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<SEC-DOCUMENT>0000898430-03-002998.txt : 20030515
<SEC-HEADER>0000898430-03-002998.hdr.sgml : 20030515
<ACCEPTANCE-DATETIME>20030514210858
ACCESSION NUMBER:		0000898430-03-002998
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		3
CONFORMED PERIOD OF REPORT:	20030331
FILED AS OF DATE:		20030515

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:		03700850

	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 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
<TEXT>
<HTML><HEAD>
<TITLE>Form 10-Q for the quarterly period ended March 31, 2003</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <hr size="4" width="100%" noshade color=black> <p align="center"><font size="5" face="Times New Roman"><b>UNITED STATES<br> SECURITIES AND EXCHANGE COMMISSION<br> </b></font> <font size="3"><b>Washington, D.C.
20549</b></font></p> <p align="center"> <font size="5" face="Times New Roman"><b>FORM 10-Q</b></font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="100%" colspan="4" valign="top"> <p> <font size="2" face="Times New Roman"><b>(Mark one)</b></font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p> <font size="3" face="Wingdings">x</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p> <font size="3" face="Times New Roman"><b>QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</b></font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="top"> <p align="center"> <font size="2" face="Times New Roman"><b>For the quarterly period ended March 31, 2003 </b></font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="top"> <p align="center"> <font size="2" face="Times New Roman"><b>or</b></font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p> <font size="3" face="Times New Roman"><b>TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</b></font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="top"> <p align="center"> <font size="2" face="Times New Roman"><b>For the transition period from ____________ to ____________.</b></font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="top"> <p align="center"><font size="2" face="Times New Roman"><b>Commission File Number: 0-24248</b></font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="top"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="bottom"> <p align="center"> <font size="6" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION</b></font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(Exact name of registrant as specified in its charter)</b></font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman"><b>Delaware</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman"><b>87-03261799</b></font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(State or other jurisdiction of incorporation or organization)</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(I.R.S. Empl. Ident. No.)</b></font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p align="center"><font size="2" face="Times New Roman"><b>13114 Evening Creek Drive South, San Diego, California</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman"><b>92128</b></font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(Address of principal executive offices)</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(Zip Code)</b></font></p> </td> </tr>
<tr>
<td width="49%" colspan="2" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman"><b>(858) 679-2114</b></font></p> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="bottom"> <hr size="1" width="50%" noshade color=black> </td> </tr>
<tr>
<td width="100%" colspan="4" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(Registrant&#146;s telephone number, including area code)</b></font></p> </td> </tr>
<tr>
<td width=58 style='border:none'></td>
<td width=299></td>
<td width=7></td>
<td width=357></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. </font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="13%">
<tr>
<td width="7%" valign="top"> <p><font size="2" face="Times New Roman">YES&nbsp;&nbsp;</font> <font size="2" face="Wingdings">x</font></p> </td>
<td width="6%" valign="top"> <p> <font size="2" face="Times New Roman">NO&nbsp;&nbsp;</font> <font size="2" face="Wingdings">o</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="13%">
<tr>
<td width="7%" valign="top"> <p> <font size="2" face="Times New Roman">Yes&nbsp;&nbsp;</font> <font size="2" face="Wingdings">o</font></p> </td>
<td width="6%" valign="top"> <p> <font size="2" face="Times New Roman">No&nbsp;&nbsp;</font> <font size="2" face="Wingdings">x</font></p> </td> </tr> </table> <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 May 1, 2003.</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="49%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman"><b>Common Stock, $0.00001 par value</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman"><b>15,192,294</b></font></p> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td> </tr>
<tr>
<td width="49%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(Class)</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="49%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>(Number of Shares)</b></font></p> </td> </tr> </table> <hr size="4" width="100%" noshade color=black>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>

<a name="toc"></a> <p align="center"><font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION<br> INDEX</b></font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="20%" colspan="2" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="70%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Page</b></font></p> </td> </tr>
<tr>
<td width="20%" colspan="2" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="70%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td> </tr>
<tr>
<td width="90%" colspan="3" valign="top"> <p> <font size="2" face="Times New Roman">PART I. FINANCIAL INFORMATION</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="90%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 1.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">Financial Statements:</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_1">Balance Sheets as of March 31, 2003 (unaudited) and September 30, 2002</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">3</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_2">Statements of Operations for the three and six months ended March 31, 2003 and 2002 (unaudited)</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">4</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="2" face="Times New Roman">
<a href="#tx122_3">Statements of Cash Flows for the six months ended March 31, 2003 and 2002 (unaudited)</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">5</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_4">Notes to Interim Financial Statements</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">6</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 2.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_5">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">13</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 3.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_6">Quantitative and Qualitative Disclosures about Market Risk</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">23</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"><font size="2" face="Times New Roman">Item 4.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_7">Controls and Procedures</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">24</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="90%" colspan="3" valign="top"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_8">PART II. OTHER INFORMATION</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">24</font></p> </td> </tr>
<tr>
<td width="90%" colspan="3" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 1.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_9">Legal Proceedings</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">24</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 2.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_10">Changes in Securities and Use of Proceeds</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">24</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 3.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_11">Defaults upon Senior Securities</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">25</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"><font size="2" face="Times New Roman">Item 4.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_12">Submission of Matters to a Vote of Security Holders</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">25</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 5.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_13">Other Information</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">25</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p style="margin-left:5em; text-indent:-1em"> <font size="2" face="Times New Roman">Item 6.</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_14">Exhibits and Reports on Form 8-K</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">25</font></p> </td> </tr>
<tr>
<td width="13%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="76%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="10%" valign="bottom"> <p align=right>&nbsp;</p> </td> </tr>
<tr>
<td width="90%" colspan="3" valign="top"> <p> <font size="2" face="Times New Roman">
<a href="#tx122_15">SIGNATURES</a></font></p> </td>
<td width="10%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">26</font></p> </td> </tr>
<tr>
<td width=86 style='border:none'></td>
<td width=42></td>
<td width=496></td>
<td width=97></td> </tr> </table> <p align="center"> <font size="2" face="Times New Roman">2</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <p align="center"> <font size="2" face="Times New Roman"><b>American Technology Corporation</b></font></p> <p align="center">
<a name="tx122_1"></a> <font size="2" face="Times New Roman">BALANCE SHEETS<br>&#160;(Unaudited)</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="11%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>March 31,<br> 2003</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="11%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>September 30, <br> 2002</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="11%" colspan="2" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="11%" colspan="2" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <font size="2" face="Times New Roman"><b>ASSETS</b></font> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p class=MsoHeader>&nbsp;</p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p class=MsoHeader>&nbsp;</p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Current Assets:</b></font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Cash</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,866,335</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,807,720 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Trade accounts receivable, less allowance of $8,091 and $20,191 for doubtful accounts</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">36,904</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">111,486 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Subscription receivable</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">25,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Inventories</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">431,756</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">136,881 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Prepaid expenses and other</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">73,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">20,130 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Total current assets</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,432,995</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,076,217 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Equipment,</b> net</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">165,247</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">363,448 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Patents,</b> net of accumulated amortization of $179,290 and $141,314</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">988,785</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,034,333 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Purchased technology,</b> net of accumulated amortization of $1,157,278 and $946,864</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">105,222</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">315,636 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Total assets</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3,692,249</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3,789,634 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>LIABILITIES AND STOCKHOLDERS&#146; DEFICIT</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Current Liabilities:</b></font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Accounts payable</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">360,640</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">733,531 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Accrued liabilities:</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Payroll and related</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">188,276</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">202,432 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Deferred revenue</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">388,168</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">276,667 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Other</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">60,264</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">59,632 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Interest on notes</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">381,534</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">240,279 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Capital lease short-term portion</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">9,110</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">8,963 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">12% Convertible Promissory Notes</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1,725,000</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Related party 12% Convertible Promissory Notes,</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">300,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Total current liabilities</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3,412,992</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,521,504 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Long-Term Liabilities:</b></font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">12% Convertible Promissory Notes net of $0 and $345,000 debt discount</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,380,000 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Related party 12% Convertible Promissory Notes, net of $0 and $60,000 debt discount</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">240,000 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">8% Senior Secured Promissory Notes</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,000,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,500,000 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Capital lease long-term portion</font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">28,497</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">33,012 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <font size="2" face="Times New Roman"><b>Total liabilities</b></font> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">4,441,489</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">4,674,516 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Commitments and contingencies</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Stockholders&#146; deficit</b></font></p> </td>
