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<SEC-DOCUMENT>0000898430-02-003157.txt : 20020814
<SEC-HEADER>0000898430-02-003157.hdr.sgml : 20020814
<ACCEPTANCE-DATETIME>20020814155917
ACCESSION NUMBER:		0000898430-02-003157
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		3
CONFORMED PERIOD OF REPORT:	20020630
FILED AS OF DATE:		20020814

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			AMERICAN TECHNOLOGY CORP /DE/
		CENTRAL INDEX KEY:			0000924383
		STANDARD INDUSTRIAL CLASSIFICATION:	HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651]
		IRS NUMBER:				870361799
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0930

	FILING VALUES:
		FORM TYPE:		10-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-24248
		FILM NUMBER:		02736426

	BUSINESS ADDRESS:	
		STREET 1:		13114 EVENING CREEK DRIVE SOUTH
		CITY:			SAN DIEGO
		STATE:			CA
		ZIP:			92128
		BUSINESS PHONE:		6196792114
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>d10q.htm
<DESCRIPTION>FORM 10-Q
<TEXT>
<HTML><HEAD>
<TITLE>Prepared by R.R. Donnelley Financial -- Form 10-Q</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF"> <hr size="4" width="100%" noshade color="black" align="center"> <p align="center"><b><font size="5" face="Times New Roman">UNITED STATES<br> SECURITIES AND EXCHANGE COMMISSION<br> </font><font size="2"
face="Times New Roman">Washington, D.C. 20549</font></b></p> <p align="center"><b><font size="5" face="Times New Roman">FORM 10-Q</font></b></p> <p><b><font size="2" face="Times New Roman">(Mark one)</font></b></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="4%" valign="top"> <p><b><font size="3" face="Wingdings">x</font></b></p> </td>
<td width="95%" valign="top"> <p><b><font size="3" face="Times New Roman">QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</font></b></p> </td> </tr> </table> <p align="center"><b><font size="2"
face="Times New Roman">For the quarterly period ended June 30, 2002</font></b></p> <p align="center"><b><font size="2" face="Times New Roman">or</font></b></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="4%" valign="top"> <p><b><font size="3" face="Wingdings">o</font></b></p> </td>
<td width="95%" valign="top"> <p><b><font size="3" face="Times New Roman">TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</font></b></p> </td> </tr> </table> <p align="center"><b><font size="2"
face="Times New Roman">For the transition period from __________to __________.</font></b></p> <p align="center"><b><font size="2" face="Times New Roman">Commission File Number <u>0-24248</u></font></b></p> <p align="center"><b><font size="5"
face="Times New Roman">AMERICAN TECHNOLOGY CORPORATION<br> </font></b><b><font size="1">(Exact name of registrant as specified in its charter)</font></b></p>
<table border="0" cellspacing="0" cellpadding="0" width="90%">
<tr>
<td width="49%" valign="bottom"> <p align="center"><b><font size="2" face="Times New Roman">Delaware</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <p align="center"><b><font size="2" face="Times New Roman">87-03261799</font></b></p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">(State or other jurisdiction of incorporation or organization)</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">(I.R.S. Empl. Ident. No.)</font></b></p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <p align="center"><b><font size="2" face="Times New Roman">13114 Evening Creek Drive South, San Diego, California</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <p align="center"><b><font size="2" face="Times New Roman">92128</font></b></p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">(Address of principal executive offices)</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">(Zip Code)</font></b></p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="48%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="100%" colspan="3" valign="bottom"> <b><font size="2" face="Times New Roman">(858) 679-2114</font></b><BR> <hr size="2" width="33%" noshade color="black" align="center"> </td> </tr>
<tr>
<td width="100%" colspan="3" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">(Registrant&#146;s telephone number, including area code)</font></b></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">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. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;YES&nbsp;&nbsp;</font><font size="2" face="Wingdings">x</font><font size="2" face="Times New Roman">&#160;
NO&nbsp;&nbsp;</font><font size="2" face="Wingdings">o</font></p> <p><font size="2" face="Times New Roman">Indicate the number of shares outstanding of each of the issuer&#146;s classes of common stock, as of the latest practicable date:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="49%" valign="bottom"> <p align="center"><font size="2" face="Times New Roman">Common Stock, $0.00001 par value</font></p> </td>
<td width="0%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="49%" valign="bottom"> <p align="center"><font size="2" face="Times New Roman">14,345,226</font></p> </td>
<td width="0%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="0%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="49%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="0%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="49%" valign="top"> <p align="center"><b><font size="1" face="Times New Roman">(Class)</font></b></p> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="49%" valign="top"> <p align="center"><b><font size="1" face="Times New Roman">(Outstanding at August 2, 2002)</font></b></p> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td> </tr> </table> <hr size="4" width="100%" noshade color="black" align="center">

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <p align="center"><font size="2" face="Times"><b>
<a name="toc"></a>AMERICAN TECHNOLOGY CORPORATION</b><br> INDEX</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="7%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">PART I</font></p> </td>
<td width="88%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;FINANCIAL INFORMATION</font></p> </td>
<td width="3%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Page</font></b></p> </td> </tr>
<tr>
<td width="96%" colspan="5" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Item 1.</font></p> </td>
<td width="84%" valign="bottom"> <p><font size="2" face="Times New Roman">Financial Statements:</font></p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx1" title="Click to goto BALANCE SHEETS">Balance Sheets as of June 30, 2002 (unaudited) and September 30, 2001</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">3</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx2" title="Click to goto STATEMENTS OF OPERATIONS">Statements of Operations for the three and nine months ended June 30, 2002 and 2001 (unaudited)</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">4</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx3" title="Click to goto STATEMENTS OF OPERATIONS">Statements of Cash Flows for the nine months ended June 30, 2002 and 2001 (unaudited)</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">5</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx4" title="Click to goto NOTES TO INTERIM FINANCIAL STATEMENTS">Notes to Interim Financial Statements</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">6</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Item 2.</font></p> </td>
<td width="84%" valign="top"> <p><font size="2" face="Times New Roman">
<a href="#l667tx5" title="Click to goto Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</a></font></p>
</td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">11</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Item 3.</font></p> </td>
<td width="84%" valign="top"> <p><font size="2" face="Times New Roman">
<a href="#l667tx6" title="Click to goto Item 3. Quantitative and Qualitative Disclosures about Market Risk">Quantitative and Qualitative Disclosures about Market Risk</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">19</font></p> </td> </tr>
<tr>
<td width="96%" colspan="5" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="7%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">PART II</font></p> </td>
<td width="88%" colspan="3" valign="bottom"> <p><font size="2" color="black" face="Times New Roman">&nbsp;&nbsp;
<a href="#l667tx7" title="Click to goto PART II. OTHER INFORMATION">OTHER INFORMATION</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">20</font></p> </td> </tr>
<tr>
<td width="96%" colspan="5" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Item 1.</font></p> </td>
<td width="84%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx8" title="Click to goto Item 1. Legal Proceedings">Legal Proceedings</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">20</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Item 2.</font></p> </td>
<td width="84%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx9" title="Click to goto Item 2. Changes in Securities">Changes in Securities and Use of Proceeds</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">20</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Item 3.</font></p> </td>
<td width="84%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx10" title="Click to goto Item 3. Defaults Upon Senior Securities">Defaults upon Senior Securities</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">20</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Item 4.</font></p> </td>
<td width="84%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">
<a href="#l667tx11" title="Click to goto Item 4. Submission of Matters to a Vote of Security Holders">Submission of Matters to a Vote of Security Holders</a></font></p> </td>
<td width="3%" valign="top"> <p align="right"><font size="2" face="Times New Roman">20</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Item 5.</font></p> </td>
<td width="84%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx12" title="Click to goto Item 5. Other Information">Other Information</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">21</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Item 6.</font></p> </td>
<td width="84%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx13" title="Click to goto Item 6. Exhibits and Reports on Form 8-K">Exhibits and Reports on Form 8-K</a></font></p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">21</font></p> </td> </tr>
<tr>
<td width="5%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" colspan="2" valign="bottom"> <p>&nbsp;</p> </td>
<td width="84%" colspan="2" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right">&nbsp;</p> </td> </tr>
<tr>
<td width="11%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#l667tx14" title="Click to goto SIGNATURES">SIGNATURES</a></font></p> </td>
<td width="84%" colspan="2" valign="bottom"> <p>&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">22</font></p> </td> </tr>
<tr>
<td width="36"></td>
<td width="17"></td>
<td width="29"></td>
<td width="0"></td>
<td width="611"></td>
<td width="27"></td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">2</font></p> <b><font size="2" face="Times New Roman"> </font></b>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <b><font size="2" face="Times New Roman"><BR> </font></b> <p align="center"><b><font size="2" face="Times New Roman">American Technology Corporation <br> </font></b>
<a name="l667tx1"><font size="2" face="Times New Roman">BALANCE SHEETS</font></a></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="1%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">June 30,<br> 2001</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">September 30,<br> </font></b><b><font size="1">2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">(unaudited)</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">ASSETS</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">Current Assets:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Cash</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,359,272</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,354,072</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p><font size="2" face="Times New Roman">Trade accounts receivable, less allowance of $20,191 for doubtful accounts for each period</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">133,538</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">117,584</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Inventories [note 5]</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">201,604</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">197,013</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p><font size="2" face="Times New Roman">Prepaid expenses and other</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">28,260</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">67,160</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Total current assets</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,722,674</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,735,829</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman"><b>Equipment</b>, net</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">361,771</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">516,208</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman"><b>Patents</b>, net of accumulated amortization of $123,170 and $74,584</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">952,020</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">848,783</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman"><b>Purchased technology</b>, net of accumulated amortization of of $841,657 and $526,036 [note 6]</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">420,843</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">736,464</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Total assets</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">3,457,308</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">3,837,284</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <p align="center">&nbsp;</p> </td>
<td width="13%"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <p align="center">&nbsp;</p> </td>
<td width="13%"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">LIABILITIES AND STOCKHOLDERS' EQUITY</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">Current Liabilities:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Accounts payable</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">488,350</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">321,775</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Accrued liabilities and other:</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Payroll and related</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">142,336</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">159,311</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p><font size="2" face="Times New Roman">Deferred revenue</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">367,492</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">248,611</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Interest</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">180,058</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p><font size="2" face="Times New Roman">Other</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">28,011</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">114,092</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">12% Convertible Promissory Note, net of $810,000 and $800,000 for for debt discount [note 7]</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,215,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Total current liabilities</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,421,247</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">843,789</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">Commitments and contingencies [notes 6 and 8]</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">Stockholders' equity </font></b>[note 8]:</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Preferred stock, $0.00001 par value; 5,000,000 shares authorized Series B Preferred stock 250,000 shares designated: 0 and 168,860 issued and
outstanding, respectively.</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Series C Preferred stock 300,000 shares designated: 10,000 issued and outstanding each period. Liquidation preference of $227,484 and $218,510,
respectively</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Series D Preferred stock 250,000 shares designated: 235,400 and 0 issued and outstanding, respectively. Liquidation preference of $2,376,442 and $0,
respectively.</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Common stock, $0.00001 par value; 20,000,000 shares authorized 14,295,226 and 13,704,139 shares issued and outstanding</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">143</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">137</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Additional paid-in capital</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">26,792,520</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">22,913,268</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Accumulated deficit</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(25,756,604</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(19,919,912</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Total stockholders' equity</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,036,061</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,993,495</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="64%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Total liabilities and stockholders' equity</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">3,457,308</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="13%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">3,837,284</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="top"> <p>&nbsp;</p> </td>
<td width="63%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="13%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">See accompanying notes to the interim financial statements.</font></p> <p align="center"><font
size="2" face="Times New Roman">3</font></p> <b><font size="2" face="Times New Roman"> </font></b>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <b><font size="2" face="Times New Roman"><BR> </font></b> <p align="center"><b><font size="2" face="Times New Roman">American Technology Corporation<br> </font></b><font size="2" face="Times New Roman">
