as amended by the Amendment of Solicitation/
Modification of Contract dated March 22, 2007 (incorporated by reference from Exhibit 10.2 to
Form S-1 filed November 13, 2006)
Contract Number N00014-02-C-0053, dated February 8, 2002, between the Office of Naval Research,
U.S. Navy and Ocean Power Technologies Inc., as modified (incorporated by reference from Exhibit 10.3
to Form S-1 filed November 13, 2006)
Option Agreement for Purchase of Emissions Credits, dated November 24, 2000 between Ocean Power
Technologies, Inc. and its affiliates and Woodside Sustainable Energy Solutions Pty. Ltd. (incorporated by
reference from Exhibit 10.4 to Form S-1 filed November 13, 2006)
1994 Stock Option Plan (incorporated by reference from Exhibit 10.4 to Form S-1 filed November 13, 2006)*
Incentive Stock Option Plan (incorporated by reference from Exhibit 10.6 to Form S-1 filed
November 13, 2006)*
2001 Stock Plan (incorporated by reference from Exhibit 10.7 to Form S-1 filed November 13, 2006)*
2006 Stock Incentive Plan (incorporated by reference from Exhibit 10.8 to Form S-1/A filed March 19,
2007)*
Amended and Restated Voting and Right of First Refusal Agreement, dated April 18, 2005, between
Ocean Power Technologies, Inc., George W. Taylor and JoAnne E. Burns (incorporated by reference from
Exhibit 10.9 to Form S-1 filed November 13, 2006)
Agreement to Refinance, dated November 14, 1993 between Joseph R. Burns, Michael Y. Epstein,
George W. Taylor and Ocean Powers Technologies, Inc. (incorporated by reference from Exhibit 10.10 to
Form S-1 filed November 13, 2006)
Employment Agreement, dated October 23, 2003, between Charles F. Dunleavy and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.11 to Form S-1 filed November 13, 2006)*
Employment Agreement, dated October 23, 2003, between George W. Taylor and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.12 to Form S-1 filed November 13, 2006)*
Consultant Agreement, dated August 1, 1999, between Thomas J. Meaney and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.13 to Form S-1 filed November 13, 2006)
Employment Agreement, dated September 9, 2004, between Mark R. Draper and Ocean Power
Technologies Ltd. (incorporated by reference from Exhibit 10.14 to Form S-1 filed November 13, 2006)*
Employment Agreement, dated September 30, 2005, between John A. Baylouny and Ocean Power
Technologies, Inc. (incorporated by reference from Exhibit 10.15 to Form S-1 filed November 13, 2006)*

59

Exhibit
Number

10.16

10.17

10.18

Description

Lease Agreement, dated August 30, 2005 between Ocean Power Technologies, Inc. and Reed Road
Industrial Park LLC #1, as amended on January 27, 2006 (incorporated by reference from Exhibit 10.16 to
Form S-1 filed November 13, 2006)
Lease, dated January 15, 2007, between University of Warwick Science Park Innovation Centre Limited
and Ocean Power Technologies Ltd. (incorporated by reference from Exhibit 10.17 to Form S-1/A filed
March 19, 2007)
Agreement for Renewable Energy Economic Development Grants, dated November 3, 2003, between
State of New Jersey Board of Public Utilities and Ocean Power Technologies, Inc. (incorporated by
reference from Exhibit 10.18 to Form S-1/A filed March 19, 2007)

10.19+ Contract for the Development and Application of a Sea Wave Energy Generation System in France, dated
as of June 17, 2005, between Iberdrola Energias Renovables II, S.A. Sociedad Unipersonal, Total Energie
Development SA, Ocean Power Technologies Ltd. and Ocean Power Technologies, Inc. (incorporated by
reference from Exhibit 10.19 to Form S-1/A filed March 19, 2007)
Contract Number DM259735, dated September 17, 2005 between Lockheed Martin Corporation
Maritime Systems and Sensors
Inc., as modified
(incorporated by reference from Exhibit 10.20 to Form S-1/A filed March 19, 2007)

(MS2) and Ocean Power Technologies,

10.20

10.21 Marketing Cooperation Agreement, dated September 9, 2006, between Ocean Power Technologies, Inc.
and Lockheed Martin Corporation through its Maritime Systems and Sensors business unit (incorporated
by reference from Exhibit 10.21 to Form S-1/A filed April 10, 2007)

21.1

10.22+ Contract Number N00014-07-C-0617, dated May 24, 2007, between the Office of Naval Research, U.S.
Navy and Ocean Power Technologies, Inc. (incorporated by reference from Exhibit 99.1+ to Form 8K
filed June 8, 2007)
Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to Form S-1/A filed
March 19, 2007)
Consent of KPMG LLP
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

23.1
31.1
31.2
32.1
32.2

+ Confidential treatment requested as to certain portions, which portions have been omitted and filed separately

with the Securities and Exchange Commission.