<td width="1%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Series C Preferred stock 300,000 shares designated: 0 and 10,000 issued and outstanding respectively. Liquidation
preference of $0 and $230,510, respectively.</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Series D Preferred stock 235,400 shares designated: 65,000 and 235,400 issued and outstanding, respectively. Liquidation preference
of $685,474 and $2,412,046, respectively.</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">2 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Series E Preferred stock 350,000 shares designated: 343,250 and 0 issued and outstanding, respectively.
Liquidation preference of $3,449,126 and $0, respectively.</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Common stock, $0.00001 par value; 50,000,000 shares authorized 15,156,670 and 14,351,476 shares issued and outstanding</font></p>
</td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">151</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">144 </font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Additional paid-in capital</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">30,976,600</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">27,255,016 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Accumulated deficit</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(31,725,995</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="2%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(28,140,044</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Total stockholders&#146; deficit</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(749,240</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="top" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(884,882</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p class=MsoFooter> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Total liabilities and stockholders&#146; deficit</b></font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3,692,249</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="top" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="9%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3,789,634 </font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="74%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="9%"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%"> <p><font size="1">&nbsp;</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">See accompanying notes to financial statements.</font></p> <p align="center"><font size="2" face="Times New Roman">3</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <p align="center"> <font size="2" face="Times New Roman"><b>American Technology Corporation <br> </b>
<a name="tx122_2"></a>STATEMENTS OF OPERATIONS<br> (Unaudited)</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="20%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>For the three months ended<br> March 31,</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>For the six month ended<br> March 31,</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="20%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Revenues:</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Product sales</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">145,611</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">99,155</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">533,578</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">324,110</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Contract and license</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">92,331</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">100,278</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">127,663</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">131,944</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Total revenues</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">237,942</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">199,433</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">661,241</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">456,054</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Cost of revenues</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">350,784</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">122,385</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">672,419</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">238,845</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Gross (loss) profit</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(112,842</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">77,048</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(11,178</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">217,209</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Operating expenses:</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Selling, general and administrative</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">908,992</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">610,463</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1,665,309</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1,103,120</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Research and development</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">727,298</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">987,060</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,308,719</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,880,997</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Total operating expenses</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,636,290</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,597,523</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,974,028</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,984,117</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Loss from operations</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,749,132</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,520,475</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(2,985,206</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(2,766,908</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="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Other income (expense):</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Interest income</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1,321</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">9,910</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">3,652</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">12,556</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Interest expense</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(104,828</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(464,918</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(602,730</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(929,474</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="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Other</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(1,667</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(1,667</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" 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="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Total other income (expense)</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(105,174</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(455,008</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(600,745</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(917,718</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="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Net loss</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,854,306</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,975,483</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,585,951</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,684,626</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="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Imputed dividends on convertible Preferred Stock</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">253,685</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,959</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">412,483</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">22,915</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Net loss available to common stockholders</b></font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(2,107,991</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(1,978,442</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(3,998,434</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(3,707,541</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Net loss per share of common stock - basic and diluted</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.14</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.14</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.27</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.26</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="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Average weighted number of common shares outstanding</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">14,897,662</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">14,273,238</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">14,629,077</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">14,074,903</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">See accompanying notes to financial statements.</font></p> <p align="center"> <font size="2"
face="Times New Roman">4</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <p align="center"> <font size="2" face="Times New Roman"><b>American Technology Corporation</b></font></p> <p align="center">
<a name="tx122_3"></a> <font size="2" face="Times New Roman">STATEMENTS OF CASH FLOWS<br> (Unaudited)</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>For the six months ended<br> March 31,</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"><font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Increase (Decrease) in Cash</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Operating Activities:</b></font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net loss</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,585,951</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,684,626</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="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Adjustments to reconcile net loss to net cash used in operations:</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Depreciation and amortization</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">339,290</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">362,826</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Allowance for doubtful accounts</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(12,100</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Warranty reserves</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">41,542</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Common stock issued for services and compensation</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">410,816</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">7,199</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Write-down on patents</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">40,321</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Options and warrants granted for services</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">137,590</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Amortization of debt discount</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">405,000</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">810,000</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Changes in assets and liabilities:</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Trade accounts receivable</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">86,682</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(48,551</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="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Inventories</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(294,875</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">27,005</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Prepaid