<a name="l667tx2">STATEMENTS OF OPERATIONS</a><br> (Unaudited)</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">For the three months ended<br> June 30</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="26%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">For the nine months ended<br> June 30</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2001</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2001</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom"> <p><b><font size="2" face="Times New Roman">Revenues:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Product sales</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">165,365</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">128,688</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">489,475</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">423,438</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p><font size="2" face="Times New Roman">Related party sales</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">32,323</font></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">32,323</font></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Contract and license</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">38,003</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">21,630</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">169,947</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">259,936</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Total revenues</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">235,691</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">150,318</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">691,745</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">683,374</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Cost of revenues</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">158,998</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">109,516</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">397,843</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">477,489</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom"> <p><b><font size="2" face="Times New Roman">Gross profit</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">76,693</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">40,802</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">293,902</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">205,885</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom"> <p><b><font size="2" face="Times New Roman">Operating expenses:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Selling, general and administrative</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">760,967</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">545,272</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,864,087</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,694,185</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p><font size="2" face="Times New Roman">Research and development</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">1,002,980</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">770,848</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">2,883,977</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">2,366,262</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Total operating expenses</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,763,947</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,316,120</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">4,748,064</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">4,060,447</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Loss from operations</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,687,254</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,275,318</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(4,454,162</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,854,562</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom"> <p><b><font size="2" face="Times New Roman">Other income (expense):</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Interest income</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">772</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">18,770</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">13,328</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">122,862</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p><font size="2" face="Times New Roman">Interest expense</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(465,584</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(1,395,058</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Gain on sale of asset</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">3,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p><font size="2" face="Times New Roman">Other</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(800</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(800</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Total other income (expense)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(464,812</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">18,770</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,382,530</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">125,062</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Net loss</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(2,152,066</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,256,548</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(5,836,692</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,729,500</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Net loss available to common stockholders [note 3]</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(2,253,264</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,285,293</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(5,960,805</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,821,660</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Net loss per share of common stock &#151; basic and diluted</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(0.16</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(0.09</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(0.42</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(0.28</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="41%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">Average weighted number of common shares outstanding</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">14,291,087</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">13,677,390</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">14,147,027</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">13,515,667</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr> </table> <p><font size="2" face="Times New Roman">See accompanying notes to the interim financial statements.</font></p> <p align="center"><font size="2" face="Times New Roman">4</font></p>
<font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><b><font size="2" face="Times New Roman">American Technology Corporation <br> </font></b><font size="2" face="Times New Roman">
<a name="l667tx3">STATEMENTS OF CASH FLOWS</a><br> (Unaudited)</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="40%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Nine Months Ended June 30,</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2001</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="54%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="19%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="19%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><b><font size="2" face="Times New Roman">Decrease in Cash</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><b><font size="2" face="Times New Roman">Operating Activities:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net loss</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(5,836,692</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,729,500</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Adjustments to reconcile net loss to net cash used in operations:</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="55%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Depreciation and amortization</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">545,292</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">451,272</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="55%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Allowance for doubtful accounts</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">191</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="55%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Gain on sale of asset</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="55%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Stock issued for services</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">106,469</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="55%" colspan="2" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Options issued for services</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">272,539</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">153,344</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="55%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">Amortization of debt discount</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">1,215,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Changes in assets and liabilities:</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p><font size="2" face="Times New Roman">Trade accounts receivable</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(15,954</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">100,510</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Inventories</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(4,591</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(347</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p><font size="2" face="Times New Roman">Prepaid expenses and other</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">38,900</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(26,042</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Accounts payable</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">166,575</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(25,814</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p><font size="2" face="Times New Roman">Accrued liabilities</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">195,883</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">80,724</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net cash used in operating activities</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,316,579</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(2,998,662</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><b><font size="2" face="Times New Roman">Investing Activities:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Purchase of equipment</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(31,647</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(211,340</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Patent costs paid</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(146,824</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(158,113</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Proceeds loaned on notes receivable &#151; officer</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(40,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Proceeds on sale of asset</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">3,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net cash used in investing activities</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(178,471</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(406,453</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><b><font size="2" face="Times New Roman">Financing Activities:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Offering costs on Series D preferred stock</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(78,750</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Proceeds from exercise of stock options</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">225,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Proceeds from issuance of series D preferred stock</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,354,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Proceeds from issuance of convertible promissory notes</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">1,225,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom"> <p><b><font size="2" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net cash provided by financing activities</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">3,500,250</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">225,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net increase (decrease) in cash</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">5,200</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,180,115</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Cash, beginning of year</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">1,354,072</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">4,645,615</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="54%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Cash, end of year</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,359,272</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,465,500</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="54%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><b><font size="2" face="Times New Roman">Supplemental Disclosure of Cash Flow Information:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><b><font size="2" face="Times New Roman">Supplemental disclosure of noncash investing and financing activities:</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Issuance of stock warrants in connection with convertible debt</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">624,750</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom"> <p><font size="2" face="Times New Roman">Common stock issued on conversion of Series B Preferred Stock</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">2,102,412</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">234,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="57%" colspan="3" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Dividends on conversion of Series B Preferred Stock</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><b><font size="2" face="Times New Roman">&#151;</font></b></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">32,076</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">See accompanying notes to the interim financial statements.</font></p> <p
align="center"><font size="2" face="Times New Roman">5</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION<br> </b>
<a name="l667tx4">NOTES TO INTERIM FINANCIAL STATEMENTS</a><br> (Unaudited)</font></p> <p><b><font size="2" face="Times New Roman">1. OPERATIONS</font></b></p> <p><font size="2" face="Times New Roman">American Technology Corporation (the
&#147;Company&#148;), a Delaware corporation, is engaged in design, development and commercialization of sound, acoustics and other technologies and the sales and marketing of portable consumer products.</font></p> <p><b><font size="2"
face="Times New Roman">2. STATEMENT PRESENTATION</font></b></p> <p><font size="2" face="Times New Roman">The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. In the opinion of management, the interim financial statements reflect all adjustments of a normal recurring nature necessary for a fair presentation of the results for interim periods.
Operating results for the three and nine month periods are not necessarily indicative of the results that may be expected for the year. The interim financial statements and notes thereto should be read in conjunction with the Company&#146;s audited
financial statements and notes thereto for the year ended September 30, 2001.</font></p> <p><b><font size="2" face="Times New Roman">3. NET LOSS PER SHARE</font></b></p> <p><font size="2" face="Times New Roman">The Company applies Statement of
Financial Accounting Standards (&#147;SFAS&#148;) No. 128, &#147;Earnings Per Share.&#148; SFAS No. 128 provides for the calculation of &#147;Basic&#148; and &#147;Diluted&#148; earnings per share (&#147;EPS&#148;). Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity.
The Company&#146;s net losses for the periods presented cause the inclusion of potential common stock instruments outstanding to be antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not required to present a diluted EPS.
Convertible preferred stock, convertible promissory notes, stock options and warrants convertible or exercisable into approximately 5,127,879 and 2,563,875 shares of common stock were outstanding at June 30, 2002 and 2001, respectively. These
securities were not included in the computation of diluted EPS because of the net losses but could potentially dilute EPS in future periods.</font></p> <p><font size="2" face="Times New Roman">Net loss available to common stockholders for the three
and nine months ended June 30, 2002, includes imputed deemed dividends based on the value of warrants issued and a discount at issuance in connection with Series D Preferred Stock (see Note 8). The Company has recorded deemed dividends for the
warrants and discount at issuance at $35,377 and $40,385, respectively. Such imputed deemed dividends are not included in the Company&#146;s stockholders&#146; equity as the Company has an accumulated deficit. The imputed deemed dividends are not
contractual obligations of the Company to pay such imputed dividends.</font></p> <p><font size="2" face="Times New Roman">The provisions of the Company&#146;s Series B Preferred Stock provided for an accretion in the conversion value (similar to a
dividend) of 6% or $0.60 per share per annum. The Series C Preferred Stock provides for an accretion in the conversion value of 6% or $1.20 per share per annum. The Series D Preferred Stock provides for an accretion in the conversion value of 6% or
$0.60 per share per annum. The accrued accretion of the Series B, C and D Preferred Stock for the nine months ended June 30, 2002 and 2001 was $48,351 and $92,160, respectively, which increases the net loss available to common stockholders. Net loss
available to common stockholders is computed as follows:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="39%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="29%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Three months ended June 30,</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Nine months ended June 30,</font></b></p> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="39%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="14%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="14%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2001</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="14%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">2001</font></b></p> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="39%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="14%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="14%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="14%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="10%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="0%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="39%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net Loss</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(2,152,066</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p align="left"><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,256,548</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p align="left"><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(5,836,692</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p align="left"><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,729,500</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p align="left"><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="39%" valign="bottom"> <p><font size="2" face="Times New Roman">Imputed deemed dividends based on warrants issued with Series D Preferred Stock</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(35,377</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(35,377</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="39%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Series D Preferred Stock imputed deemed</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="0%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="39%" valign="bottom"> <p><font size="2" face="Times New Roman">dividends based on discount at issuance</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(40,385</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(40,385</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="0%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="39%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Accretion on Series B, C and D Preferred</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="0%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="39%" valign="bottom"> <p><font size="2" face="Times New Roman">Stock at stated rate</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(25,436</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(28,745</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(48,351</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(92,160</font></p> </td>
<td width="0%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="39%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="8%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="39%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Net loss available to common stockholders</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(2,253,264</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(1,285,293</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(5,960,805</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(3,821,660</font></p> </td>
<td width="0%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="39%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="8%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="0%" valign="bottom"> <p>&nbsp;</p> </td> </tr> </table> <p><b><font size="2" face="Times New Roman">4. RECENT ACCOUNTING PRONOUNCEMENTS</font></b></p> <p><font size="2" face="Times New Roman">In June 2001, the Financial Accounting
Standards Board finalized FASB Statements No. 141 &#147;Business Combinations&#148; (SFAS 141) and No. 142; &#147;Goodwill and Other Intangible Assets&#148; (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the
use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business</font></p> <p align="center"><font size="2" face="Times New Roman">6</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION<br> </b>NOTES TO INTERIM FINANCIAL STATEMENTS<br> (Unaudited)</font></p>
<p><font size="2" face="Times New Roman">combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.</font></p> <p><font size="2" face="Times New Roman">SFAS 142 requires among other things, that companies no longer amortize goodwill but instead test goodwill for
impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets
and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite </font><font size="2" face="Times New Roman">useful life should be tested for impairment in accordance with the guidance in SFAS 142.
SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date regardless of when those assets were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test nine months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company has
not entered into any business combinations and has no recorded goodwill. The Company is assessing, but has not yet determined how the adoption of SFAS 142 will impact its financial position and results of operations.</font></p> <p><font size="2"
face="Times New Roman">In August 2001, the FASB issued SFAS No. 143, &#147;Accounting for Asset Retirement Obligations.&#148; SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for the Company, for the fiscal year
ending September 30, 2003. The Company believes the adoption of this statement will have no material impact on its financial statements.</font></p> <p><font size="2" face="Times New Roman">In October 2001, the SFAS issued SFAS No. 144,
&#147;Accounting for the Impairment or Disposal of Long-Lives Assets&#148;. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value, less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, is to be applied prospectively. The Company has not yet determined what effect, if any, SFAS 144 will have on its financial statements once implemented.</font></p> <p><font size="2"
face="Times New Roman">In April 2002, the FASB issued SFAS No. 145, &#147;Rescission of FASB No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections.&#148;&#160; SFAS rescinds FASB No. 4 &#147;Reporting Gains and Losses from
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.&#148;&#160; This statement also rescinds SFAS No. 44 &#147;Accounting for Intangible Assets of Motor Carriers&#148; and amends SFAS No. 13, &#147;Accounting for Leases&#148;, to
eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.&#160; This Statement
also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions.&#160; This statement is effective for fiscal years beginning after May 15,
2002.&#160; The Company does not expect the adoption of this statement to have a material effect on the Company&#146;s financial statements.</font></p> <p><font size="2" face="Times New Roman">In June 2002, the FASB issued SFAS No. 146,
&#147;Accounting for Costs Associated with Exit or Disposal Activities.&#148;&#160; SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
&#147;Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).&#148;&#160; SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value when the liability is incurred.&#160; SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application
encouraged.&#160;&#160; The Company does not expect the adoption of this statement to have a material effect on the Company&#146;s financial statements.</font></p> <p><b><font size="2" face="Times New Roman">5. INVENTORIES</font></b></p> <p><font
size="2" face="Times New Roman">Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of the following:</font></p> <p align="center"><font size="2"
face="Times New Roman">7</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION<br> </b>NOTES TO INTERIM FINANCIAL STATEMENTS<br> (Unaudited)</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="90%">
<tr>
<td width="14%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="42%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">June 30, 2002</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">September 30, 2001</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="42%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p>&nbsp;</p> </td>
<td width="42%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Finished goods</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">168,680</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">137,890</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p>&nbsp;</p> </td>
<td width="42%" valign="bottom"> <p><font size="2" face="Times New Roman">Raw materials</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="16%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">52,924</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="16%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">79,123</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p>&nbsp;</p> </td>
<td width="42%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Reserve for obsolete inventory</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(20,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(20,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p>&nbsp;</p> </td>
<td width="42%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="16%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="16%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p>&nbsp;</p> </td>
<td width="42%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">201,604</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">197,013</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="14%" valign="top"> <p>&nbsp;</p> </td>
<td width="42%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="16%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="16%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr> </table> <p><b><font size="2" face="Times New Roman">6. PURCHASED TECHNOLOGY</font></b></p> <p><font size="2" face="Times New Roman">In April
2000, the Company acquired all rights to certain loudspeaker technology owned by David Graebener (&#147;Graebener&#148;), Stephen M. Williams (&#147;Williams&#148;) and Hucon Limited, a Washington corporation (&#147;Hucon&#148;).&#160; The purchase
price consisted of $300,000 cash plus 200,000 shares of common stock.&#160; The 200,000 shares of common stock were issued in June 2000 and were valued at $962,500. The Company will pay up to an additional 159,843 shares of common stock to Williams
and Graebener contingent upon the achievement of certain performance milestones relating to gross revenues received by the Company from the purchased technology. These contingent shares will be recorded as compensation expense when earned and
issued. The Company agreed to employ Mr. Williams and Mr. Graebener for a term of three years subject to certain terms and conditions.</font></p> <p><b><font size="2" face="Times New Roman">7. CONVERTIBLE PROMISSORY NOTES</font></b></p> <p><font
size="2" face="Times New Roman">In September and October, 2001 the Company sold for cash in a private offering $800,000 and $1,225,000, respectively of unsecured 12% Convertible Subordinated Promissory Notes due December 31, 2002 (&#147;Notes&#148;)
to accredited investors. The principal and interest amount of each Note may at the election of the Note holder be converted one or more times into fully paid and nonassessable shares of common stock, at a price of $2.00 per share. The Notes may be
called by the Company for conversion if the market price exceeds $5.00 per share for five days and certain conditions are met. The purchasers were granted warrants to purchase 1,012,500 common shares of the Company at $2.00 per share until September
30, 2006 (&#147;Warrants&#148;). As of June 30, 2002 the Notes and accrued interest would have been convertible into 1,102,530 shares of common stock.</font></p> <p><font size="2" face="Times New Roman">The Notes and Warrants have antidilution
rights reducing the conversion and exercise price for certain issuances of equity securities by the Company at an effective price below the applicable conversion or exercise price. In connection with the Notes and Warrants, the Company recorded
$2,025,000 as the value of the beneficial conversion feature of the Notes and the value of the Warrants. The Warrants were valued using the Black-Scholes model and the value was reflected as a discount to the debt. This debt discount is being
amortized as non-cash interest expense over the term of the Notes. As of June 30, 2002, $1,215,000 was amortized as non-cash interest expense.</font></p> <p><b><font size="2" face="Times New Roman">8. STOCKHOLDERS&#146; EQUITY</font></b></p>
<p><font size="2" face="Times New Roman">The Company has 10,000 shares of Series C Preferred Stock outstanding convertible into 39,562 shares of Common Stock as of June 30, 2002. The dollar amount of Series C Preferred Stock, increased by $1.20 per
share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $8.00 per share or (ii) 92% of the average of the five days closing bid market
price prior to conversion, but in no event less than $5.75 per share. The shares of Series C Preferred Stock may be called by the Company for conversion if the market price of the common stock exceeds $20.00 per share for ten days and certain
conditions are met. The Series C Preferred Stock is subject to automatic conversion on March 31, 2003.</font></p> <p><font size="2" face="Times New Roman">In May 2002, the Company sold 235,400 shares of Series D Convertible Preferred Stock
(&#147;Series D Stock&#148;), par value $.00001 per share, at $10.00 per share for gross cash proceeds of $2,354,000. A total of 250,000 shares of Series D Stock have been authorized. The dollar amount of Series D Stock, increases by $0.60 per share
accretion per annum and other adjustments, is convertible one or more times into fully paid shares of common stock at a conversion price which is the lower of (i) $4.50 per share or (ii) 90% of the volume weighted average market price for the five
days prior to conversion, but in no event less than $2.00 per share, subject to adjustment. Provided however, that no such conversion may be made prior to January 1, 2003 at a conversion price of less then $4.50 per share. The Company is required to
file a registration statement by December 31, 2002, if the registration statement is not filed, the conversion value of the Series D Stock is subject to adjustment. The shares of Series D Stock may be called by the Company for conversion if the
market price of the common stock exceeds $9.50 per share for ten days and certain conditions are met. The Series D Stock is subject to automatic conversion on March 31, 2006. The purchasers of the Series D Stock were granted warrants to purchase an
aggregate of 517,880 common shares of the Company at $4.50 per share until March 31, 2007 (&#147;D Warrants&#148;). The Series D Stock and the D Warrants have antidilution rights reducing the floor conversion and warrant exercise price for certain
issuances of equity securities by the Company at an effective price below the applicable floor conversion or warrant exercise price.&#160; In connection with the Series D Stock financing, the Company incurred closing costs of $78,750. As of June 30,
2002 the Series D Stock</font></p> <p align="center"><font size="2" face="Times New Roman">8</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION<br> </b>NOTES TO INTERIM FINANCIAL STATEMENTS<br> (Unaudited)</font></p>
<p><font size="2" face="Times New Roman">(based on 360-day year) would have been convertible into 528,161 shares of common stock.</font></p> <p><font size="2" face="Times New Roman">In connection with the Series D Stock and D Warrants, the Company
recorded $994,310 and $871,000 as the value of the discount at issuance of the Series D Stock and the value of the warrants, respectively.&#160; The warrants were valued using the Black-Scholes model.&#160; The value of the warrants and the discount
at issuance are being amortized as a deemed dividend over the period to automatic conversion of the Series D stock (&#147;March 31, 2007&#148;).</font></p> <p><font size="2" face="Times New Roman">As of June 30, 2002, $35,377 and $40,385 was
amortized as a deemed dividend.</font></p> <p><font size="2" face="Times New Roman">The following table summarizes changes in equity components from transactions during the nine months ended June 30, 2002:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="21%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="22%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Preferred Stock</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="23%" colspan="5" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Common Stock</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="13%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Additional</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Accumulated</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Shares</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Amount</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Shares</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="8%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Amount</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="13%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Paid-in-Capital</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="12%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Deficit</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="21%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="10%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="10%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="12%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="8%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="13%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="12%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Balance as of October 1, 2001</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">168,860</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">13,704,139</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="6%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">137</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="11%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">22,913,268</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(19,919,912</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p><font size="2" face="Times New Roman">Issuance of Common Stock for compensation and services</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">24,129</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">106,469</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Issuance of Series D Preferred Stock net of offering costs of $78,750</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">235,400</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,275,248</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p><font size="2" face="Times New Roman">Options issued for services</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">272,539</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Debt discount on promissory notes</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,225,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p><font size="2" face="Times New Roman">Accretion of deemed dividends ($75,762)</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Conversion of Series B preferred stock and cumulative dividends</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(168,860</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(2</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">566,958</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">6</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(4</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p><font size="2" face="Times New Roman">Net Loss</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="6%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="11%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">(5,836,692</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="8%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="8%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="6%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="11%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Balance as of June 30, 2002</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">235,400</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">14,295,226</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="6%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">143</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="11%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">26,792,520</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="10%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(25,756,604</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="21%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="8%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="8%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="6%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="11%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="10%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr> </table> <p><b><font size="2" face="Times New Roman">8. STOCKHOLDERS&#146; EQUITY (cont&#146;d)</font></b></p> <p><font size="2" face="Times New Roman">The following table summarizes
information about stock option activity during the nine months ended June 30, 2002:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="4%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Shares</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Weighted Average<br> Exercise Price</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="19%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Outstanding October 1, 2001</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,338,200</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">5.17</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p><font size="2" face="Times New Roman">Granted</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">340,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">3.70</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Canceled/expired</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">(296,775</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">8.87</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="17%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Outstanding June 30, 2002</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,381,425</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">4.01</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="17%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="17%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Exercisable at June 30, 2002</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">1,051,100</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">4.10</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="17%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="17%" valign="bottom"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="26%" valign="bottom"> <p>&nbsp;</p> </td> </tr> </table> <p><font size="2" face="Times New Roman">Options outstanding are exercisable at prices ranging from $2.50 to $9.03 and expire over the period from 2002 to 2007 with an average life
of three years.</font></p> <p><font size="2" face="Times New Roman">At June 30, 2002, the Company had warrants outstanding, exercisable into the following number of common shares:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="90%">
<tr>