* Management contract or compensatory plan or arrangement

60

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets, April 30, 2006 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations, Years ended April 30, 2005, 2006 and 2007. . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss, Years ended April 30, 2005,
2006 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows, Years ended April 30, 2005, 2006 and 2007 . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2
F-3
F-4

F-5
F-6
F-7

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Ocean Power Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Ocean Power Technologies, Inc. and
subsidiaries as of April 30, 2006 and 2007, and the related consolidated statements of operations, stockholders’
equity and comprehensive loss, and cash flows for each of the years in the three-year period ended April 30, 2007.
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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 financial position of Ocean Power Technologies, Inc. and subsidiaries as of April 30, 2006 and 2007, and the
results of their operations and their cash flows for each of the years in the three-year period ended April 30, 2007, in
conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, effective May 1, 2006, the Company adopted
the fair value method of accounting for stock-based compensation as required by Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment.

/s/ KPMG LLP

Philadelphia, Pennsylvania
July 27, 2007

F-2

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

April 30,

2006

2007

Current assets:

ASSETS

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,957,209
482,156
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
211,000
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
331,139
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Property and equipment, net
Patents, net of accumulated amortization of $157,451 and $176,840,

respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32,981,504
544,285

372,448
—
97,901

107,505,473
8,390,146
865,081
313,080
441,342

117,515,122
387,923

597,280
983,376
227,845

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,996,138

119,711,546

Current liabilities:

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

242,624
1,726,870
14,405
111,576

2,095,475
233,959
—
600,000

1,708,408
4,593,413
—
26,106

6,327,927
231,585
10,825
600,000

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,929,434

7,170,337

Commitments and contingencies (note 13)
Stockholders’ equity:

Preferred stock, $0.001 par value; authorized 5,000,000 shares, issued or

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.001 par value; authorized 105,000,000 shares, issued and
outstanding 5,171,119 and 10,186,254 shares, respectively . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

5,171
59,725,777
(28,632,153)
(32,091)

10,186
150,842,671
(38,270,918)
(40,730)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31,066,704

112,541,209

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,996,138

119,711,546

See accompanying notes to consolidated financial statements.

F-3

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Year Ended April 30,
2006

2007

2005

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,365,235
5,170,521

1,747,715
2,059,318

2,531,315
3,983,742

Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

194,714

(311,603)

(1,452,427)

Operating expenses:

Product development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative costs . . . . . . . . . . . . . . . . . .

904,618
2,553,911

4,224,997
3,190,687

6,219,893
4,893,580

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,458,529

7,415,684

11,113,473

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,263,815)
1,297,156
1,545
1,507,145

(7,727,287)
1,408,361
74,294
(978,242)

(12,565,900)
1,389,702
13,906
1,523,527

Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(457,969)
29,335

(7,222,874)
143,963

(9,638,765)
—

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (428,634)

(7,078,911)

(9,638,765)

Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . .

$

(0.08)

(1.37)

(1.83)

Weighted average shares used to compute basic and diluted net

loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,135,550

5,162,340

5,260,794

See accompanying notes to consolidated financial statements.

F-4

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss

options . . . . . . . . . . . . . . . . . . . . .

36,116

Balance, May 1, 2004 . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation

adjustment . . . . . . . . . . . . . . . . . .

Total comprehensive loss . . . . . . . .
Compensation related to stock option
grants issued to employees . . . . . . .
Compensation related to stock option
grants issued for services . . . . . . . .

Adjustment for stockholder reduction

in shares held . . . . . . . . . . . . . . . .

Proceeds from exercise of stock

Balance, April 30, 2005 . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation

adjustment . . . . . . . . . . . . . . . . . .

Total comprehensive loss . . . . . . . .
Compensation related to stock option
grants issued to employees . . . . . . .
Compensation related to stock option
grants issued for services . . . . . . . .
Shares issued for amounts received in
prior years . . . . . . . . . . . . . . . . . .

Proceeds from exercise of stock

Balance, April 30, 2006 . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation

adjustment . . . . . . . . . . . . . . . . . .

Total comprehensive loss . . . . . . . .
Compensation related to stock option
grants issued to employees . . . . . . .
Compensation related to stock option
grants issued for services . . . . . . . .

Adjustment for reverse stock split

rounding . . . . . . . . . . . . . . . . . . . .

Sale of common stock, net of

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Loss

Stockholders’
Equity

5,116,502 $ 5,116
—

—

59,005,666 (21,124,608)
(428,634)

—

(32,928)
—

37,853,246
(428,634)

—

—

—

—

(6,405)

(6,405)

(435,039)

131,500

53,174

—

233,650

—

—

(1,397)

—

—

(1)

36

131,500

53,174

1

233,614

—

—

—

—

—

—

—

—

5,151,221
—

5,151
—

59,423,955 (21,553,242)
— (7,078,911)

(39,333)
—

37,836,531
(7,078,911)

—

—

—

—

7,242

7,242

—

—

2,732

—

—

3

17

44,000

85,139

49,997

122,686

—

—

—

—

(7,071,669)

44,000

85,139

50,000

122,703

—

—

—

—

5,171,119
—

5,171
—

59,725,777 (28,632,153)
— (9,638,765)

(32,091)
—

31,066,704
(9,638,765)

—

—

—

—

(8,639)

(8,639)

—

—

(9)

— 1,082,181

—

—

70,235

—

(9,647,404)

1,082,181

70,235

—

89,903,819

65,674

—

—

—

—

—

—

—

—

—

—

issuance costs . . . . . . . . . . . . . . . .

5,000,000

5,000

89,898,819

Proceeds from exercise of stock

options . . . . . . . . . . . . . . . . . . . . .