expenses and other</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(52,870</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">34,503</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Accounts payable</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(255,891</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">254,479</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Accrued liabilities</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">197,690</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">112,081</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net cash used in operating activities</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(2,680,346</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,987,494</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="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman"><b>Investing Activities:</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Purchase of equipment</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(9,700</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(27,086</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Patent costs paid</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(32,749</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(55,476</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="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net cash used in investing activities</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(42,449</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(82,562</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="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Financing Activities:</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Payments on capital lease</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(4,368</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Proceeds from issuance of convertible promissory notes</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">500,000</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Proceeds from the issuance of preferred stock</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">2,407,500</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Cash paid for offering costs</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(141,222</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Proceeds from issuance of convertible promissory notes</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" 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="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Proceeds from exercise of stock options</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">19,500</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Net cash provided by financing activities</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,781,410</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" 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="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net increase (decrease) in cash</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">58,615</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(845,056</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="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Cash, beginning of year</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1,807,720</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" 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="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Cash, end of year</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,866,335</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">509,016</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Supplemental disclosures of cash information:</b></font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Cash paid during the period for:</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Interest</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">72,305</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman"><b>Supplemental disclosure of noncash investing and financing activities:</b></font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Issuance of stock warrants in connection with convertible debt</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">624,750</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Increase in additional paid in capital for the beneficial conversion feature of convertible debt</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">600,250</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Common stock issued on conversion of Series B preferred stock</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2,102,412</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Sale of equipment for accounts payable</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">117,000</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Secured Notes converted into Series E Preferred Stock</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,000,000</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Issuance of Series E Preferred Stock for Subscription receivable</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">25,000</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">See accompanying notes to financial statements.</font></p> <p align="center"> <font size="2"
face="Times New Roman">5</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <p align="center"> <font size="2" face="Times New Roman"><b>AMERICAN TECHNOLOGY CORPORATION<br> </b>
<a name="tx122_4"></a>NOTES TO INTERIM FINANCIAL STATEMENTS<br> (Unaudited)</font></p> <p> <font size="2" face="Times New Roman"><b>1. OPERATIONS<br> </b>American Technology Corporation is engaged in design, development and commercialization of
sound, acoustic and other technologies. Our primary focus is on marketing four of our proprietary sound reproduction technologies and supplying components based on these technologies to customers.</font></p> <p><font size="2"
face="Times New Roman"><b>2. STATEMENT PRESENTATION<br> </b>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 six 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, 2002 included in the Company&#146;s annual report on Form 10K.</font></p> <p> <font size="2" face="Times New Roman">The Company&#146;s financial statements are presented on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. The ability of the Company to continue as a going concern is contingent upon it obtaining sufficient financing to sustain its operations and its ability to
ultimately generate profits and positive cash flow from operations. The Company has funded its operations primarily through the issuance of securities and debt financings. Other than cash of $1,866,335 at March 31, 2003 the Company has no other
material unused sources of liquidity at this time. 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 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. The Company
has significant debt that comes due in December 2003 and December 2004. </font></p> <p> <font size="2" face="Times New Roman">Based on its current plan and assumptions, the Company anticipates that it will be able to meet its cash requirements for
the next twelve months. Management believes increased product sales may provide additional operating funds and believes that any additional investment capital will be available if required. Management has significant flexibility to adjust the level
of research and development and selling and administrative expenses based on the availability of resources. </font></p> <p><font size="2" face="Times New Roman">Management expects to incur additional operating losses as a result of expenditures for
research and development and marketing costs for sound and other products and technologies. The timing and amounts of these expenditures and the extent of the Company&#146;s operating losses will depend on many factors, some of which are beyond
management&#146;s control. Management anticipates that the commercialization of the Company&#146;s technologies may require increased operating costs, however management cannot currently estimate the amounts of these costs.</font></p> <p> <font
size="2" face="Times New Roman">There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations or that such required funds would be available from the aforementioned or other potential
sources. The lack of sufficient funds from operations or additional capital could force the Company to curtail, scale back operations, or cease operations and would therefore have a material adverse effect on the Company&#146;s business. </font></p>
<p> <font size="2" face="Times New Roman">As such, there is substantial doubt about the Company&#146;s ability to continue as a going concern. The financial statements do not include any adjustments necessary to reflect the possible future effects
on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.</font></p> <p> <font size="2" face="Times New Roman"><b>3.
NET LOSS PER SHARE<br> </b>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 6,745,474 and 3,786,805 shares of common stock were
outstanding at </font></p> <p align="center"><font size="2" face="Times New Roman">6</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <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">March 31,
2003 and 2002, 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">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 Series E Preferred Stock
provides for an accretion in the conversion value of 6% or $0.60 per share per annum. The accrued accretion increases the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="22%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Three months ended March 31</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="22%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Six months ended March 31</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="22%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="22%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="10%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net Loss</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" 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">(1,854,306</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,975,483</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,585,951</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" 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">(3,684,626</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="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Series D Preferred Stock imputed deemed dividends based on discount at issuance</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(62,667</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(126,726</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Imputed deemed dividends on warrants issued with Series D Preferred Stock</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(59,255</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(115,370</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Series E Preferred Stock imputed deemed dividends based on discount at issuance</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(59,821</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(59,821</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Imputed deemed dividends on warrants issued with Series E Preferred Stock</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(16,883</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(16,883</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Accretion on Series C, D, and E Preferred Stock at stated rate</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(55,059</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(2,959</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(93,683</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(22,915</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="48%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net loss available to common stockholders</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" 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">(2,107,991</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(1,978,442</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,998,434</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" 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">(3,707,541</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="48%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman"><b>4. RECENT ACCOUNTING PRONOUNCEMENTS<br> </b>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 adopted this statement effective
October 1, 2002. &nbsp;The adoption of this statement did not have a material impact on its financial statements.</font></p> <p> <font size="2" face="Times New Roman">In October 2001, the FASB 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 adoption of this statement did not have a material impact on its financial statements.</font></p> <p> <font size="2" face="Times New Roman">In April 2002, the FASB issued SFAS No. 145, Rescission
of FASB No. 4, 44 and 64, Amendment of FASB No.13, and Technical Corrections. SFAS rescinds FASB No. 4 Reporting Gains and Losses from Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement also rescinds SFAS No.44
Accounting for Intangible Assets of Motor Carriers and amends SFAS No.13, Accounting for Leases, 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. The adoption of this statement did not have a material impact on its financial statements.</font></p> <p><font size="2"
face="Times New Roman">In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.&#160;&#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, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). 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 March 31,
2003, with </font></p> <p align="center"> <font size="2" face="Times New Roman">7</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <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">early
application encouraged.&#160;&#160; The Company does not expect the adoption of this statement to have a material effect on its financial statements.</font></p> <p> <font size="2" face="Times New Roman">In December 2002, the FASB issued SFAS No.