<td width="29%" valign="top"> <p align="center">&nbsp;</p> </td>
<td width="20%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Number</font></b></p> </td>
<td width="4%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="20%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Exercise Price</font></b></p> </td>
<td width="3%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="20%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Expiration Date</font></b></p> </td>
<td width="1%" valign="top"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="4%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="20%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="3%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="20%" colspan="2" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="4%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="3%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">50,000</font></p> </td>
<td width="4%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">16.00</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">May 12, 2003</font></p> </td>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">50,000</font></p> </td>
<td width="4%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="18%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">10.00</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">January 5, 2004</font></p> </td>
<td width="1%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">375,000</font></p> </td>
<td width="4%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">11.00</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">March 31, 2005</font></p> </td>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">1,012,500</font></p> </td>
<td width="4%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="18%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">2.00</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">September 30, 2006</font></p> </td>
<td width="1%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">517,880</font></p> </td>
<td width="4%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">4.50</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">March 31, 2007</font></p> </td>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="18%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="4%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <p align="center">&nbsp;</p> </td>
<td width="18%"> <p align="center">&nbsp;</p> </td>
<td width="3%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <p align="center">&nbsp;</p> </td>
<td width="18%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="29%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,005,380</font></p> </td>
<td width="4%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="18%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="top" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="29%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="18%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="4%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <p align="center">&nbsp;</p> </td>
<td width="18%"> <p align="center">&nbsp;</p> </td>
<td width="3%"> <p align="center">&nbsp;</p> </td>
<td width="2%"> <p align="center">&nbsp;</p> </td>
<td width="18%"> <p align="center">&nbsp;</p> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr> </table> <p><font size="2" face="Times New Roman">In October 2001, the Company granted a total of 110,000 stock options to a consultant in conjunction with related development and
manufacturing agreements.&#160; Options to purchase 65,000 shares of common stock vest depending on the consultant&#146;s completion of various project milestones as well as the Company&#146;s acceptance of the specified work. The Company estimates
the period required to complete the specified milestones each reporting period and records consulting expense based on the current market price of the Company&#146;s stock and the estimated percentage of the work completed. Consulting expense is
adjusted each reporting period until vesting occurs. The Company has recorded consulting expense of $29,797 for the Black Scholes value of 10,000 milestone options vested at March 31, 2002 and</font></p> <p align="center"><font size="2"
face="Times New Roman">9</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><b><font size="2" face="Times New Roman">AMERICAN TECHNOLOGY CORPORATION<br> </font></b><font size="2">NOTES TO INTERIM FINANCIAL
STATEMENTS</font><br> <font size="2">(Unaudited)</font></p> <p><font size="2" face="Times New Roman">consulting expense of $30,889 for the Black Scholes value of 10,000 milestone options vested at April 30, 2002. Options to purchase 45,000 shares of
common stock vest based on the consultant meeting certain performance criteria. The Company records consulting expense at each vesting date. The Company has recorded consulting expense of $96,655 for the Black Scholes value of 45,000 performance
options vested during the nine month period ended June 30, 2002.</font></p> <p><b><font size="2" face="Times New Roman">9. INCOME TAXES</font></b></p> <p><font size="2" face="Times New Roman">At June 30, 2002, a valuation allowance has been provided
to offset the net deferred tax asset as management has determined that it is more likely than not that the deferred tax asset will not be realized. As of September 30, 2001, the Company has for federal income tax purposes net operating loss
carryforwards of approximately $17,600,000, which expire through 2021 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended.</font></p> <p><b><font size="2" face="Times New Roman">10. RELATED PARTY
SALES</font></b></p> <p><font size="2" face="Times New Roman">On April 19, 2002, We offered to our shareholders and employees the opportunity to purchase limited edition NeoPlanar Speaker Systems with Purebass Subwoofers. The offer was limited to a
first come first serve basis.&#160; We offered 100 complete sets at a price of $979.50 per set. As of June 30, 2002 we sold 33 units for cash receipts of $32,323.</font></p> <p align="center"><font size="2" face="Times New Roman">10</font></p> <font
size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p>
<a name="l667tx5"><b><font size="2" face="Times New Roman">Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</font></b></a></p> <p><font size="2" face="Times New Roman">THE FOLLOWING DISCUSSION
INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED
BELOW UNDER THE SUB-HEADING, &#147;BUSINESS RISKS.&#148; ALSO SEE OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2001.</font></p> <p><b><font size="2" face="Times New Roman">Overview</font></b></p> <p><font size="2"
face="Times New Roman">We are focused on commercializing our proprietary HyperSonic, NeoPlanar, PureBass and Stratified Field sound technologies. Our HyperSonic Sound (HSS) technology employs a laser-like beam to project sound to any listening
environment. Our NeoPlanar technology is a thin film magnetic speaker that uses unique films and materials, which we believe results in superior sound quality and volume for any given size with low distortion. PureBass is an extended range woofer
designed to complement our high performance Stratified Field and NeoPlanar technologies. PureBass employs unique cabinet construction and vent configurations along with multiple acoustic filters, which we believe produces improved performance. Our
Stratified Field technology features a thin form factor, in a variety of shapes and sizes, producing high-fidelity, low distortion sound reproduction. Our strategy is to commercialize these technologies through OEMs primarily through licensing or
supply agreements.</font></p> <p><font size="2" face="Times New Roman">We believe our NeoPlanar, PureBass and Stratified Field technologies currently meet OEM commercial requirements. These technologies have been licensed to OEMs (including Harman
International and Amtech Manufacturing Inc.) and are being transferred to commercial production. We expect product royalties to commence in fiscal 2002 from these technologies. We are also completing second generation HSS electronic packages and
ultrasonic emitters that can be supplied to OEMs to be incorporated into end-user products. We expect that these components will be supplied to HSS licensees in fiscal 2002 for use in HSS products. We are however in the early stage of licensing of
our sound technologies and have not generated significant revenues from such technologies to date.</font></p> <p><font size="2" face="Times New Roman">When we license an audio technology, we typically receive a flat fee up-front, with the balance of
payments based upon a percentage of net revenues of the products in which our technology is incorporated. Revenues from up-front license fees are recognized ratably over the specified term of the particular license. Contract fees are recorded as
services are performed.</font></p> <p><font size="2" face="Times New Roman">We have developed a strategic manufacturing relationship with HST, Inc., providing for sub-contract manufacturing of our sound technologies. HST has commenced production of
HyperSonic sound systems and is currently developing volume manufacturing for magnetic NeoPlanar components for military contracts and other OEM customers. Production of the NeoPlaner transducers is expected in the fourth quarter of fiscal 2002. HST
also provides us with additional developmental manufacturing support for ongoing research and future technologies. On April 18, 2002 we announced a letter of intent for the acquisition of HST, Inc., in a stock transaction. No formal merger agreement
was executed and the parties announced the mutual termination of acquisition discussions on June 24, 2002.</font></p> <p><font size="2" face="Times New Roman">Our various technologies are high risk in nature. Unanticipated technical obstacles can
arise at any time and disrupt licensing activities or OEM product sales or result in lengthy and costly delays. There can be no assurance commercially viable sound products being developed by OEMs will meet with market acceptance or that such
products will perform on a cost-effective basis.</font></p> <p><font size="2" face="Times New Roman">Our future is largely dependent upon the success of our sound technologies. We invest significant funds in research and development and on patent
applications related to our proprietary technologies. There can be no assurance our technologies will achieve market acceptance sufficient to sustain operations or achieve future profits. See &#147;Business Risks&#148; below.</font></p> <p><font
size="2" face="Times New Roman">In past years substantially all of our revenues have been derived from the sale of portable consumer products. We have sourced a total of 16 products targeted for niche markets at retail prices ranging from $11.99 to
$29.99. Sourcing is on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. Our market focus is in North America. We inventory finished goods as well as provide direct factory shipment to
certain customers. There can be no assurance that our line of products can be marketed successfully. We have also produced high-end NeoPlanar speakers for sale to the marine market and expect to target other high-end sales to selected niche
markets.</font></p> <p align="center"><font size="2" face="Times New Roman">11</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font><b><font size="2" face="Times New Roman">Critical Accounting Policies</font></b> <p><font size="2" face="Times New Roman">We have identified the policies below as
critical to our business operations and the understandings of our results of operations.&#160; The impact and any associated risks related to these policies on our business operations is discussed throughout Management&#146;s Discussion and Analysis
of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.</font></p> <p><font size="2" face="Times New Roman">In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America.&#160; Actual results
could differ significantly from those estimates under different assumptions and conditions.&#160; We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of
our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.</font></p> <p><font
size="2" face="Times New Roman">We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as &#147;special purpose entities&#148; (SPEs).</font></p> <p><b><font
size="2" face="Times New Roman">Revenue Recognition</font></b></p> <p><font size="2" face="Times New Roman">We derive our revenue primarily from two sources: (i) product revenue and (ii) contract and license fee revenue. We recognize revenue on
product sales in the periods that products are shipped. Revenue from on going per unit license fees are based on units shipped incorporating the Company&#146;s patented proprietary technologies and are recognized in the period when the
manufacturers&#146; units shipped information is available to the Company and collectibility is reasonably assured. We recognize revenue from up-front license and other fees and annual license fees ratably over the specified term of the particular
license or agreement.</font></p> <p><b><font size="2" face="Times New Roman">Research and Development Expenses</font></b></p> <p><font size="2" face="Times New Roman">Research and development expenses are salaries and related expenses associated
with the development of our proprietary sound technologies and include compensation paid to engineering personnel and fees to outside contractors and consultants.</font></p> <p><b><font size="2" face="Times New Roman">Deferred Tax
Asset</font></b></p> <p><font size="2" face="Times New Roman">We have provided a full valuation reserve related to our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate sufficient future taxable income
in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowances, resulting in income tax benefits in our consolidated statement of operations. We evaluate the realizability of the deferred tax assets and assesses
the need for valuation allowance quarterly.</font></p> <p><b><font size="2" face="Times New Roman">Results of Operations</font></b></p> <p><font size="2" face="Times New Roman">Total revenues for the nine months ended June 30, 2002 were $691,745, a
1% increase from the comparable nine months of the prior year. Revenue for the three month period ended June 30, 2002 and 2001 were $235,691 and $150,318, respectively. Product revenue including related party sales for the nine months ended June 30,
2002 was $521,798 a 23% increase from the comparable nine months of the prior year. Contract and license revenues for the nine months ended June 30, 2002 and 2001 were $169,947 and $259,936, respectively. Consumer product sales are subject to
significant month to month and quarter to quarter variability based on the timing of orders, new accounts, lost accounts and other factors. At June 30, 2002 and 2001 we had $367,492 and $126,279, respectively, collected and recorded as deferred
revenue for existing contracts and licenses. We recognize upfront fees and advance revenues over the term of the respective license agreements.</font></p> <p><font size="2" face="Times New Roman">At June 30, 2002, we had open purchase orders for
approximately $316,000 of&#160; backordered products and services to be billed for future work under development contracts. The product is expected to be shipped by December 2002. The contracts are expected to be completed during the fourth quarter
ending September 30, 2002. There was no material backlog at June 30, 2001. Anticipated shipments are subject to change due to a variety of factors, many outside our control. Our customers may modify or cancel orders and delay or change schedules.
Shipments may also be delayed due to production delay, component shortages and other production related issues.</font></p> <p><font size="2" face="Times New Roman">Cost of sales for the nine months ended June 30, 2002 was $397,843 resulting in a
gross profit of $293,902 or 42%. This compares to a gross profit of $205,885 or 30% for the comparable period of the prior year. Cost of sales for the three months ended June 30, 2002 and 2001 were $158,998 and $109,516, representing gross profit
percentages of 33% and 27%, respectively. The fiscal 2002 second quarter gross profit is due to the increase in margins for new products introduced in the retail radio division and higher margins for our acoustic technologies. Product cost of sales
for the nine months ended June 30, 2002 and 2001 were $329,275 and $344,164, respectively, representing a gross profit of 37%</font></p> <p align="center"><font size="2" face="Times New Roman">12</font></p> <font size="2" face="Times New Roman">
</font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font><font size="2" face="Times New Roman">and 19% on product sales.&#160; Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and
overhead allocations.</font> <p><font size="2" face="Times New Roman">Selling, general and administrative expenses for the nine months ended June 30, 2002 and 2001 were $1,864,087 and $1,694,185, respectively. The $169,902 increase resulted
primarily from an increase of $35,136 for depreciation and amortization, an increase of $116,611 for professional services and consulting, and an increase of $10,842 for legal and related costs related to the proposed acquisition of HST, Inc.&#160;
Selling, general and administrative expenses for the three month period ended June 30, 2002 and 2001 were $760,967 and $545,272, respectively. The $215,695 increase resulted from an increase of $90,160 for professional services and consulting, a
$16,629 increase in legal and related costs, an $11,100 increase for annual meeting costs and an increase of $84,912 for personnel and related costs. We may expend additional resources on marketing HSS, NeoPlanar and other technologies in future
quarters, which may increase selling, general and administrative expenses.</font></p> <p><font size="2" face="Times New Roman">Research and development costs for the nine months ended June 30, 2002 were $2,883,977 compared to $2,366,262 for the
comparable nine months of the prior year. The $517,715 increase resulted from an increase of $374,030 for consulting and professional services and an increase of $151,679 for materials, film and other related costs used in developing our
technologies. Research and development costs for the three months ended June 30, 2002 and 2001 were $1,002,980 and $770,848, respectively. The $232,131 increase resulted from an increase of $125,169 for consulting services, an increase of $52,847
for materials, film and other related costs for the development of our sound technologies and an increase of $91,961 for personnel and related costs offset by a decrease of $25,570 for prepaid PMT royalties.</font></p> <p><font size="2"
face="Times New Roman">Research and development costs vary quarter by quarter due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms.