15,144

15

65,659

Balance, April 30, 2007 . . . . . . . . . .

10,186,254 $10,186 150,842,671 (38,270,918)

(40,730)

112,541,209

See accompanying notes to consolidated financial statements.

F-5

options . . . . . . . . . . . . . . . . . . . . .

17,166

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year Ended April 30,
2006

2005

2007

Cash flows from operating activities:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net loss to net cash used in operating

(428,634) (7,078,911)

(9,638,765)

activities:
Foreign exchange (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to stock option grants . . . . . . . . . .
Realization of deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,507,145)
140,984
—
184,674
—
—

978,242
233,132
—
129,139
(75,000)
—

(1,523,527)
269,075
24,572
1,152,416
—
10,825

(621,499)
(268,216)
(239,274)
404,491
708,022
(246,890)
—

668,424
611,037
161,505
(632,778)
(121,840)
(2,383)
57,803

(827,287)
(95,896)
(99,436)
1,233,484
2,126,616
(14,405)
(85,470)

Net cash used in operating activities . . . . . . . . . . . . . . . . . .

(1,873,487)

(5,071,630)

(7,467,798)

Cash flows from investing activities:

Purchases of certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of patent costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in joint ventures and other noncurrent assets . . . . . . . .

(58,050,287) (62,677,400) (55,187,304)
33,573,254 87,397,606 47,279,314
— (983,376)
(107,271)
(217,763)
(122,001)

—
(435,488)
(125,414)
(78,399)

(330,047)
(57,396)
(30,747)

Net cash (used in) provided by investing activities . . . . . . . .

(25,116,334) 24,302,016

(9,338,401)

Cash flows from financing activities:

Sale of common stock, net of issuance costs . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . .

Net cash provided by financing activities . . . . . . . . . . . . . . .

—
233,650

233,650

— 90,773,935
65,674

122,703

122,703

90,839,609

Effect of exchange rate changes on cash and cash equivalents . . . . . . .

1,500,740

(980,694)

1,514,854

Net (decrease) increase in cash and cash equivalents . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . .

(25,255,431) 18,372,395 75,548,264
38,840,245 13,584,814 31,957,209

Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . $ 13,584,814 31,957,209 107,505,473

Supplemental disclosure of noncash investing and financing activities:
Issuance of shares in connection with amounts received in prior

years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Capitalized patent costs financed through accounts payable . . . . . . .
Stock issuance costs financed through accounts payable and

accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—

—

50,000
—

—
30,343

—

870,116

See accompanying notes to consolidated financial statements.

F-6

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Background

Ocean Power Technologies, Inc. (the Company) was incorporated on April 19, 1984 in the State of New Jersey,
commenced active operations in 1994 and re-incorporated in the State of Delaware in April 2007. The Company
develops and is commercializing proprietary systems that generate electricity by harnessing the renewable energy
of ocean waves. The Company markets and sells its products in the United States and internationally.

(2) Summary of Significant Accounting Policies

(a) Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its majority
owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

In addition, the Company evaluates its relationships with other entities to identify whether they are variable
interest entities as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46(R), Consol-
idation of Variable Interest Entities (FIN 46R), and to assess whether it is the primary beneficiary of such entities. If
the determination is made that the Company is the primary beneficiary, then that entity is included in the
consolidated financial statements in accordance with FIN 46R.

(b) Use of Estimates

The preparation of the consolidated financial statements requires management of the Company to make a
number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant items subject to such estimates and assumptions include the
recoverability of the carrying amount of property and equipment and patents; valuation allowances for receivables
and deferred income tax assets; and percentage of completion of customer contracts for purposes of revenue
recognition. Actual results could differ from those estimates.

(c) Revenue Recognition

The Company recognizes revenue on government and commercial contracts under the percentage-of-com-
pletion method. The percentage of completion is determined by relating the costs incurred to date to the estimated
total costs. The cumulative effects resulting from revisions of estimated total contract costs and revenues are
recorded in the period in which the facts requiring revision become known. Upon anticipating a loss on a contract,
the Company recognizes the full amount of the anticipated loss in the current period. During the years ended
April 30, 2005 and 2007, the Company recorded provisions of approximately $21,000 and $1,290,000, respectively,
related to anticipated losses on contracts. Reserves related to loss contracts in the amounts of approximately
$785,000 and $1,780,000 are included in accrued expenses in the accompanying consolidated balance sheets as of
April 30, 2006 and 2007, respectively.

Unbilled receivables represent expenditures on contracts, plus applicable profit margin, not yet billed.
Unbilled receivables are normally billed and collected within one year. Billings made on contracts are recorded
as a reduction of unbilled receivables, and to the extent that such billings exceed costs incurred plus applicable profit
margin, they are recorded as unearned revenues.

(d) Cash Equivalents

Cash equivalents consist of investments in short-term financial instruments with maturities of three months or
less from the date of purchase. Cash and cash equivalents include $31,506,000 and $13,254,000 of certificates of
deposit with an initial term of less than three months at April 30, 2006 and 2007, respectively, and $93,000,000
invested in a money market fund as of April 30, 2007.