148<i>, </i>&#147;Accounting for Stock-Based Compensation - Transition and Disclosure -- an Amendment of FASB Statement No. 123.&#148; This statement amends SFAS No. 123, &#147;Accounting for Stock-Based Compensation&#148;, to provide alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure requirements effective October 1, 2002, in its
financial statements.</font></p> <p> <font size="2" face="Times New Roman">In November 2002, the FASB issued FASB Interpretation No. 45, &#147;Guarantor&#146;s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others&#148; (&#147;FIN 45&#148;).&#160; FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.&#160; The
initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.&#160; The disclosure requirements of FIN 45 are applicable for financial statements of
interim periods ending after December 15, 2002.&#160; The Company the disclosure requirements of FIN 45 in the 1<sup>st</sup> quarter of 2002 and has include the new disclosure requirements in the Notes to the Financial Statements (see Note
6).</font></p> <p><font size="2" face="Times New Roman"><b>5. INVENTORIES<br> </b>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>

<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>March 31,<br> 2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>September 30,<br> 2002</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Finished goods</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">214,885</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">78,361</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Raw materials</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">236,871</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">78,520</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Reserve for obsolete inventory</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(20,000</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" 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="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">431,756</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">136,881</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman"><b>6. PRODUCT WARRANTY COST<br> </b>At the time revenue is recognized, the Company provides for
estimated cost of product warranties as provided under contractual arrangements.&#160; Warranty obligations are affected by product failure rates and service delivery costs incurred in correcting a product failure.&#160; Should such failure rates or
costs differ from these estimates, accrued warranty costs would be adjusted in the period that such events or costs become known.</font></p> <p> <font size="2" face="Times New Roman">Changes in the warranty reserves during the six months ended March
31, 2003 were as follows:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="87%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Balance at October 1, 2002</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">6,313</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="87%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Accruals for warranty during the six months ended March 31, 2003</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">41,542</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="87%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="87%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Balance at March 31, 2003</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">47,855</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="87%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman"><b>7. PURCHASED TECHNOLOGY<br> </b>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 agreed to 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. Contingent shares are recorded as compensation expense when earned.&#160; During fiscal 2002, a total of 50,000
contingent shares were issued.&#160; In fiscal 2003, the Company issued the balance of 109,843 contingent shares and recorded $410,816 in compensation expense. The Company agreed to employ Mr. Williams and Mr. Graebener for a term of three years
subject to certain terms and conditions. The Company did not renew the employment agreements, which terminated on February 15, 2003.&#160; </font></p> <p align="center"><font size="2" face="Times New Roman">8</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <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"><b>8.
SENIOR SECURED AND CONVERTIBLE SUBORDINATED PROMISSORY NOTES<br> </b><i><u>8% Senior Secured Promissory Notes<br> </u></i>On September 30, 2002, the Company issued to accredited investors 8% Senior Secured Promissory Notes (&#147;Senior Notes&#148;)
for cash proceeds of $1,500,000. The Senior Notes bear interest at a rate of eight percent (8%) per annum on the principal outstanding until the earlier to occur of (i) December 31, 2003 or (ii) when declared due and payable by the Holder upon the
occurrence of an Event of Default (the &#147;Maturity Date&#148;). Interest is payable on a quarterly basis with the first payment due January 2, 2003. The Senior Notes are secured by accounts receivable, certain equipment and inventory.&#160; The
Senior Notes are convertible at the option of the Company. &nbsp;In January 2003, the Company received an additional $500,000 in cash proceeds from the issuance of a Senior Note to one accredited investor. The terms of this note are the same as the
8% Senior Secured Notes discussed above. In connection with the Series E Financing, the Company amended its Senior Notes (i)&nbsp;to allow the holders of the Notes to convert all or a portion of the principal balance of the Senior Notes into Series
E Preferred Stock and (ii)&nbsp;to extend the due date of the unconverted balance of the Senior Notes from December&nbsp;31, 2003 to December&nbsp;31, 2004.The Senior Notes were converted into Series E Preferred Stock at a conversion price equal to
the outstanding principal balance of the Senior Notes.&#160; All accrued but unpaid interest on the converted principal balances plus an amount equal to two months interest on the converted principal balances was paid in cash on the day of
conversion. At March 31, 2003 an aggregate of $1,000,000 was converted into Series E Preferred Stock.&#160; The Senior Notes are also subject to mandatory redemption upon the closing of a sale of equity securities in an amount exceeding $3,000,000.