We expect fiscal 2002 research and development costs to remain at levels higher than the prior year due to increased staffing and the use of outside designers and consultants.</font></p> <p><font size="2" face="Times New Roman">We recorded in
selling, general and administrative expenses non-cash compensation expenses of $106,469 and $153,344 for the nine month periods ended June 30, 2002 and 2001. The non-cash compensation expense was for services paid through the issuance of 24,129 and
35,250 shares of common stock, respectively.&#160; Non-cash compensation costs vary depending on elections regarding the use of common stock to pay services and other factors related to warrant and option valuations.</font></p> <p><font size="2"
face="Times New Roman">We experienced a loss from operations of $4,454,162 during the nine months ended June 30, 2002, compared to a loss from operations of $3,854,562 for the comparable nine months ended June 30, 2001. The $599,600 increase is
primarily due to the increase in research and development expenses.</font></p> <p><font size="2" face="Times New Roman">The net loss available to common stockholders for the nine months ended June 30, 2002 and 2001 of $5,960,805 and $3,821,660
respectively included $48,351 and $92,160 of accretion on the Series B, C and Series D Preferred Stock, respectively.</font></p> <p><font size="2" face="Times New Roman">At September 30, 2001, we have federal net loss carryforwards of approximately
$17,600,000 for federal tax purposes expiring through 2021. The amount and timing of the utilization of our net loss carryforwards may be limited under Section 382 of the Internal Revenue Code. A valuation allowance has been recorded to offset the
related net deferred tax asset as management was unable to determine that it is more likely than not that the deferred tax asset will be realized.</font></p> <p><b><font size="2" face="Times New Roman">Liquidity and Capital Resources</font></b></p>
<p><font size="2" face="Times New Roman">Since we recommenced operations in January 1992, we have had significant negative cash flow from operating activities.&#160; During the nine months ended June 30, 2002, operating activities used cash of
$3,316,579. This amount consisted primarily of a net loss of $5,836,692 and a $15,954 increase in accounts receivable and $4,591 in inventories, offset by $545,292 of depreciation and amortization, $1,215,000 of debt discount amortization, $379,008
of compensation paid in options and common stock, an increase of $38,900 in prepaid expenses and other, an increase of $166,575 in accounts payable and an increase of $195,883 in accrued liabilities.</font></p> <p><font size="2"
face="Times New Roman">At June 30, 2002, we had gross accounts receivable of $153,729 as compared to $137,775 at September 30, 2001. This represented approximately 72 days of sales. Receivables can vary substantially due to quarterly and seasonal
variations in sales and timing of shipments to and receipts from large customers, many of which demand extended terms of 90-120 days.</font></p> <p align="center"><font size="2" face="Times New Roman">13</font></p> <font size="2"
face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font><font size="2" face="Times New Roman">For the nine months ended June 30, 2002, net cash used in investing activities was $178,471, consisting primarily of&#160;
$31,647 for the purchase of computer equipment, website development costs and leasehold improvements, and $146,824 in patents and new patent applications. We anticipate significant investments in patents in fiscal 2002. We cannot currently estimate
the dollar amounts of these patent investments.</font> <p><font size="2" face="Times New Roman">At June 30, 2002, we had working capital deficit of $698,573 compared to working capital of $892,040 at September 30, 2001. In May 2002, the Company
issued 235,400 shares of Series D Convertible Preferred Stock for gross cash proceeds of $2,354,000 (see Page 8, Note 8).</font></p> <p><font size="2" face="Times New Roman">We have financed our operations primarily through the sale of preferred
stock, exercise of stock options, issuances of convertible notes, proceeds from the sale of investment securities and margins from consumer product sales. At June 30, 2002, we had cash of $1,359,272. As a result of the cash used in operations offset
by proceeds from convertible notes, our cash position increased by approximately $5,200 from September 30, 2001. Based on our current cash position and projections for future revenues and currently planned expenditures, we will need to raise
additional capital of approximately $2.3 million to continue operations at planned levels during the next twelve months. While we believe that investment capital in sufficient amounts will be available to us, there can be no guarantee that we will
be able to raise funds on terms acceptable to us, or at all.&#160; In addition, we may be required to repay up to $2,025,000 borrowed under convertible promissory notes, which mature December 31, 2002.&#160; We have the right to require the holders
of these notes to convert the entire principal balance of the notes into common shares at a conversion price of $2.00 per share if the closing bid price of our common shares is at least $5.00 per share for five consecutive days of regular trading,
and if at such time there is an effective registration statement for resale of such conversion shares on file with the SEC.&#160; We intend to file a registration statement for those shares promptly after the date of this report.&#160; If the
conditions for mandatory conversion are not satisfied before December 31, 2002, we anticipate that most or all of the note holders will elect to convert the notes to common shares if the market price of our shares is in excess of $2.00 per
share.&#160; On August 7, 2002, our stock closed at $4.39 on the Nasdaq SmallCap Market.&#160; However, there can be no guarantee that our share value will not decrease or that such conversion will occur.&#160; If such conversion does not occur we
will attempt to renegotiate the terms of the notes with non-converting note holders or to raise capital from other sources to repay the notes.&#160; If we are not successful with either of those alternatives, we will be obligated to pay the
remaining balance due, which would further increase our need for additional capital to maintain operations at planned levels.</font></p> <p><font size="2" face="Times New Roman">Any equity based source of additional funds could be dilutive to
existing equity holders and the dilution could be material. The lack of sufficient funds from operations or additional capital could force us to curtail or scale back operations and would therefore have an adverse effect on our business. Other than
cash and cash equivalents, we have no unused sources of liquidity at this time. We expect to incur additional operating losses as a result of expenditures for research and development and marketing costs for our sound and other products and
technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. We anticipate that the commercialization of our technologies may require increased
operating costs, however we cannot currently estimate the amounts of these costs.</font></p> <p><b><font size="2" face="Times New Roman">Contractual Commitments and Commercial Commitments</font></b></p> <p><font size="2" face="Times New Roman">The
following table summarizes our contractual obligations, including purchase commitments at June 30, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="31%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="65%" colspan="11" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Payments Due by Period</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="31%" valign="bottom"> <p><b><font size="1" face="Times New Roman">Contractual Obligations</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Less than 1 Year</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">1-3 years</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">4-5 years</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td>
<td width="15%" colspan="2" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">After 5 Years</font></b></p> </td>
<td width="1%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">&nbsp;</font></b></p> </td> </tr>
<tr>
<td width="31%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td>
<td width="15%" colspan="2"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%"> <p align="center">&nbsp;</p> </td> </tr>
<tr>
<td width="31%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Operating leases</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">50,050</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">164,800</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="31%" valign="bottom"> <p><font size="2" face="Times New Roman">Employment agreements</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">143,250</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">124,200</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="31%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Convertible promissory notes due December 31, 2002 <sup>(1)</sup></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,025,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="31%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="31%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Total contractual cash obligations</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">2,218,300</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">289,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right">&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">$</font></p> </td>
<td width="12%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">&#151;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="31%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="12%"> <hr size="4" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">(1) Assumes notes are not sooner converted to common shares at $2.00 per share.</font></p>
<p><b><font size="2" face="Times New Roman">Employment Agreements</font></b></p> <p><font size="2" face="Times New Roman">The Company has entered into six employment agreements with executive officers and key employees. These agreements are each for
one to three-year terms expiring from September 2002 to February 2003.&#160; Certain of the</font></p> <p align="center"><font size="2" face="Times New Roman">14</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font><font size="2" face="Times New Roman">agreements provide for up to twelve months severance for certain terminations and payments for the term of the agreement (or in
one case twelve months, if longer) on certain changes in control.</font> <p><b><font size="2" face="Times New Roman">New Accounting Pronouncements</font></b></p> <p><font size="2" face="Times New Roman">A number of new pronouncements have been
issued for future implementation as discussed in the footnotes to our interim financial statements (see page 6, Note 4). As discussed in the notes to the interim financial statements, the implementation of these new pronouncements is not expected to
have a material effect on our financial position or results of operations.</font></p> <p><b><font size="2" face="Times New Roman">Business Risks</font></b></p> <p><font size="2" face="Times New Roman">You should consider each of the following
factors as well as the other information in this Quarterly Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us
or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You
should also refer to the other information set forth in this Quarterly Report and in our Annual Report of Form 10-K for the fiscal year ended September 30, 2001, including our financial statements and the related notes.</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman"><b>We have a history of net losses. We expect to continue to incur net losses and we may not achieve or maintain profitability.</b>&#160; We have incurred significant
operating losses and anticipate continued losses in fiscal 2002. At June 30, 2002 we had an accumulated deficit of $25,756,604. We need to generate additional revenue to be profitable in future periods. Failure to achieve profitability, or maintain
profitability if achieved may have a material adverse effect on our stock price.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">We will need additional capital to support our operations during the next twelve months.&#160; If additional capital is not available, we may have to curtail or
cease operations.</font></b></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Our current plans indicate we will need to raise significant additional capital to support our planned level of operations for the next twelve months.&#160; The
actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated.&#160; These factors include:</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="88%" valign="top"> <p><font size="2" face="Times New Roman">the extent to which we receive royalties from existing license agreements for our sound technologies;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="88%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="88%" valign="top"> <p><font size="2" face="Times New Roman">our success in entering into new licensing arrangements for our sound technologies;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="88%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="88%" valign="top"> <p><font size="2" face="Times New Roman">our progress with research and development; and</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="88%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="88%" valign="top"> <p><font size="2" face="Times New Roman">the costs and timing of obtaining new patent rights.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="88%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">When we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transactions.&#160;
If we require additional funds and we are unable to obtain them on a timely basis or on terms favorable to us, we may be required to scale back our research and development efforts, sell or license some or all of our technology or assets or curtail
or cease operations.&#160; If we raise additional funds by selling additional shares of our capital stock or securities convertible into common stock, the ownership interest of our stockholders will be diluted.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">We may not have sufficient funds to pay the outstanding principal on convertible notes due December 31, 2002 if those notes are not converted prior to the due
date.</font></b></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">We may be obligated to pay $2,025,000 in outstanding principal for unsecured convertible notes which mature on December 31, 2002.&#160; While we have a right to force
conversion of the amounts due under these notes to common shares, we can exercise that right only if our stock price exceeds $5.00 per share for five trading days in a row, and we have on file with the SEC an effective registration statement for the
resale of such shares.&#160; We have not yet filed a registration statement for this purpose.&#160; The note holders may voluntary convert the notes to common shares at a conversion price of $2.00 per share any time before payment, but they are not
obligated to do so unless the conditions for mandatory conversion are met.&#160; If our stock price is below $2.00 per share at December 31, 2002, it is unlikely any remaining holders will elect to convert, and the notes will be due and payable
unless they are renegotiated.&#160; Even if our stock price exceeds $2.00 per share on that date or before, some or all of the holders may not elect to convert their notes.</font></p> </td> </tr> </table> <p align="center"><font size="2"
face="Times New Roman">15</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">We may not have sufficient funds available to make payments of notes which do not convert before December 31, 2002.&#160; Even if we do have sufficient funds, such
payments could impair our ability to meet other critical operating expenses, and could require us to scale back our research and development efforts, sell or license some or all of our technology or assets or curtail or cease operations.&#160; If we
do not pay any amounts due and any note holders declare us in default, our financial position and business prospects could be materially impaired.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>We are an early stage company introducing new technologies. If commercially successful products do not result from our efforts, we may be unprofitable or forced to
cease operations.</b>&#160; Our HSS, NeoPlanar, PureBass and SFT technologies have only recently been introduced to market and are still being improved. Commercially viable sound technology systems may not be successfully and timely produced by OEMs
due to the inherent risks of technology development, new product introduction, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors. We have not generated significant revenues from our sound
technology to date, and we cannot guarantee significant revenues in the future. The development and introduction of our sound technology has taken longer than anticipated by management and could be subject to additional delays. Even if products
employing our sound technology are introduced, they may not achieve market acceptance. Our various sound projects are high risk in nature, and unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result
in a determination that further exploitation is unfeasible. If we do not successfully exploit our technology, our financial condition and results of operations and business prospects would be adversely affected.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>Our quarterly and annual revenues are subject to fluctuations caused by many factors, any of which could result in our failure to achieve our revenue
expectations.&#160;</b>Our quarterly and annual revenues from portable consumer products have varied significantly in the past and are likely to continue to vary in the future due to a number of factors. Our revenues from licensing our sound
reproduction technologies are also expected to vary significantly due to a number of factors. Many of these factors are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue
expectations. These factors include:</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">our ability to develop, introduce, produce in volume quantities and market successfully new or enhanced portable consumer products;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">our ability to develop and license to OEMs our sound reproduction technologies or our ability to supply components to OEMs or customers;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">changes in the relative volume of sales of various products or components with sometimes significantly different margins or royalties;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">market acceptance of and changes in demand for our portable consumer products and products of our licensees;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">gains or losses of significant customers, distributors or strategic relationships;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">unpredictable volume and timing of customer orders;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">the availability, pricing and timeliness of delivery of components for our products and OEM products;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">the timing of new technological advances, product announcements or introductions by us, by our licensees and by our competitors;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">product obsolescence and the management of product transitions and inventory;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">production delays by OEMs or by us or our suppliers;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">decreases in the average selling prices of products;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">seasonal fluctuations in sales;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">general consumer electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">the conditions of other industries, such as military and commercial industries, into which our technologies may be licensed; and</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling.</font></p> </td> </tr>
</table> <p align="center"><font size="2" face="Times New Roman">16</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Some or all of these factors could adversely affect demand for our portable consumer products and for OEM products incorporating our sound reproduction technologies,
and therefore adversely affect our future operating results.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales or license
revenue shortfalls, which could harm our quarterly operating results. Because the lead times of firm orders are typically short in the consumer electronics industry, we do not have the ability to predict future operating results with any
certainty.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Because of the above factors, you should not rely on period-to-period comparisons of results of operations as an indication of future performance.</font></p> </td>
</tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>Our expenses may vary from period to period, which could affect quarterly results and our stock price.&#160; </b>If we incur additional expenses in a quarter in
which we do not experience increased revenue, our results of operations would be adversely affected and we may incur larger losses than anticipated for that quarter. Factors that could cause our expenses to fluctuate from period to period
include:</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">the timing and extent of our research and development efforts;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="85%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">the extent of marketing and sales efforts to promote our technologies; and</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="85%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="85%" valign="top"> <p><font size="2" face="Times New Roman">the timing of personnel and consultant hiring.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td>
<td width="85%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>The demand for our portable consumer products has historically been weaker in certain quarters, which makes it difficult to compare our quarterly results.&#160;
</b>Due to industry seasonality, demand for consumer electronic products is strongest during the fourth quarter of each year and is generally slower in the period from March through July. Because the consumer products market experiences substantial
seasonal fluctuations, with more sales occurring toward the end of the year, our quarterly results will be difficult to compare so long as portable consumer products remains our principal revenue source.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>Sound reproduction markets are subject to rapid technological change, so our success will depend on our ability to develop and introduce new technologies.</b>
Technology and standards in the sound reproduction markets evolve rapidly, making timely and cost-effective product innovation essential to success in the marketplace. The introduction of products with improved technologies or features may render
our technologies obsolete and unmarketable. If we cannot develop products in a timely manner in response to industry changes, or if our technologies do not perform well, our business and financial condition will be adversely affected. The life
cycles of our technologies are difficult to estimate, particularly those such as HyperSonic sound for which there is no established market. As a result, our technologies, even if successful, may become obsolete before we recoup our
investment.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>Our HSS technology is subject to government regulation, which could lead to unanticipated expense or litigation</b>.&#160; Our HyperSonic Sound technology emits
ultrasonic vibrations, and as such is regulated by the Food and Drug Administration. In the event of certain unanticipated defects in an HSS product, a licensee or we may be required to comply with FDA requirements to remedy the defect and/or notify
consumers of the problem. This could lead to unanticipated expense, and possible product liability litigation against a licensee or us. Any regulatory impediment to full commercialization of our HSS technology, or any of our other technologies,
could adversely affect our results of operation. For a further discussion of the regulation of our HSS technology, see Part I, Item 1 of our Annual Report on Form 10-K, under the heading &#147;Government Regulation.&#148;</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>Many potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete.&#160;
</b>Technological competition from other and longer established electronic and loudspeaker manufacturers are significant and expected to increase. Most of the companies with which we expect to compete have substantially greater capital resources,
research and development staffs, marketing and distribution program and facilities and many of them have substantially greater experience in the production and marketing of products. In addition, one or more of our competitors may have developed or
may succeed in developing technologies and products that are more effective than any of ours, rendering our technology and products obsolete or noncompetitive.</font></p> </td> </tr> </table> <p align="center"><font size="2"
face="Times New Roman">17</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Commercialization of our sound technologies depends on collaborations with HST, Inc. and other companies. If we are not able to maintain or find collaborators and strategic
alliance relationships in the future, we may not be able to develop our sound technologies and products.</b> As we do not have the production, marketing and selling resources to commercialize our products on our own our strategy is to establish
business relationships with leading participants in various segments of the electronics and sound reproduction markets to assist us in producing, marketing and selling consumer electronic components and products that include our sound
technologies.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman">Our success will therefore depend on our ability to maintain or enter into new strategic arrangements with partners on commercially reasonable terms. If we fail to enter into
such strategic arrangements with third parties, our financial condition, results of operations, cash flows and business prospects will be adversely affected. Any future relationships may require us to share control over our development,
manufacturing and marketing programs or to relinquish rights to certain versions of our sound and other technologies.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman">We have developed a strategic manufacturing relationship with HST, Inc. providing for sub-contract manufacturing of our sound technologies. The loss or disruption of HST, Inc. as
a supplier could have a material adverse effect on our financial condition and results of operations.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Any inability to adequately protect our proprietary technologies could harm our competitive position.&#160; </b>We are heavily dependent on patent protection to secure the
economic value of our technologies. We have both issued and pending patents on our sound reproduction technologies and we are considering additional patent applications. Patents may not be issued from some or all of our pending applications. Claims
allowed from existing or pending patents may not be of sufficient scope or strength to protect the economic value of our technologies. Issued patents may be challenged or invalidated. Further, we may not receive patents in all countries where our
products can be sold or licensed. Our competitors may also be able to design around our patents. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is currently no pending intellectual property litigation against us. Third parties may charge that our technologies or products infringe their patents or proprietary rights. Problems
with patents or other rights could potentially increase the cost of our products, or delay or preclude our new product development and commercialization. If infringement claims against us are deemed valid, we may be forced to obtain licenses, which
might not be available on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions, or to defend against infringement claims. A successful
challenge to our sound technology could have a material adverse effect on our business prospects.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Our retail products and sound component production are dependent on outside contractors and suppliers. Disruptions in supply could adversely affect us.</b>&#160; We are
dependent on contract suppliers for our finished consumer electronics products. We source products from a variety of suppliers. The loss of a supply of a high selling product could have a material adverse effect on our operations. Disruption of our
supply could cause additional costs and delays and could also have an adverse impact on our operations. The manufacturers of our consumer electronic products are also dependent upon the availability of electronic components. Any significant delays
in obtaining components could have a material adverse effect on our financial condition and results of operations.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman">We have developed component supply arrangements for film and components for our Neoplanar and HSS sound technologies. These are generally sole supplier arrangements and the loss
or a disruption of supply could have a material adverse effect on our ability to introduce these technologies, or once introduced in volume, could disrupt future revenues adversely affecting financial condition and results of operations.</font></p>
</td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Two customers represented a significant amount of our business in the last fiscal year. We do not know if we will receive further orders from them.&#160; </b>ASI and Vulcan
Northwest Inc. accounted for 23% and 11% of total revenues for the fiscal year ended September 30, 2001. Neither ASI nor Vulcan have committed to purchase any further products or technology from us. During the quarter ended June 30, 2002, neither
company made significant purchases from us. We cannot provide any assurances that any of our current customers will continue at current or historical levels or that we will be able to obtain orders from new customers.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>If our key employees do not continue to work for us, our business will be harmed because competition for replacements is intense. </b>&#160;Our performance is substantially
dependent on the performance of our executive officers and key technical employees. We are dependent on our ability to retain and motivate high quality personnel, especially highly skilled technical personnel. Our future success and growth also
depend on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, there can be no assurance that we will be able to attract,</font></p>
</td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">18</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
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<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman">assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or
sales personnel could have a material adverse effect upon our business, operating results or financial condition.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Terrorist acts and acts of war may seriously harm our business and results of operations. </b>&#160;Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to our employees, facilities, OEM partners, suppliers, distributors and resellers, and customers, which could significantly impact our results of operations. The terrorist attacks that took place in the United States on
September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially harm our business and results of operations. The long-term effects of the September 11, 2001 attacks on our
business and results of operations are unknown. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties,
which could adversely affect our business and results of operations in ways that cannot presently be predicted.&#160; We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of your common stock. </b>We are authorized to issue up to 5,000,000
shares of preferred stock in one or more series. Our board of directors may determine the terms of future preferred stock without further action by our stockholders. If we issue additional preferred stock, it could affect your rights or reduce the
value of your common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund provisions.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and, consequently, decrease the market value
of your investment.&#160; </b>Some provisions of our amended certificate of incorporation and bylaws and Delaware law could delay or prevent a change in control or changes in our management that a stockholder might consider favorable. If a change of
control or change in management is delayed or prevented, the market price of our common stock could decline.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Conversion of all of or part of our outstanding convertible preferred stock and debt or the exercise of outstanding warrants will cause immediate and possibly significant
dilution in the net tangible book value of your shares.&#160; </b>If the holders of our outstanding convertible preferred stock, convertible debt or warrants decide to convert or exercise all or part of their securities, you will experience
immediate and possibly significant dilution in the net tangible book value of your shares. The market price of our common stock could also decline upon the resale of the common stock obtained upon conversion of our preferred stock or convertible
debt or upon exercise of warrants.</font></p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="7%" valign="top"> <p>&nbsp;</p> </td>
<td width="92%" valign="top"> <p><font size="2" face="Times New Roman"><b>Our stock price is volatile and may continue to be volatile in the future.</b>&#160; Our common stock trades on the NASDAQ Small Cap Market. The market price of our common
stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in (i) our anticipated or
actual operating results; (ii) developments concerning our sound reproduction technologies; (iii) technological innovations or setbacks by us or our competitors; (iv) conditions in the consumer electronics market; (v) announcements of merger or
acquisition transactions; and (vi) other events or factors and general economic and market conditions. The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market price of many technology
companies, and that have often been unrelated or disproportionate to the operating performance of companies.</font></p> </td> </tr> </table> <p>
<a name="l667tx6"><b><font size="2" face="Times New Roman">Item 3. Quantitative and Qualitative Disclosures about Market Risk</font></b></a></p> <p><font size="2" face="Times New Roman">Market risk represents the risk of loss that may impact our
financial position, results of operations or cash due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks.</font></p> <p><font size="2" face="Times New Roman">We are exposed to some market
risk through interest rates, related to our investment of our current cash of $1,359,272 We do not consider this risk to be material, and we manage the risk by continuing to evaluate the best investment rates available for short-term high quality
investments.</font></p> <p><font size="2" face="Times New Roman">We have no activities in long-term indebtedness and our other investments are insignificant. At the present time we do not have any significant foreign sales or foreign currency
transactions.</font></p> <p align="center"><font size="2" face="Times New Roman">19</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
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<a name="l667tx7"><b><font size="2" face="Times New Roman">PART II. OTHER INFORMATION</font></b></a> <p>
<a name="l667tx8"><b><font size="2" face="Times New Roman">Item 1. Legal Proceedings</font></b></a></p> <p><font size="2" face="Times New Roman">From time to time we are involved in routine litigation incidental to the conduct of our business. There
are currently no material pending legal proceedings to which we are a party or to which any of our property is subject.</font></p> <p>