F-7

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(e) Restricted Cash and Credit Facility

As of April 30, 2007, the Company had $983,376 in cash restricted under the terms of a security agreement (the
Agreement) between Ocean Power Technologies, Inc and Barclays Bank. Under the Agreement, this cash is on
deposit at Barclays Bank and serves as security for letters of credit which are expected to be issued by Barclays
Bank on behalf of Ocean Power Technologies Ltd., under a A800,000 credit facility established by Barclays Bank
for Ocean Power Technologies Ltd. The credit facility is for the issuance of letters of credit and bank guarantees,
and carries a fee of 1% per annum of the amount of any such obligations issued by Barclays Bank. The credit facility
does not have an expiration date, and is cancelable at the discretion of the bank.

(f) Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation and
amortization is calculated using the straight-line method over the estimated useful lives (three to seven years) of the
assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the remaining lease term. Expenses for maintenance and repairs are charged to operations
as incurred. Depreciation was $112,070, $213,374 and $247,515 for the years ended April 30, 2005, 2006 and 2007,
respectively.

(g) Foreign Exchange Gains and Losses

The Company has invested in certain certificates of deposit and has maintained cash accounts that are
denominated in British pound sterling, Euros and Australian dollars. Such certificates of deposit and cash accounts
had a balance of approximately $16,724,000 and $15,646,000 as of April 30, 2006 and 2007, respectively. Such
positions may result in realized and unrealized foreign exchange gains or losses from exchange rate fluctuations,
which are included in foreign exchange gain (loss) on the accompanying consolidated statements of operations.

(h) Patents

External costs related to the filing of patents, including legal and filing fees, are capitalized. Amortization is
calculated using the straight-line method over the life of the patents (17 years). Expenses for the development of
technology are charged to operations as incurred. Amortization expense was $28,914, $19,758 and $21,560 for the
years ended April 30, 2005, 2006 and 2007, respectively. Amortization expense for the next five fiscal years related
to amounts capitalized for patents as of April 30, 2007 is estimated to be approximately $22,000 per year.

(i) Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, and purchased
intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, then an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and
liability sections of the consolidated balance sheet. The Company reviewed its long-lived assets for indicators of
impairment in accordance with SFAS No. 144 and determined that no impairment review was necessary for the
years ended April 30, 2005, 2006 and 2007.

(j) Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of
cash balances, bank certificates of deposit and trade receivables. The Company invests its excess cash in highly

F-8

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

liquid investments (principally short-term bank deposits and a money market fund) and does not believe that it is
exposed to any significant risks related to its cash accounts, money market fund or certificates of deposit.

The table below shows the percentage of the Company’s revenues derived from customers whose revenues

accounted for at least 10% of the Company’s consolidated revenues for the periods indicated:

Customer

Years Ended April 30,
2005
2007
2006

US Navy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iberdrola and Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lockheed Martin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57% 61% 54%
4%
9% 35%
32% 22% —

The loss of, or a significant reduction in revenues from, any of these customers could significantly impact the
Company’s financial position or results of operations. The Company does not require collateral from its customers.

(k) Net Loss per Common Share

Basic and diluted net loss per share for all periods presented is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Due to the Company’s net losses,
potentially dilutive securities, consisting of outstanding stock options, were excluded from the diluted loss per share
calculation due to their anti-dilutive effect.

In computing diluted net loss per share, 1,116,281, 1,205,030, and 1,303,574 options to purchase shares of
common stock were excluded from the computations for the years ended April 30, 2005, 2006 and 2007,
respectively.

(l) Stock-Based Compensation

Prior to May 1, 2006, the Company applied the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, to account for its fixed plan stock options. Under this method, compensation expense was recorded
only if on the date of grant the market price of the underlying stock exceeded the exercise price. SFAS No. 123,
Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation —
Transition and Disclosure, established accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the
Company elected to continue to apply the intrinsic-value-based method of accounting described above, and adopted
only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net loss
if the fair-value-based method had been applied to all outstanding and unvested awards in the periods presented:

Years Ended April 30,
2005
2006

Net loss, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (428,634)
Add stock-based employee compensation expense included in reported

(7,078,911)

net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

131,500

44,000

Deduct total stock-based employee compensation expense determined

under fair-value-based method for all awards . . . . . . . . . . . . . . . . . . .

(1,367,000)

(680,000)

Pro forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,664,134)

(7,714,911)

Basic and diluted net loss per share, as reported . . . . . . . . . . . . . . . . . . . $

Basic and diluted net loss per share, pro forma . . . . . . . . . . . . . . . . . . . $

(0.08)

(0.32)

(1.37)

(1.49)

In accordance with SFAS No. 123, as amended by SFAS No. 148, the fair value of option grants is estimated on
the date of grant using the Black-Scholes option pricing model for pro forma disclosure purposes with the following

F-9

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

weighted-average assumptions used for grants: dividend yield of 0%; risk-free interest rate of 4% and 4.9% for the
years ended April 30, 2005 and 2006, respectively; an expected option life of 8.9 years and 9.3 years for the years
ended April 30, 2005 and 2006, respectively; and volatility of 80.8% and 72% for the years ended April 30, 2005
and 2006, respectively. These assumptions were used to determine the weighted average per share fair value of
$13.92 and $10.20 for stock options granted during the years ended April 30, 2005 and 2006, respectively.