The amendment to the Senior Notes clarified that Senior Note balances converted to Series E Stock would not be included for purposes of determining whether mandatory redemption of the remaining Senior Note balance is required.</font></p> <p><font
size="2" face="Times New Roman"><i><u>12% Convertible Subordinated Promissory Notes<br> </u></i>In September and October 2001, the Company sold for cash in a private offering an aggregate of $2,025,000 of unsecured 12% Convertible Subordinated
Promissory Notes (&#147;Notes&#148;) to accredited investors and related parties. The Notes were originally due December 31, 2002, but the maturity date was extended to December 31, 2003 by amendment dated November 19, 2002. 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.&#160; Each purchaser was granted a warrant to purchase one common share of the Company at $2.00 per share until September 30, 2006 (the &#147;Warrant&#148;) for
each $2.00 of Notes (aggregate Warrants exercisable into 1,012,500 shares). At March 31, 2003, the Notes could have been converted into 1,193,738 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 a $2,025,000 discount to the notes to reflect 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 with a dividend yield of zero percent;
expected volatility of 89 to 90 percent; risk free interest rate of 4 percent; and an expected life of five years.&#160; The value was reflected as a discount to the debt. This debt discount was being amortized as non-cash interest expense over the
original term of the Notes. For the six month period ending March 31, 2003, $405,000 was amortized as non-cash interest expense.</font></p> <p> <font size="2" face="Times New Roman"><b>9. STOCKHOLDERS&#146; DEFICIT<br> </b>At March 31, 2003, the
10,000 shares of Series C Preferred Stock outstanding were automatically converted into 41,130 shares of Common stock.</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;), 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, increased by $0.60 per share accretion
per annumand 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 could be made prior to January 1, 2003 at a conversion price of less than $4.50 per share. 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 </font></p> <p align="center"><font size="2" face="Times New Roman">9</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <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">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 $78,752. </font></p> <p> <font size="2" face="Times New Roman">During the six months ending March 31, 2003, 170,400 shares of Series D Stock were converted into 647,720 shares of common stock. As of March 31, 2003 the 65,000
remaining outstanding shares of Series D Stock (based on 360-day year) would have been convertible into 208,986 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 D warrants, respectively.&#160; The D warrants were valued using the Black-Scholes model with a dividend yield of zero
percent; expected volatility of 78 percent; risk free interest rate of 4.94 percent; and an expected life of five years.&#160; The Series E Financing resulted in a repricing of the 517,880&nbsp;outstanding D warrants from $4.50&nbsp;per share to
$3.01 per share in accordance with repricing provisions of such warrants. In connection with the repricing the Company recorded $158,519 in additional warrant value. For the six months ended March 31, 2003, $126,726 and $115,370 were amortized as a
deemed dividend related to the value of the discount at issuance and the value of the D warrants. </font></p> <p> <font size="2" face="Times New Roman">Subsequent to March 31, 2003, 10,000 shares of Series D Stock were converted into 35,624 shares
of common stock.</font></p> <p> <font size="2" face="Times New Roman">In March 2003, the Company sold $3,432,500 of Series E Preferred Stock, par value $.00001, at $10.00 per share (the &#147;Series E Stock&#148;) to a limited number of investors
(the &#147;Series E Financing&#148;).&#160; In connection with the Series E Financing, the Company amended its 8% Senior Secured Promissory Notes (the &#147;Notes&#148;) (i)&nbsp;to allow the holders of the Senior Notes to convert all or a portion
of the principal balance of the Notes into Series E Stock and (ii)&nbsp;to extend the due date of the unconverted balance of the Senior Notes from December&nbsp;31, 2003 to December&nbsp;31, 2004. The Company raised an aggregate of $2,432,500 in new
cash, a subscription receivable and converted Senior Notes with an aggregate value of $1,000,000. A total of $1,000,000 in principal amount of the Senior Notes remains outstanding.&#160; </font></p> <p><font size="2" face="Times New Roman">The
dollar amount of Series E Stock, increased 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) $3.25 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 can be made prior to September 30, 2003 at a
conversion price of less than $3.25 per share. The shares of Series E 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 E Stock
is subject to automatic conversion on December 31, 2006. Each purchaser of Series E Preferred Stock was also granted a warrant to purchase 1.5 shares of common stock for each share of Series E Preferred Stock purchased, exercisable until December
31, 2007 at a price of $3.25 per share.&#160; In connection with the Series E financing, we issued warrants exercisable for an aggregate of 514,875 shares (&#147;E Warrants&#148;). In connection with the Series E Stock financing, the Company
incurred closing costs of $141,222. </font></p> <p> <font size="2" face="Times New Roman">As of March 31, 2003 the outstanding Series E Stock (based on 360-day year) would have been convertible into 1,061,270 shares of common stock. </font></p> <p>
<font size="2" face="Times New Roman">In connection with the Series E Stock and E Warrants, the Company recorded $2,677,000 and $755,500 as the value of the discount at issuance of the Series E Stock and the value of the warrants,
respectively.&#160; The warrants were valued using the Black-Scholes model with a dividend yield of zero percent; expected volatility of 76.5 percent; risk free interest rate of 4.0 percent; and an expected life of five years.&#160; For the six
months ended March 31, 2003, $59,821 and $16,883 were amortized as a deemed dividend related to the value of the discount at issuance and the value of the E warrants.</font></p> <p> <font size="2" face="Times New Roman">In March 2003, the Company
issued a $25,000 subscription receivable related to the sale of Series E Stock.&#160; The receivable was collected in April 2003.</font></p> <p align="center"> <font size="2" face="Times New Roman">10</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <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">The
following table summarizes changes in equity components from transactions during the six months ended March 31, 2003:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="20%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Preferred Stock</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Common Stock</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" rowspan="3" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Additional <br> Paid-In <br> Capital</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" rowspan="3" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Accumulated<br>&#160;Deficit</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="20%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Shares</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Amount</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Shares</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Amount</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Balance as of October 1, 2002</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">245,400</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">2</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">14,351,476</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">144</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">27,255,016</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(28,140,044</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="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Stock issued upon exercise of stock options</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">6,500</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">19,500</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Stock issued for services</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">109,844</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">410,815</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Stock issued on conversion of Series D Preferred Stock</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(170,400</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(1</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">647,720</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">6</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(6</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Stock issued on conversion of Series C Preferred Stock</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(10,000</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">41,130</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Issuance of Series E Preferred Stock, net of&#160; offering costs of $141,222</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">343,250</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">3</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right><font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">3,291,275</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Net loss</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(3,585,951</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="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="32%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Balance as of March 31, 2003</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">408,250</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">4</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">15,156,670</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">151</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">30,976,600</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(31,725,995</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="32%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">The following table summarizes information about stock option activity during the six months