<a name="l667tx9"><b><font size="2" face="Times New Roman">Item 2. Changes in Securities</font></b></a></p> <p><font size="2" face="Times New Roman">(a) Not applicable</font></p> <p><font size="2" face="Times New Roman">(b) Not applicable</font></p>
<p><font size="2" face="Times New Roman">(c) In May 2002 we sold in a private offering for cash at $10.00 per share a total of 235,400 shares of Series D Preferred Stock to a limited number of accredited or foreign investors for aggregate gross
proceeds of $2,354,000. The dollar amount of the Series D stock, increased by $0.60 per share per annum and other adjustments, may be converted one or more times at the election of the Preferred holder, into common stock at a conversion price which
is the lower of (i) $4.50 per share or (ii) 90% of the volume weighted average market price of our common stock for the five trading days prior to conversion, but no less than $2.00 per share, subject to certain adjustments. The Series D Preferred
Stock may not be converted at less than $4.50 per share prior to December 31, 2002. We may call the shares of Series D Preferred Stock for conversion if the market price of the common stock exceeds $9.50 per share for ten consecutive trading days
and certain conditions are met. The Series D Preferred Stock will be subject to automatic conversion on March 31, 2006.</font></p> <p><font size="2" face="Times New Roman">Each purchaser was also granted a warrant to purchase 2.2 common shares at
$4.50 per share, subject to certain future adjustments, until March 31, 2007 for each share of preferred stock purchased (aggregate warrants exercisable into 517,880 shares).</font></p> <p><font size="2" face="Times New Roman">The Series D Preferred
Stock and the related warrants have antidilution rights reducing the floor price for conversion of the Series D stock and the warrant exercise price for certain issuances of equity securities at an effective price below the applicable floor
conversion or warrant exercise price.</font></p> <p><font size="2" face="Times New Roman">We sold these securities without an underwriter. We paid finders fees of $78,750 for the introduction of purchasers. These securities were offered and sold
without registration under the Securities Act in reliance upon the exemption provided by Regulation D or Regulation S thereunder, and an appropriate legend was placed on the Series D Preferred Stock and the warrants and will be placed on the shares
issuable upon conversion of the Series D Preferred Stock or exercise of the warrants unless registered under the Securities Act prior to issuance. We have agreed to file, not later than December 31, 2002, a registration statement for the resale of
the common stock issuable on conversion of the Series D Preferred Stock and exercise of the warrants.</font></p> <p><font size="2" face="Times New Roman">Net proceeds from the sale of the Series D stock of approximately $2,275, 000 will be used for
working capital.</font></p> <p><font size="2" face="Times New Roman">(d)&nbsp;&nbsp;&nbsp;&nbsp;Not applicable</font></p> <p>
<a name="l667tx10"><b><font size="2" face="Times New Roman">Item 3. Defaults Upon Senior Securities</font></b></a></p> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable</font></p> <p>
<a name="l667tx11"><b><font size="2" face="Times New Roman">Item 4. Submission of Matters to a Vote of Security Holders</font></b></a></p> <p><font size="2"
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At the Company&#146;s fiscal 2002 Annual Meeting of Stockholders held on May 20, 2002, the following individuals, constituting all of the members of
the Board of Director were elected: Elwood G. Norris, Terry Conrad, Richard M. Wagner, David J. Carter, O&#146;Connell J. Benjamin and Daniel Hunter. For each elected director, the results of the voting were:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="90%">
<tr>
<td width="32%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Affirmative Votes</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Negative Votes</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Votes Withheld</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Elwood G. Norris</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">11,742,360</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">-0-</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">38,682</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p><font size="2" face="Times New Roman">Terry Conrad</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">11,744,895</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">-0-</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">36,147</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Richard M. Wagner</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">11,744,895</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">-0-</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">36,147</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p><font size="2" face="Times New Roman">David J. Carter</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">11,749,595</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">-0-</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">31,447</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">O&#146;Connell J. Benjamin</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">11,749,595</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">-0-</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">31,447</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p><font size="2" face="Times New Roman">Daniel Hunter</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">11,744,895</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">-0-</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="2" face="Times New Roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="right"><font size="2" face="Times New Roman">36,147</font></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">20</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman">Our stockholders also voted to ratify the selection of BDO Seidman, LLP as our independent auditors for the fiscal year ended September 30, 2002. The results of the voting on this
proposal were:</font>
<table border="0" cellspacing="0" cellpadding="0" width="90%">
<tr>
<td width="32%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Affirmative Votes</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Negative Votes</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <p align="center"><b><font size="1" face="Times New Roman">Votes Withheld</font></b></p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">11,762,843</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">12,070</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td>
<td width="17%" valign="bottom" bgcolor="#cceeff"> <p align="right"><font size="2" face="Times New Roman">6,129</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p>&nbsp;</p> </td> </tr> </table> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; The foregoing proposal was approved and accordingly ratified.</font></p> <p>
<a name="l667tx12"><b><font size="2" face="Times New Roman">Item 5. Other Information</font></b></a></p> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable</font></p> <p>
<a name="l667tx13"><b><font size="2" face="Times New Roman">Item 6. Exhibits and Reports on Form 8-K</font></b></a></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="4%" valign="top"> <p><b><font size="2" face="Times New Roman">(a)</font></b></p> </td>
<td width="95%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">Exhibits:</font></b></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="95%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">3.1</font></p> </td>
<td width="91%" valign="top"> <p><font size="2" face="Times New Roman">Certificate of Designations of Series D Preferred Stock filed with Delaware on May 3, 2002, incorporated by reference to exhibit 3.1 to Form 10-Q filed May 15, 2002.</font></p>
</td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="91%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">10.1</font></p> </td>
<td width="91%" valign="top"> <p><font size="2" face="Times New Roman">Stock and Warrant Purchase Agreement dated May 3, 2002, incorporated by reference to exhibit 10.1 to Form 10-Q filed May 15, 2002.</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="91%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">10.2</font></p> </td>
<td width="91%" valign="top"> <p><font size="2" face="Times New Roman">Form of Stock Purchase Warrant exercisable until March 31, 2007 granted to investors for an aggregate of 517,880 common shares (individual warrants differ as to holder, number of
shares and issuance date), incorporated by reference to exhibit 10.2 to Form 10-Q filed May 15, 2002.</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="91%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">10.3</font></p> </td>
<td width="91%" valign="top"> <p><font size="2" face="Times New Roman">Amendment No. 1 To Series D Preferred Stock And Warrant Purchase Agreement dated July 3, 2002.</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="91%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">99.1</font></p> </td>
<td width="91%" valign="top"> <p><font size="2" face="Times New Roman">Certifications.</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="4%" valign="top"> <p>&nbsp;</p> </td>
<td width="91%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><b><font size="2" face="Times New Roman">(b)</font></b></p> </td>
<td width="95%" colspan="2" valign="top"> <p><b><font size="2" face="Times New Roman">Reports on Form 8-K</font></b></p> </td> </tr> </table> <p align="right"><font size="2" face="Times New Roman">&nbsp;</font></p> <p><font size="2"
face="Times New Roman">We filed a report on Form 8-K on April 23, 2002 disclosing in Item 5 of a press release concerning our letter of intent to acquire HST, Inc.</font></p> <p><font size="2" face="Times New Roman">We filed a report on Form 8-K on
June 24, 2002 disclosing in Item 5 of a press release concerning the termination by mutual agreement of the letter of intent to acquire HST, Inc.</font></p> <p align="center"><font size="2" face="Times New Roman">21</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <center>
<a name="l667tx14"><b><font size="2" face="Times New Roman">SIGNATURES</font></b></a> </center> <p><font size="2" face="Times New Roman">Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="30%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="49%" colspan="4" valign="top"> <p><font size="2" face="Times New Roman">AMERICAN TECHNOLOGY CORPORATION</font></p> </td> </tr>
<tr>
<td width="30%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="5%" valign="top"> <p>&nbsp;</p> </td>
<td width="43%" colspan="3" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="30%" valign="top"> <p><font size="2" face="Times New Roman">Date:&#160; August 14, 2002</font></p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="5%" valign="top"> <p><font size="2" face="Times New Roman">By:</font></p> </td>
<td width="43%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">/s/ RENEE&#180; WARDEN</font></p> </td> </tr>
<tr>
<td width="30%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="5%" valign="top"> <p>&nbsp;</p> </td>
<td width="23%" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="20%" colspan="2" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="30%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="5%" valign="top"> <p>&nbsp;</p> </td>
<td width="43%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Renee</font><font face="Symbol">&#162;</font> <font size="2" face="Times New Roman">Warden, Chief Accounting</font></p> </td> </tr>
<tr>
<td width="30%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="5%" valign="top"> <p>&nbsp;</p> </td>
<td width="43%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Officer, Treasurer and Corporate Secretary</font></p> </td> </tr>
<tr>
<td width="30%" valign="top"> <p>&nbsp;</p> </td>
<td width="20%" valign="top"> <p>&nbsp;</p> </td>
<td width="5%" valign="top"> <p>&nbsp;</p> </td>
<td width="26%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">(Principal Financial and Accounting Officer and duly authorized to sign on behalf of the Registrant)</font></p> </td>
<td width="16%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="222"></td>
<td width="145"></td>
<td width="40"></td>
<td width="167"></td>
<td width="27"></td>
<td width="121"></td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">22</font></p>
</BODY></HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>3
<FILENAME>dex103.htm
<DESCRIPTION>STOCK & WARRANT PURCHASE AGREEMENT
<TEXT>
<HTML><HEAD>
<TITLE>Prepared by R.R. Donnelley Financial -- Stock &amp; Warrant Purchase Agreement</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF"> <p align="right"><font size="2" face="Times New Roman">Exhibit 10.3</font></p> <p align="center"><font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION</b></font></p> <p align="center"><font size="2"
face="Times New Roman"><b>AMENDMENT NO. 1 TO SERIES D PREFERRED STOCK AND WARRANT<br> PURCHASE AGREEMENT</b></font></p> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </b><b>T<small>HIS</small> A<small>MENDMENT</small> No. 1 <small>TO</small> S<small>ERIES</small> D P<small>REFERRED</small> S<small>TOCK AND</small> W<small>ARRANT</small>
P<small>URCHASE</small> A<small>GREEMENT</small></b> &nbsp;(the &#147;Amendment&#148;) is entered into effective as of July 3, 2002, by and among American Technology Corporation, a Delaware corporation (the &#147;Company&#148;), and each of those
persons and entities, severally and not jointly, whose names are set forth on the Schedule of Purchasers attached hereto as <u>Exhibit A</u> (which persons and entities are hereinafter collectively referred to as &#147;Purchasers&#148; and each
individually as a &#147;Purchaser&#148;).</font></p> <p align="center"><font size="2" face="Times New Roman"><b>R<small>ECITALS</small></b></font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>A.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>The parties have previously entered into a Series D Preferred Stock Purchase Agreement
dated as of May 3, 2002 (the &#147;Purchase Agreement&#148;);</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>B.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>The Company desires to amend the Purchase Agreement and its Certificate of Incorporation
so as to ensure compliance by it with the rules and interpretive policies of the Nasdaq Stock Market, where the Company&#146;s common shares are currently listed for trading;</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>C.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>Section 7.6 of the Purchase Agreement requires the consent of the Company and the holders
of at least fifty percent (50%) of the Shares (treated as if converted and including any Conversion Shares into which the Shares or Warrants have been converted or exercised that have not been sold to the public) to amend or modify the Purchase
Agreement; and</font></p> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>D.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>The designations, rights and preferences of
the Shares may be amended by amendment of the Charter, which amendment requires the approval of the holders of a majority of the outstanding stock of the Corporation entitled to vote thereon, together with approval of the holders of a majority of
the outstanding Shares voting separately as a class; and</font></p> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>E.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>The
undersigned, constituting the Company and at least fifty percent (50%) of the Shares (treated as if converted and including any Conversion Shares into which the Shares or Warrants have been converted or exercised that have not been sold to the
public), wish to amend the Purchase Agreement to correct certain errors and to agree to not to vote their Shares in excess of the number of votes permitted by Nasdaq policies applicable to voting rights for convertible securities; and</font></p>
<p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>F.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>The undersigned, constituting the holders of at least a majority of the
outstanding Shares,&#160; wish to consent to the amendment to the Charter as approved by the Company&#146;s board of directors.</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>NOW, THEREFORE, in consideration of the mutual promises set forth in this Amendment, and for other valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows:</font></p> <p align="center"><font size="2" face="Times New Roman">1</font></p> <font size="2" face="Times New Roman">
</font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>1.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Defined terms</b>.&#160; Except as otherwise defined herein, all capitalized terms used
herein shall have the respective meanings ascribed to them in the Purchase Agreement.</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>2.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Correction of Drafting Error Concerning Adjustment of Conversion Terms</b>.&#160;
Section 6.2(b) of the Purchase Agreement is hereby deleted and replaced with the following:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="97%">
<tr>
<td width="13%" valign="top"> <p>&nbsp;</p> </td>
<td width="86%" valign="top"> <p><font size="2" face="Times New Roman">(b)&#160;&#160;&#160;&#160; <b>Adjustment of Conversion Terms</b>.&#160; If the Registration Statement covering the Registrable Securities which is required to be filed by the
Company pursuant to the first sentence of Section 6.2(a) hereof is not filed by December 31, 2002, the terms of conversion of the Shares shall be adjusted as provided in the Certificate of Designation.</font></p> </td> </tr> </table> <BR> <p><font
size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>3.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Voting Agreement</b>.&#160; Purchasers&#146; agree that until such time as the
Charter is amended in accordance with the resolution to amend the Charter attached hereto as Exhibit B, for each matter upon which the Shares are entitled to vote pursuant to Section 4(a) of the Certificate of Designation (a &#147;Stockholder
Matter&#148;), no Purchaser shall cast votes in excess of the number of votes obtained by multiplying the number of such Purchaser&#146;s Shares held at the time of such vote by a fraction obtained by dividing the purchase price per share paid by