On May 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R), which requires that the costs resulting from all share-based payment transactions be recognized
in the consolidated financial statements at their fair values. The Company adopted SFAS No. 123R using the
modified prospective application method under which the provisions of SFAS No. 123R apply to new awards and to
awards modified, repurchased, or canceled after the adoption date. Additionally, compensation cost for the portion
of the awards for which the requisite service had not been rendered that were outstanding as of May 1, 2006 will be
recognized in the consolidated statements of operations over the remaining service period after such date based on
the award’s original estimated fair value. The aggregate share-based compensation expense recorded in the
consolidated statements of operations for the year ended April 30, 2007 under SFAS No. 123R was approximately
$1,082,000. The Company would have recorded an immaterial amount of share-based compensation expense
related to employees for the year ended April 30, 2007 if it had continued to account for share-based compensation
under APB Opinion No. 25. For the year ended April 30, 2007, this additional share-based compensation increased
the net loss by approximately $1,073,000 and increased basic and diluted loss per share by approximately $0.20.

Valuation Assumptions for Options Granted During the Year Ended April 30, 2007

The fair value of each stock option granted during the year ended April 30, 2007 was estimated at the date of
grant using the Black-Scholes option pricing model, assuming no dividends and using the weighted average
valuation assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected life (estimated period of time outstanding) of the stock options granted was
estimated using the “simplified” method as permitted by the Securities and Exchange Commission’s Staff
Accounting Bulletin No. 107, Share-Based Payment. Expected volatility was based on historical volatility for a
peer group of companies for a period equal to the stock option’s expected life, calculated on a daily basis.

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5%
0.0%

5.5 years

72.0%

The above assumptions were used to determine the weighted average per share fair value of $8.80 for stock

options granted during the year ended April 30, 2007.

(m) Accounting for Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are
expected to be recovered, settled or utilized. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.

(n) Accumulated Other Comprehensive Loss

The functional currency for the Company’s foreign operations is the applicable local currency. The translation
from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using the exchange

F-10

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during
the period. The unrealized gains or losses resulting from such translation are included in accumulated other
comprehensive loss within stockholders’ equity.

(o) Recent Accounting Pronouncements

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which requires
entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’
financial statements, unless this would be impracticable. SFAS No. 154 supersedes APB Opinion No. 20,
Accounting Changes, which previously required that most voluntary changes in accounting principles be recog-
nized by including the cumulative effect of changing to the new accounting principle in the current period’s net
income or loss. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting
principle and the “restatement” of financial statements to reflect the correction of an error. Another significant
change in practice under SFAS No. 154 will be that if an entity changes its method of depreciation, amortization or
depletion of long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate
effected by a change in accounting principle. Under APB Opinion No. 20, such a change would have been reported
as a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. Adoption of SFAS No. 154 did not have any effect on the
Company’s financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or
FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition and
measurement method for tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the
effects of FIN 48, but does not expect FIN 48 to have a material effect on its financial position or results of
operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108. SAB 108 provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial statements for purposes of determining
whether the current year’s financial statements are materially misstated. SAB 108 was effective for the Company’s
year ended April 30, 2007. The adoption of SAB 108 did not have any impact on the Company’s consolidated
financial statements.

(3) Certificates of Deposit

Certificates of deposit with maturities in excess of 90 days from purchase are summarized as follows:

Nominal Face
Amount

Currency

2006

2007

April 30,

3.92% due August 11, 2006 . . . . . . . . . . . . . . . .
5.20% due May 17, 2007 . . . . . . . . . . . . . . . . . .
5.22% due June 20, 2007 . . . . . . . . . . . . . . . . . .

482,156
2,496,832
1,701,810

USD
GBP
GBP

$482,156

—
— 4,989,420
— 3,400,726

$482,156

8,390,146

F-11

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(4) Property and Equipment

The components of property and equipment are as follows:

Computers and software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 402,037
452,448
233,178
59,358

466,734
403,233
198,923
47,494

April 30,

2006

2007

Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,147,021
(602,736)

1,116,384
(728,461)

$ 544,285

387,923

(5) Accrued Expenses

Included in accrued expenses at April 30, 2006 and 2007 were contract reserves of approximately $785,000
and $1,780,000, respectively, and accrued employee incentive payments of approximately $353,000 and
$1,051,000, respectively. Accrued expenses at April 30, 2007 also included costs associated with the initial public
offering in the US of approximately $680,000.

(6) Related-Party Transactions

The Company is obligated to pay royalties to G.W. Taylor, a founding stockholder of the Company;
M.Y. Epstein; and the estate of J.R. Burns (stockholders of the Company) related to U.S. patent 4404490 entitled,
“Power Generation from Waves Near the Surface of Bodies of Water.” Royalty payments are limited to $925,000 in
the aggregate, based on revenues related to certain piezoelectric-technology, if any, on the basis of 6% of future
licenses sold and 4% of future product sales and development contracts. Through April 30, 2007, approximately
$200,000 of royalties had been earned. During the years ended April 30, 2005, 2006 and 2007, no royalties were
earned pursuant to these agreements, and no future royalties are expected to be earned. As of April 30, 2006 and
2007, approximately $26,000 was included in other current liabilities related to these agreements.

In August 1999, the Company entered into a consulting agreement with an individual for marketing services at
a rate of $600 per day of services provided. The individual became a member of the board of directors in June 2006.
Under this consulting agreement, the Company expensed approximately $51,000, $53,000 and $54,000 during the
years ended April 30, 2005, 2006 and 2007, respectively.