ended March 31, 2003:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Number of<br> Options</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Weighted Average <br> exercise price</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Outstanding October 1, 2002</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,459,175</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3.97</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Canceled/expired</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(84,450</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">4.25</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">Exercised</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(6,500</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3.00</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Granted</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">293,000</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">3.37</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Outstanding March 31, 2003</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,661,225</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3.86</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Exercisable at March 31, 2003</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,289,559</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3.86</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="76%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></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 2003 to 2008 with an average life of 3 years. </font></p> <p> <font size="2" face="Times New Roman">At March 31, 2003, the Company had the following warrants outstanding arising from offerings and other transactions, each exercisable
into one Common Share:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="80%">
<tr>
<td width="39%" colspan="2" valign="top"> <p style="margin-left:1em; text-indent:-1em"> <font size="1" face="Times New Roman"><b>Number</b></font></p> </td>
<td width="3%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="16%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Exercise Price</b></font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="21%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Expiration Date</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="39%" colspan="2" valign="top"> <hr size="1" width="100%" noshade color=black> </td>
<td width="3%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="16%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="21%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom" bgcolor="#cceeff"> <p align=right><font size="2" face="Times New Roman">50,000</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" 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">16.00</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">May 12, 2003</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">50,000</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">10.00</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">January 5, 2004</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom" bgcolor="#cceeff"> <p align=right><font size="2" face="Times New Roman">375,000</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">11.00</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">March 31, 2005</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">1,012,500</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">2.00</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">September 30, 2006</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">517,880</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3.01</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">March 31, 2007</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom"> <p align=right><font size="2" face="Times New Roman">100,000</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">4.25</font></p> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">September 30, 2007</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">514,875</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3.25</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">December 31, 2007</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top"> <hr size="1" width="100%" noshade color=black> </td>
<td width="37%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="16%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="21%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="37%" valign="bottom" bgcolor="#cceeff"> <p align=right><font size="2" face="Times New Roman">2,620,255</font></p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="16%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="3%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="21%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="2%" valign="top"> <hr size="3" width="100%" noshade color=black> </td>
<td width="37%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="16%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="3%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="21%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">At March 31, 2003, the Company has two stock-based employee compensation plans.&#160; The
Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, &#147;Accounting for Stock Issued to Employees, and related Interpretations&#148;.&#160; No stock-based employee compensation cost is reflected
in net loss available to common shareholders, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.&#160; The following table illustrates the
effect on net loss available to common shareholders and basic and diluted loss per common share if the Company had applied the fair value recognition provisions of SFAS No. 123:</font></p> <p align="center"><font size="2"
face="Times New Roman">11</font></p>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <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 align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="20%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>For the three months ended<br> March 31,</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>For the six months ended <br> March 31,</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="20%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="19%" colspan="5" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2003</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>2002</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net loss available to common shareholders</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Net loss as reported</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(2,107,991</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(1,978,442</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(3,998,434</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(3,707,541</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"> <font size="2" face="Times New Roman">Deduct:</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Total stock-based employee compensation determined under fair value based method for all awards, net of related tax
effects</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">136,076</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">148,718</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">258,152</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">297,436</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Pro forma net loss</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(2,244,067</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(2,127,160</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(4,256,586</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(4,004,977</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="54%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="2" face="Times New Roman">Net loss per common share</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right>&nbsp;</p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"> <font size="2" face="Times New Roman">As reported</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(0.14</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(0.14</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(0.27</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">(0.26</font></p> </td>
<td width="1%" valign="bottom"> <p> <font size="2" face="Times New Roman">)</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p style="margin-left:3em; text-indent:-1em"><font size="2" face="Times New Roman">Pro forma</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.15</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.15</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(0.29</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">)</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">(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="54%" valign="bottom"> <p style="margin-left:3em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman"><b>10. INCOME TAXES<br> </b>At September 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. The Company has for federal income tax purposes net operating loss carryforwards of approximately
$23,259,000 which expire through 2022 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended.</font></p> <p align="center"> <font size="2" face="Times New Roman">12</font></p>

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 <p>
<a name="tx122_5"></a> <font size="2" face="Times New Roman"><b>Item 2. Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</b></font></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, 2002.</font></p> <p><font size="2" face="Times New Roman"><b>Overview<br> </b>We are focused on commercializing our
proprietary HyperSonic Sound (&#147;HSS&#148;), NeoPlanar, PureBass and HIDA sound technologies. Our HyperSonic Sound 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 HSS, NeoPlanar technologies
and other high performance satellite systems. Our HIDA technology employs proprietary techniques and components to produce variable intensity directional acoustical sound intended for use as a hailing device or supercharged megaphone or as a
non-lethal weapon. Our strategy is to commercialize these technologies through licensing and product sales to customers, distributors and OEMs. We believe our HSS, NeoPlanar and PureBass technologies meet customer and OEM requirements. These
technologies have been licensed to OEMs and are being transferred to production. We expect product sales and royalties to commence in fiscal 2003 from these technologies. We are also producing HSS and NeoPlanar systems for sale to customers,