such Purchaser for such Shares, by $4.03 (as adjusted for any stock splits, reorganizations, dividends, recapitalizations and the like).&#160; Purchasers further agree that any proxy delivered in connection with a Stockholder Matter shall be deemed
a proxy to vote only the number of shares permitted to be voted in accordance with this Section 3.&#160; The Company shall treat as abstentions any Shares which, in accordance with the agreement in this Section 3, are not voted to the full extent
otherwise permitted by Section 4(a) of the Certificate of Designation. The provisions of this Section 3 shall be binding upon the successors in interest to any of the Shares.&#160; The Company shall not permit the transfer of any of the Shares on
its books or issue a new certificate representing any of the Shares unless and until the person to whom such security is to be transferred shall have executed a written agreement, substantially in the form of this Amendment, pursuant to which such
person agrees to the provisions of this Section 3. The agreement in this Section 3 shall terminate upon the filing with the Delaware Secretary of State of a certificate certifying that the Charter has been amended in the manner contemplated by the
resolutions in Exhibit B.</font></p> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>4.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Ownership</b>.&#160; Each
Purchaser represents and warrants that (a) such Purchaser now owns its Shares, free and clear of liens or encumbrances, and has not, prior to or on the date of this Amendment, executed or delivered any proxy or entered into any other voting
agreement or similar arrangement other than one which has expired or terminated prior to the date hereof, and (b) such Purchaser has full power and capacity to execute, deliver and perform this Amendment, which has been duly executed and delivered
by, and evidences the valid and binding obligation of, such Purchaser enforceable in accordance with its terms.</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>5.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Specific Performance</b>.&#160; The parties hereto hereby declare that it is impossible
to measure in money the damages which will accrue to a party hereto or to its heirs, personal representatives, or assigns by reason of a failure to perform any of the obligations under this Amendment and agree that the terms of this Amendment shall
be specifically enforceable.&#160; If any party hereto or its heirs, personal representatives, or assigns institutes any action or proceeding to</font></p> <p align="center"><font size="2" face="Times New Roman">2</font></p> <font size="2"
face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p><font size="2" face="Times New Roman">specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the
claim or defense therein that such party or such personal representative has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists.</font></p> <p><font
size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>6.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Consent to Amendment of Certificate of Incorporation</b>.&#160; The
undersigned hereby consents to the amendments to the Charter in substantially the form set forth in the resolutions to amend the Charter attached as Exhibit B hereto, and the filing of a certificate evidencing such amendment with the Delaware
Secretary of State.</font></p> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>7.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Ratification</b>.&#160; The Purchase
Agreement, as hereby amended, is ratified and confirmed as being in full force and effect.</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>8.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Governing Law</b>.&#160; This Amendment shall be interpreted and enforced under the
laws of the State of California as such laws are applied to agreements between California residents entered into and performed entirely in California.</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>9.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b><b>Counterparts; Facsimile Signatures</b>.&#160; This Amendment may be executed in
counterparts, all of which together shall constitute a single original.&#160; Facsimile signatures shall be deemed originals for all purposes.</font></p> <p align="center"><font size="2" face="Times New Roman">3</font></p> <font size="2"
face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p><font size="2" face="Times New Roman"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I<SMALL>N</SMALL>
W<SMALL>ITNESS</SMALL> W<SMALL>HEREOF,</SMALL> the parties hereto have executed the S<SMALL>ERIES</SMALL> D P<SMALL>REFERRED </SMALL> S<SMALL>TOCK</SMALL> A<SMALL>ND</SMALL> W<SMALL>ARRANT</SMALL> P<SMALL>URCHASE</SMALL> A<SMALL>GREEMENT</SMALL>as
of the date set forth in the first paragraph hereof.</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="56%" colspan="4" valign="top"> <p><font size="2" face="Times New Roman"><b>C<small>OMPANY:</small></b></font></p> </td>
<td width="39%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman"><b>P<small>URCHASER:</small></b></font></p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p>&nbsp;</p> </td>
<td width="39%" colspan="3" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p><font size="2" face="Times New Roman"><b>A<small>MERICAN</small> T<small>ECHNOLOGY</small> C<small>ORPORATION</small></b></font></p> </td>
<td width="39%" colspan="3" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p><font size="2" face="Times New Roman">13114 Evening Creek Drive South</font></p> </td>
<td width="39%" colspan="3" valign="top"> <p><b><font size="2" face="Times New Roman">[Print Name of Purchaser]</font></b></p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p><font size="2" face="Times New Roman">San Diego, California&#160; 92128</font></p> </td>
<td width="39%" colspan="3" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p>&nbsp;</p> </td>
<td width="39%" colspan="3" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p><font size="2" face="Times New Roman">By:</font></p> </td>
<td width="39%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">By:</font></p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="2%" valign="top"> <p>&nbsp;</p> </td>
<td width="44%" colspan="2" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="9%" valign="top"> <p>&nbsp;</p> </td>
<td width="2%" valign="top"> <p>&nbsp;</p> </td>
<td width="37%" colspan="2" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" colspan="2" valign="top"> <p>&nbsp;</p> </td>
<td width="52%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Name:</font></p> </td>
<td width="39%" colspan="3" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="4%" colspan="2" valign="top"> <p>&nbsp;</p> </td>
<td width="52%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">Title:</font></p> </td>
<td width="39%" colspan="3" valign="top"> <p>&nbsp;</p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p>&nbsp;</p> </td>
<td width="39%" colspan="3" valign="top"> <p><font size="2" face="Times New Roman">Title (if any):</font></p> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="56%" colspan="4" valign="top"> <p>&nbsp;</p> </td>
<td width="9%" colspan="2" valign="top"> <p>&nbsp;</p> </td>
<td width="30%" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="3%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="21"></td>
<td width="11"></td>
<td width="310"></td>
<td width="66"></td>
<td width="18"></td>
<td width="47"></td>
<td width="221"></td>
<td width="27"></td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">AMERICAN TECHNOLOGY CORPORATION<br> SIGNATURE PAGE<br> TO SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT</font></p> <p align="center"><font size="2"
face="Times New Roman">4</font></p> <font size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><b><font size="2" face="Times New Roman">SERIES D PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT</font></b></p> <p align="center"><b><font size="2"
face="Times New Roman">EXHIBIT A<br> SCHEDULE OF PURCHASERS</font></b></p>
<table border="0" cellspacing="0" cellpadding="0" width="51%">
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Michael E. Spencer</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Leonard M. Teninbaum Keogh Account,</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Leonard M. Teninbaum, Trustee</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Veech Trust,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Bryant I.&#160; Pickering,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Trustee</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Jerry E. Polis Family</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Trust,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Jerry E. Polis, Trustee</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Canusa Trading Ltd.</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">W.A. Manuel,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">President</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Palermo Trust</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">James A. Barnes,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Trustee</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Sunrise Management, Inc. Profit Sharing Plan</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">James A. Barnes, </font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Trustee</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Clifford E. Koerner and Kathy L. Koerner,</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">JTWROS</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">James C. Zolin and Josephine M. Zolin,</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">JTWROS</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Wayne Opperman</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Horacek Family Trust,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Anthony J. Horacek,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Trustee</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">NGHK Holdings, LLC</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Gerald L. and Wilma S. Ehrens Family Trust</font></p> </td> </tr> </table> <BR> <p align="center"><font size="2" face="Times New Roman">5</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <BR>
<table border="0" cellspacing="0" cellpadding="0" width="51%">
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Stifel, Nicolaus Custodian for Jonathan Berg</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">IRA</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">R. Kirk Avery</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">John C. Roemer</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Allan F. Gossman</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Jaron Summers and Kathleen Dahlberg,</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">JTWROS</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Granite Capital LP</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">c/o Walter F. Harrison,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">III</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Managing Member, Granite Capital LLC, G.P.</font></p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p>&nbsp;</p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">Granite Capital II LP</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">c/o Walter F. Harrison,</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="179" height="15" valign="top"> <p><font size="2" face="Times New Roman">III</font></p> </td>
<td width="191" height="15" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr style="height:11.5pt;">
<td width="370" colspan="2" height="15" valign="top"> <p><font size="2" face="Times New Roman">Managing Member, Granite Capital LLC, G.P.</font></p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">6</font></p> <font
size="2" face="Times New Roman"> </font>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#CCEEFF" WIDTH="100%" ALIGN="CENTER"> <font size="2" face="Times New Roman"><BR> </font> <p align="center"><b><font size="2" face="Times New Roman">EXHIBIT B</font></b></p> <p align="center"><b><font size="2" face="Times New Roman">RESOLUTIONS TO
AMEND<br> CERTIFICATE OF INCORPORATION<br> OF<br> AMERICAN TECHNOLOGY CORPORATION</font></b></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, </b>American Technology Corporation, a corporation organized under the laws of Delaware (the
&#147;Corporation&#148;), filed a Certificate of Designations of Series D Preferred Stock with the Delaware Secretary of State on May 3, 2002 (the &#147;Series D Certificate of Designations&#148;), and in accordance with Section 151 of the Delaware
Corporation Code, the Series D Certificate of Designations had the effect of amending Corporation&#146;s Certificate of Incorporation;</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS, </b>the Corporation has proposed to make certain amendments to the Series D Certificate of
Designations to conform the same to policies of the Nasdaq Stock Market concerning voting and conversion rights of securities issued by a listed company which are convertible to common shares; and</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;WHEREAS,</b> the Board of Directors has approved the following resolutions, and directed that the same be
submitted to the stockholders of the Corporation for approval in accordance with Delaware law and Section 4(b) of the Series D Certificate of Designation.</font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW THEREFORE, BE IT:</b></font></p> <p><font size="2"
face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Resolved</b>, that the Corporation&#146;s Certificate of Incorporation be amended to modify the voting powers,
preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions of the Series D Preferred Stock, as set forth in the Series D Certificate of Designation, as follows:</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="97%">
<tr>
<td width="6%" valign="top"> <p>&nbsp;</p> </td>
<td width="93%" valign="top"> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>1.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>Section 4(a) of the Series D Certificate
of Designation be amended by adding the following immediately prior to the period at the end of the first sentence thereof:&#160; &#147;provided, however, that the number of such votes for each holder of Series D Preferred Stock shall in no event
exceed the number of votes obtained by multiplying the number of shares of Series D Preferred Stock held by the fraction obtained by dividing the Original Issue Price by $4.03 (as adjusted for any stock splits, reorganizations, dividends,
recapitalizations and the like)&#148;.</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p>&nbsp;</p> </td>
<td width="93%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p>&nbsp;</p> </td>
<td width="93%" valign="top"> <p><font size="2" face="Times New Roman"><b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>2.<b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>Section 5(l) of the Series D Certificate
of Designation be amended by replacing the phrase &#147;Common Stock equal to&#148; in the first sentence thereof with: &#147;Common Stock, which when added to the maximum number of shares of Common Stock issuable upon exercise of all warrants
issued by the Corporation in connection with the sale of the Series D Preferred Stock, is equal to&#148;.</font></p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">7</font></p>
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<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>4
<FILENAME>dex991.htm
<DESCRIPTION>CERTIFICATIONS
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<HTML><HEAD>
<TITLE>Prepared by R.R. Donnelley Financial -- Certifications</TITLE>
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<BODY bgcolor="#FFFFFF"> <p align="right"><font size="2" face="Times New Roman">Exhibit 99.1</font></p> <p align="center"><font size="2" face="Times New Roman">CERTIFICATION OF CHIEF EXECUTIVE OFFICER</font></p> <p><font size="2"
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I, Elwood G. Norris, Chief Executive Officer of American Technology Corporation (the&#160; &#147;Company&#148;), do hereby certify as of
August 14, 2002, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:</font></p> <p><font size="2"
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and,</font></p> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
information contained in the foregoing Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.</font></p>
<table border="0" cellspacing="0" cellpadding="0" width="100%">
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<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">/s/ Elwood G. Norris</font></p> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">Elwood G. Norris</font></p> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">Chief Executive Officer</font></p> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">CERTIFICATION OF CHIEF FINANCIAL OFFICER</font></p> <p><font size="2"
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;I, Renee Warden, Chief Accounting Officer of American Technology Corporation (the&#160; &#147;Company&#148;), do hereby certify as of
August 6, 2002, in accordance with 18 U.S.C.&#160; 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:</font></p> <p><font size="2"
face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and,</font></p> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
information contained in the foregoing Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.</font></p>
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<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">/s/ Renee Warden</font></p> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <hr size="2" width="100%" noshade color="black" align="center"> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">Renee Warden</font></p> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr>
<tr>
<td width="27%" valign="top"> <p>&nbsp;</p> </td>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">Chief Accounting Officer</font></p> </td>
<td width="51%" valign="top"> <p>&nbsp;</p> </td> </tr> </table> <p><font size="2" face="Times New Roman">&nbsp;</font></p>
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