Also see Note 8 for an additional related-party transaction.

(7) Debt

During the year ended April 30, 2000, the Company received an award of $250,000 from the State of
New Jersey Commission on Science and Technology for the development of a wave power system that was
deployed off the coast of New Jersey. Under the terms of this award, the Company must repay the amount funded,
without interest, by January 15, 2012. The amounts to be repaid each year are determined as a percentage of
revenues (as defined in the loan agreement) the Company receives that year from its customer contracts that meet
criteria specified in the loan agreement, with any remaining amount due on January 15, 2012. Based upon the terms
of the award, the Company has repaid approximately $16,000 and is required to repay an additional approximately
$2,000 as of April 30, 2007. The total repayment amount of approximately $18,000 has reduced the long-term debt
balance. The current payment required was included in accrued expenses in the accompanying consolidated balance
sheet as of April 30, 2007.

F-12

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(8) Deferred Credits

During the year ended April 30, 2003, the Company entered into an agreement under which the Company
received a payment of $75,000, which was included in deferred credits until the earning process was completed.
During the year ended April 30, 2006, the earning process was completed, and the nonrefundable payment of
$75,000 has been included in other income in the accompanying consolidated statement of operations.

During the year ended April 30, 2001, in connection with the sale of common stock to an investor, the
Company received $600,000 from the investor in exchange for an option to purchase up to 500,000 metric tons of
carbon emissions credits generated by the Company during the years 2008 through 2012, at a 30% discount from the
then-prevailing market rate. This amount has been recorded in deferred credits in the accompanying consolidated
balance sheets as of April 30, 2006 and 2007. If by December 31, 2012 the Company does not become entitled under
applicable laws to the full amount of emission credits covered by the option, the Company is obligated to return the
option fee of $600,000, less the aggregate discount on any emission credits sold to the investor prior to such date. If
the Company receives emission credits under applicable laws and fails to sell to the investor the credits up to the full
amount of emission credits covered by the option, the investor is entitled to liquidated damages equal to 30% of the
aggregate market value of the shortfall in emission credits (subject to a limit on the market price of emission
credits).

(9) Common Stock

On December 7, 2006, the board of directors approved and recommended to shareholders and on January 12,
2007, the shareholders of the Company approved a one-for-ten reverse stock split, which was effective on April 20,
2007. All share data shown in the accompanying consolidated financial statements have been retroactively restated
to reflect the reverse stock split and the reincorporation.

On April 30, 2007, the Company completed an initial public offering in the United States on The NASDAQ
Global Market by issuing 5,000,000 shares of its common stock for a purchase price of $20.00 per share, resulting in
net proceeds to the Company of $89,903,819.

During the year ended April 30, 2003, the Company sold 3,750 shares of common stock to an investor at a price
of $13.30 per share, which was subject to adjustment based on the pricing of future financings, if any, during
calendar year 2003. Based on the price at which the Company’s common shares were sold at the time of an initial
public offering on the AIM market of the London Stock Exchange in October 2003, this adjustment, in the form of a
reduction of 1,397 shares issued, was resolved and recorded during the year ended April 30, 2005.

During the year ended April 30, 1998, under an agreement with a group of investors, the Company received
$50,000 as an advance payment related to a potential future transaction, which was recorded in accrued expenses.
During the year ended April 30, 2006, the Company repaid this amount by issuing 2,732 shares of common stock, in
accordance with the terms of the agreement.

(10) Preferred Stock

In September 2003, and in connection with the AIM offering, the Company’s stockholders authorized
5,000,000 shares of undesignated preferred stock with a par value of $0.001 per share. At April 30, 2006 and 2007,
no shares of preferred stock had been issued.

(11) Stock Options

Prior to August 2001, the Company maintained qualified and nonqualified stock option plans. The Company
has reserved 494,594 shares of common stock for issuance under these plans. There are no options available for
future grant under these plans as of April 30, 2007.

F-13

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

In August 2001, the Company approved the 2001 Stock Plan, which provides for the grant of incentive stock
options and nonqualified stock options. A total of 1,000,000 shares are authorized for issuance under the 2001 Stock
Plan. As of April 30, 2007, the Company had issued or reserved 808,980 shares for issuance under the 2001 Stock
Plan. Members of the board of directors who are not full-time employees receive an annual option grant to acquire
2,500 shares. The options are granted after the annual meeting of shareholders for the year then ended. Vesting of
stock options is determined by the board of directors. The contractual term of these stock options is up to ten years.
After the effectiveness of the 2006 Stock Incentive Plan, no further options or other awards have been or will be
granted under the 2001 Stock Plan.

On April 24, 2007, the Company’s 2006 Stock Incentive Plan became effective. There are 803,215 shares
reserved for issuance under this plan, which consists of 680,000 new shares plus 123,215 shares of common stock
previously available under the 2001 Stock Plan. The Company’s employees, officers, directors, consultants and
advisors are eligible to receive awards under the 2006 Stock Incentive Plan; however, incentive stock options may
only be granted to employees. The maximum number of shares of common stock with respect to which awards may
be granted to any participant under the 2006 Stock Incentive Plan is 200,000 per calendar year. The 2006 Stock
Incentive Plan is administered by the Company’s board of directors who may delegate authority to one or more
committees or subcommittees of the board of directors or to the Company’s officers. If the board of directors
delegates authority to an officer, the officer has the power to make awards to all of the Company’s employees,
except to executive officers. The board of directors will fix the terms of the awards to be granted by such officer. No
award may be granted under the 2006 Stock Incentive Plan after December 7, 2016, but the vesting and
effectiveness of awards granted before that date may extend beyond that date.