distributors and OEMs. We are in the early stage of sales and licensing of our sound technologies with many customers purchasing systems for evaluation and demonstration. </font></p> <p> <font size="2" face="Times New Roman">We incurred net losses
of $8,220,132, $5,046,219 and $3,068,046 in the fiscal years ended September 30, 2002, 2001 and 2000 and a net loss of $3,585,951 for the six months ended March 31, 2003. We have substantial research and development and general administrative
expenses, and our revenues from our audio technologies and portable consumer products have not yet been sufficient to offset these costs. We expect to incur additional operating losses during the balance of fiscal 2003, and we anticipate that we
will need to raise additional capital of approximately $2 million to continue operations at planned levels during the next twelve months. See &#147;Liquidity and Capital Resources&#148; below. As a result of our need for capital and our net losses
to date, our independent auditors noted in their audit report on our financial statements for the fiscal year ended September 30, 2002 substantial doubt about our ability to continue as a going concern. We will need to generate additional revenue to
achieve profitability and generate positive cash flow from operations in future periods.</font></p> <p><font size="2" face="Times New Roman">We license our technologies for production by others. 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">In other instances we supply complete systems or components used in other products to customers, distributors or OEMs. In
these cases we include our intellectual property fees in the selling prices of the systems or components. We currently produce HSS systems and NeoPlanar panels which are installed as a component of a sound system.</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 sales or licensing activities and result in lengthy and costly delays. There can be no assurance
commercially viable sound products offered by us or by our customers, distributors or 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 Risk&#148; below.</font></p> <p> <font size="2" face="Times New Roman">Effective in October 2002, we discontinued our portable consumer product
line in order to focus financial, personnel and facility resources on our sound technologies, which we expect to provide substantially all of our fiscal 2003 revenues. For the six months ended March 31, 2003 and for fiscal 2002 we recorded revenues
of $78,680 and $301,116, respectively for portable consumer products. These revenues represented products sourced by us, private labeled under our name and resold to sporting good stores and other retailers. Historically, portable consumer product
revenues accounted for the majority of our revenues. </font></p> <p align="center"> <font size="2" face="Times New Roman">13</font></p>

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 <p><font size="2" face="Times New Roman">Demand for our sound technologies and products is subject to significant month to month variability resulting from seasonal demand fluctuations and the limited number of
customers and market penetration achieved by us to date. Further, we expect future sales may be concentrated with a limited number of customers. We are also reliant on outside suppliers for components of our products and outside manufacturers for
assembly and there can be no assurance of future supply. The markets for our products and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demographic trends in society, marketing and
advertising expenditures, and product positioning in retail outlets, technological developments, seasonal variations and general economic conditions influence demand for our products. Because these factors can change rapidly, customer demand can
also shift quickly. We may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and/or limited financial resources.</font></p> <p> <font size="2"
face="Times New Roman"><b>Critical Accounting Policies<br> </b>We have identified the policies below as critical to our business operations and the understandings of our results of operations. 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. Actual results could differ significantly from those estimates under different assumptions and conditions. 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> <font size="2" face="Times New Roman"><b>Revenue Recognition<br> </b>We derive our revenue primarily from two sources: (i) product revenue and (ii) contract and
license fee revenue. Product revenues are recognized in the periods that products are shipped to customers, FOB shipping point, if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and there
are no resulting obligations. Revenues from ongoing per unit license fees are earned based on units shipped incorporating our patented proprietary technologies and are recognized in the period when the manufacturers&#146; units shipped information
is available to us and collectibility is reasonably assured. Revenues from up-front license and other fees and annual license fees are recognized ratably over the specified term of the particular license or agreement.</font></p> <p> <font size="2"
face="Times New Roman"><b>Research and Development Expenses<br> </b>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> <font size="2" face="Times New Roman"><b>Deferred Tax Asset<br> </b>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 assess the need for valuation allowance quarterly. The utilization of the net operating loss carryforwards could be substantially limited due to restrictions
imposed under federal and state laws upon a change in ownership.</font></p> <p> <font size="2" face="Times New Roman"><b>Results of Operations<br> </b>Total revenues for the six month period ended March 31, 2003 and 2002 were $661,241and $456,054,
respectively. Total revenues for the three month period ended March 31, 2003 and 2002 were $237,942 and $199,433, respectively. Product revenues for the six months ended March 31, 2003 were $533,578 a 65% increase from the comparable six month total
of&#160; $324,110 for the prior year. For the six months ended March 31, 2003 product sales included $78,680 of consumer portable product sales and $454,898 from the sale of NeoPlanar, HIDA and HSS products. For the six months ended March 31, 2002
product sales included $165,463 of consumer portable product sales and $158,647 from the sale of NeoPlanar, HIDA and HSS products. Product revenues for the second quarter ended March 31, 2003 and 2002 were $145,611 and $99,155, respectively. We
experienced manufacturing quality control problems with some of our initial </font></p> <p align="center"><font size="2" face="Times New Roman">14</font></p>

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 <p> <font size="2" face="Times New Roman">commercial HSS units, which negatively impacted product sales during the second quarter of fiscal 2003.&#160; We have worked closely with our contract manufacture to resolve
these issues, but because our HSS emitters are a new and unique product, we may continue to experience manufacturing problems that could adversely impact product sales in future periods. Consumer product revenues were historically volatile due to
changing customers and product offerings and reliance on a limited number of customers. Since we have discontinued our portable consumer products line, fiscal 2003 revenues for these products will be substantially below those for fiscal 2002, and
will be limited to sales of inventory on hand. Sales of sound products are also expected to be volatile as a result of manufacturing startup requirements and the need to recruit new customers for products not previously available in the
marketplace.</font></p> <p> <font size="2" face="Times New Roman">Contract and license revenues for the quarters ended March 31, 2003 and 2002 were $127,663 and $131,944, respectively. We recognize upfront fees and advance revenues over the term of
respective license agreements. At March 31, 2003 and September 30, 2002 we had $388,168 and $276,667, respectively, collected and recorded as unrecognized revenue for existing contracts and licenses. </font></p> <p> <font size="2"
face="Times New Roman">At&#160; March 31, 2003, we received purchase orders for approximately $240,000 for military product expected to ship during our fiscal third quarter ending June 30, 2003.&#160; 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 delays, component shortages and other production related issues.</font></p>
<p> <font size="2" face="Times New Roman">Cost of revenues for the six months ended March 31, 2003 was $672,419 resulting in a gross loss of $11,178 or 1.7%. This compares to a gross profit of $217,209 or 48% for the comparable period of the prior
year. It is difficult to compare historical gross profit percentages due to changes in contract and license revenues as a percentage of total revenues and changes in the product mix in each year. Cost of revenues for the three months ended March 31,
2003 and 2002 were $350,784 and $122,385 resulting in a gross loss of 47% and a gross profit of 39%, respectively. The lower gross profit percentage in the six and three months ended March 31, 2003 resulted from lower margins on consumer product
sales, and establishing a warranty reserve and startup production costs for HSS and NeoPlanar products. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations. Overall gross margins will also
be impacted by future contract and licensing revenues and the types of products sold to customers. Margins may vary significantly from period to period.</font></p> <p><font size="2" face="Times New Roman">Selling, general and administrative expenses
for the six months ended March 31, 2003 and 2002 were $1,665,309 and $1,103,120, respectively. The $562,189 increase resulted from an increase in legal costs and fees of $166,055, an increase in professional services of $61,461, an increase in
personnel and related costs of $333,972 and an increase of&#160; $8,284 for print advertising. The increase in personnel costs included four new hires. Selling, general and administrative expense for the three month period ending March 31, 2003
increased by $298,529 or 49% from the comparable prior year period.&#160; We may expend additional resources on marketing our sound technologies in future quarters, which may increase selling, general and administrative expenses in future periods.