Transactions under these option plans during the year ended April 30, 2007 are as follows:

Shares Under
Option

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Contractual
Term
(In Years)

Outstanding April 30, 2006 . . . . . . . . . . . . . . . . . . . . . . .
Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,205,030
(10,026)
(64,950)
(22,600)
196,120

Outstanding April 30, 2007 . . . . . . . . . . . . . . . . . . . . . . .

1,303,574

Exercisable April 30, 2007 . . . . . . . . . . . . . . . . . . . . . . .

974,266

14.19
16.83
8.42
8.55
13.75

14.49

14.89

5.1

4.0

The total intrinsic value of options exercised during the years ended April 30, 2005, 2006 and 2007 was
approximately $313,000, $153,000 and $188,000, respectively. The total intrinsic value of outstanding and
exercisable options as of April 30, 2007 was approximately $2,400,000 and $2,000,000, respectively. As of
April 30, 2007, approximately 296,000 additional options were expected to vest, which had total intrinsic value of
approximately $339,000 and a weighted average remaining contractual term of 8.2 years. As of April 30, 2007,
there was approximately $2,400,000 of total unrecognized compensation cost related to non-vested stock options
granted under the plans. This cost is expected to be recognized over a weighted-average period of 2.5 years. The
Company normally issues new shares to satisfy option exercises under these plans.

Certain stock options granted during the years ended April 30, 2005 and 2006 were granted to employees with
exercise prices less than the fair value of the underlying common stock on the date of grant. Additionally, certain
options were granted to consultants during the years ended April 30, 2005, 2006 and 2007. The Company has
charged compensation expense of $184,674, $129,139 and $70,235 related to these option grants, which has been

F-14

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

included in selling, general, and administrative costs in the accompanying consolidated statements of operations for
the years ended April 30, 2005, 2006 and 2007, respectively.

(12)

Income Taxes

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax

assets and deferred tax liabilities are presented below.

April 30,

2006

2007

Deferred tax assets:
Federal net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . .
Foreign net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 6,638,000
1,210,000
505,000
1,478,000
—
314,000

8,218,000
1,897,000
761,000
1,509,000
6,000
829,000

Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,145,000

13,220,000

Deferred tax liabilities:

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign exchange gain . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(31,000)
(60,000)

(91,000)

(17,000)
—

(17,000)

Deferred tax assets valuation allowance . . . . . . . . . . . . . . . . . . . . . . .

(10,054,000)

(13,203,000)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

—

—

Income tax benefit was $29,335 and $143,963 for the years ended April 30, 2005 and 2006, respectively. The
effective income tax rate differed from the percentages computed by applying the U.S. Federal income tax rate of
34% to loss before income taxes as a result of the following:

Years Ended April 30,
2005
2007
2006

Computed “expected” tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6)
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
(6)
Federal research and development tax credits . . . . . . . . . . . . . . . . . . . . . . . . . .
(6)
Sale of state loss carryforwards and tax credits . . . . . . . . . . . . . . . . . . . . . . . . .
9
Other non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
Increase in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(6)
(6)
8
—
(1)
(2)
(2) —
1
1
32
41

(34)% (34)% (34)%

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. As of April 30, 2006 and 2007, based upon the level of historical taxable losses, valuation
allowances of $10,054,000 and $13,203,000, respectively, were recorded in accordance with the provisions of

(6)% (2)% —

F-15

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

SFAS No. 109. The valuation allowance increased $2,697,000, $2,436,000 and $3,149,000 during the years ended
April 30, 2005, 2006 and 2007, respectively.

As of April 30, 2007, the Company had net operating loss carryforwards for Federal income tax purposes of
approximately $24,200,000, which begin to expire in 2009. The Company also had federal research and devel-
opment credit carryforwards of approximately $761,000 as of April 30, 2007, which begin to expire in 2012. The
Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit
carryforwards if there has been an ownership change, as defined. Such an ownership change, as described in
Section 382 of the Internal Revenue Code, may limit the Company’s ability to utilize its net operating loss and tax
credit carryforwards on a yearly basis. Foreign loss before income taxes was $527,974, $982,934 and $2,289,834
for the years ended April 30, 2005, 2006 and 2007, respectively. As of April 30, 2007, foreign net operating loss
carryforwards were approximately $6,300,000. These losses can be carried forward indefinitely, but the Company’s
ability to utilize these carryforwards may be limited in the event of an ownership change.

During the years ended April 30, 2005 and 2006, the Company sold a portion of its New Jersey state net
operating loss carryforwards and research and development credits to a company for net proceeds of $29,335 and
$143,963, respectively, resulting in the recognition of income tax benefits in the accompanying consolidated
statements of operations.

(13) Commitments and Contingencies

(a) Operating Lease Commitments

The Company leases office, laboratory and manufacturing space in Pennington, New Jersey and office space in
Warwick, United Kingdom under operating leases that expire on various dates through April 30, 2013. Rent expense
under operating leases was $154,731, $295,089 and $338,113 for the years ended April 30, 2005, 2006 and 2007,
respectively. Future minimum lease payments under operating leases as of April 30, 2007 are as follows:

Year ending April 30:
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 256,857
240,191
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,859
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,859
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,859
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
206,859
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,324,484

(b) Litigation

The Company is involved from time to time in certain legal actions arising in the ordinary course of business.
Management believes that the outcome of such actions will not have a material adverse effect on the Company’s
financial position or results of operations.

F-16

OCEAN POWER TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(14) Quarterly Financial Data (Unaudited)

Fiscal Year 2007

Jul 31

Three Months Ended
Oct 31

Jan 31

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit (loss) . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . $

305,186
79,221
(2,360,950)
(1,660,954)
(0.32)

555,561
(601,104)
(2,976,109)
(2,307,200)
(0.45)

652,884
(67,594)
(2,436,457)
(1,540,296)
(0.30)

Fiscal Year 2006

Jul 31

Three Months Ended
Oct 31

Jan 31

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit (loss) . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and diluted net loss per share . . . . . . . $

492,820
(123,615)
(1,401,420)
(2,645,920)
(0.51)

613,679
(276,520)
(1,984,647)
(1,402,480)
(0.27)

360,784
(53,562)
(1,866,638)
(1,437,877)
(0.28)

Apr 30

1,017,684
(862,950)
(4,792,384)
(4,130,315)
(0.75)

Apr 30

280,432
142,094
(2,474,582)
(1,592,634)
(0.31)

(15) Operating Segments and Geographic Information

The Company’s business consists of one segment as this represents management’s view of the Company’s
operations. The Company operates on a worldwide basis with one operating company in the US, one subsidiary in
the UK and one subsidiary in Australia, which are categorized below as North America, Europe and Australia,
respectively. Revenues are generally attributed to the operating unit which bills the customers.

Geographic information is as follows:

Revenues from external customers. . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . .

Revenues from external customers. . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . .

North America

$ 5,365,235
(3,263,815)
427,613
41,596,387

North America

$ 1,747,715
(6,743,896)
487,770
33,820,540

Year Ended April 30, 2005
Australia

Europe

—
—
—
—

—
—
—
—

Year Ended April 30, 2006
Australia

Europe

—
(833,147)
56,515
156,102

—
(150,244)
—
19,496

Total

5,365,235
(3,263,815)
427,613
41,596,387

Total

1,747,715
(7,727,287)
544,285
33,996,138

North America

Year Ended April 30, 2007
Australia

Europe

Total

Revenues from external customers. . . . . . . $
Operating loss . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . .

1,484,998
(10,254,579)
293,633
118,074,176

1,007,689
(2,191,703)
94,290
1,607,549

38,628
(119,618)
—
29,821

2,531,315
(12,565,900)
387,923
119,711,546

F-17

OCEAN POWER TECHNOLOGIES, INC.

Directors

Sir Eric A. Ash
Non-executive Director
(Member, Keppel Corporation
Limited)

Charles F. Dunleavy
Chief Financial Officer

Executive Officers

Dr. George W. Taylor
Chief Executive Officer

Charles F. Dunleavy
Chief Financial Officer, Senior
Vice President, Treasurer and
Secretary

Thomas J. Meaney
Non-executive Director
(President and Chief Executive
Officer, Mikros Systems Corp)

Mark R. Draper
Chief Operating Officer; Chief
Executive and Director of
Ocean Power Technologies Ltd.

Company Secretary

Charles F. Dunleavy

Seymour S. Preston III
Non-executive Chairman

Dr. George W. Taylor
Chief Executive Officer

Independent Registered
Public Accounting Firm

KPMG LLP
1601 Market Street
Philadelphia, PA 19103-2499
USA

Legal Advisors

Wilmer Cutler Pickering Hale
and Dorr LLP
399 Park Avenue
New York, New York 10022
USA

Wilmer Cutler Pickering Hale
and Dorr LLP
Alder Castle
10 Noble Street
London EC2V 7QJ
UK

Share Price Information

Bankers

Barclays Bank Plc
1 Churchill Place
London E14 5HP
UK

PNC Bank
76 Nassau Street
Princeton, New Jersey 08540
USA

Nominated Advisors and
Nominated Broker

Collins Stewart
88 Wood Street, 9th Floor
London EC2V 7QR

Registrar

Computershare Trust
Company N.A.
P.O. Box 43078
Providence, RI 02940-3078
877-282-1168
www.computershare.com

Computershare Investor
Services (Channel Islands)
Limited
Ordnance House
31 Pier Road
St Helier, Jersey
Channel Islands JE4 8PW

The Company’s share price is quoted on the Nasdaq Global Market under the symbol OPTT and on
the London Stock Exchange, AIM market, under the symbol OPT. Go to www.nasdaq.com or to
www.londonstockexchange.com to access the Company’s share price information. In addition, share
price information and other publicly released information is available at our website, under the Investor
Relations tab.

Offices

Ocean Power Technologies, Inc.
1590 Reed Road
Pennington, New Jersey 08534
USA

Ocean Power Technologies (Australasia) Pty Ltd.

Website address

www.oceanpowertechnologies.com

Ocean Power Technologies, Ltd.
Warwick Innovation Center
Gallows Hill
Warwick CV34 6UW
UK