</font></p> <p> <font size="2" face="Times New Roman">Research and development expenses for the six months ended March 31, 2003 were $1,308,719 compared to $1,880,997 for the comparable six months of the prior year. The $572,278 decrease resulted
from a reduction of $386,470 for supplies and materials used in the development of our sound technologies and a decrease of $314,468 for consulting services offset by an increase in personnel and related costs of $182,798. The increase in personnel
and related costs can be attributed to the addition of an engineer administrative assistant, two lab technicians and a quality control director. Research and development costs for the three months ended March 31, 2003 decreased by $259,762 or 26%
from the comparable prior year period. 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 that fiscal 2003 research and development costs may be at lower levels than the prior year based on current staffing and budgeting as we focus resources on sales of products from developed technologies.</font></p> <p>
<font size="2" face="Times New Roman">We recorded in selling, general and administrative expenses $3,600 for the six months ended March 31, 2002 for services paid through the issuance of 1,425 shares of common stock. </font></p> <p> <font size="2"
face="Times New Roman">We experienced a loss from operations of $2,985,206 during the six months ended March 31, 2003, compared to a loss from operations of $2,766,908 for the comparable six months ended March 31, 2002. The $218,298 increase is
primarily due to the decrease in our gross profit on product sales reflecting production start up costs.</font></p> <p><font size="2" face="Times New Roman">Interest expense of $602,730 for the six months ended March 31, 2003 included $405,000 of
noncash amortization of debt discount, $121,529 of accrued interest on convertible subordinated promissory notes and $72,305 of paid interest on senior secured promissory notes.</font></p> <p align="center"> <font size="2"
face="Times New Roman">15</font></p>

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<h5 align="left"><a href="#toc">Table of Contents</a></h5>
 <p> <font size="2" face="Times New Roman">The net loss available to common stockholders for the six months ended March 31, 2003 of $3,998,434 included $93,683 of accretion on the Series C, D and E Preferred Stock and
also included $126,726 and $59,821 on Series D and Series E Preferred Stock imputed deemed dividends based on discount at issuance, respectively, and $115,370 and $16,883 on imputed deemed dividends on warrants issued in connection with the Series D
and Series E Preferred Stock, respectively. The net loss available to common stockholders for the three months ended March 31, 2003 of $2,107,991 included $55,059 of accretion on the Series C, D and E Preferred Stock and also included $62,667 and
$59,821 on Series D and Series E Preferred Stock imputed deemed dividends based on discount at issuance, respectively, and $59,255 and $16,883 on imputed deemed dividends on warrants issued in connection with the Series D and Series E Preferred
Stock, respectively. </font></p> <p> <font size="2" face="Times New Roman">The net loss available to common stockholders for the six months ended March 31, 2002 of $3,707,541 included $22,915 of accretion on the Series C Preferred Stock. The net
loss available to common stockholders for the three months ended March 31, 2002 of $1,978,442 included $2,959 of accretion on the Series C Preferred Stock.</font></p> <p> <font size="2" face="Times New Roman">We have federal net loss carryforwards
of approximately $23,259,000 for federal tax purposes expiring through 2022. 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> <font size="2" face="Times New Roman">Future operations are
subject to significant variability as a result of licensing activities, product sales and margins, timing of new product offerings, the success and timing of new technology exploitation, decisions regarding future research and development and
variability in other expenditures.</font></p> <p><font size="2" face="Times New Roman"><b>Liquidity and Capital Resources<br> </b>We have experienced significant negative cash flow from operating activities developing and introducing our sound
technologies. Due to our need for additional capital and our net losses, our independent auditors have noted in their report on our financial statements a substantial doubt about our ability to continue as a going concern. Our negative cash flow
from operating activities was $2,680,346 for the six months ended March 31, 2003. As of March 31, 2003, the net loss of $3,585,951 included certain expenses not requiring the use of cash totaling $1,124,869. In addition, cash was used in operating
activities through an increase of $294,875 in inventories,&#160; an increase of $52,870 in prepaid expenses and other and a decrease of $255,891 in accounts payable. Cash provided by operating activities included an $86,682 decrease in accounts
receivable and a $197,690 increase in accrued liabilities.</font></p> <p> <font size="2" face="Times New Roman">At March 31, 2003, we had gross accounts receivable of $44,995 as compared to $131,677 at September 30, 2002. This represented
approximately 25 days of sales. Terms with individual customers vary greatly. We typically require pre-payment or a maximum of thirty day terms for our&#160; sound technology products. Our receivables can vary dramatically due to overall sales
volumes and due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers.</font></p> <p> <font size="2" face="Times New Roman">For the six months ended March 31, 2003, we used approximately $9,700
for the purchase of laboratory and computer equipment and made a $32,749 investment in patents and new patent applications. We anticipate a continued investment in patents in fiscal 2003. Dollar amounts to be invested on these patents are not
currently estimable by management.</font></p> <p> <font size="2" face="Times New Roman">At March 31, 2003, we had negative working capital of $979,997 compared to working capital of $554,713 at September 30, 2002. </font></p> <p> <font size="2"
face="Times New Roman">We have financed our operations primarily through the sale of preferred stock, exercises of stock options, sale of convertible and non-convertible notes, proceeds from the sale of investment securities and margins from product
sales. At March 31, 2003, we had cash of $1,866,335, representing an increase of $58,615 from cash at September 30, 2002.&#160; The increase resulted from cash used in operating activities offset by proceeds from Series E Preferred Stock, a
subscription receivable and an 8% Senior Note, in aggregate amount of&#160; $2,932,500.&#160; </font></p> <p><font size="2" face="Times New Roman">During the quarter ended March 31, 2003, we raised an additional $500,000 through the sale of an 8%
Senior Secured Note. We previously issued $1,500,000 of such notes on September 30, 2002.&#160; In connection with our sale of Series E Preferred Stock, all of the outstanding senior notes were amended in February 2003:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">to allow the holders of the senior notes to convert all or a portion of the principal balance of the senior notes into Series E Preferred Stock; and</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">to extend the due date of the unconverted balance of the senior notes from December 31, 2003 to December 31, 2004.</font></p> </td> </tr> </table> <p align="center"> <font
size="2" face="Times New Roman">16</font></p>

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 <p> <font size="2" face="Times New Roman">The senior notes bear interest at a rate of eight percent per annum.&#160; Interest is payable on a quarterly basis with the first payment due January 2, 2003. The senior
notes are secured by accounts receivable, certain equipment and inventory. The senior notes are also subject to mandatory redemption upon the closing of a sale of equity securities in an amount exceeding $3,000,000. The February 2003 amendment
clarified that senior note balances converted to Series E Preferred Stock would not be included for purposes of determining whether mandatory redemption of the remaining senior note balance is required.</font></p> <p> <font size="2"
face="Times New Roman">During the quarter ended March 31, 2003, we sold 343,250 shares of Series E Preferred Stock at $10.00 per share, and issued 514,875 related common stock purchase warrants exercisable at $3.25 per share. Through this sale, we
raised approximately $2,266,278 in new cash after deducting offering costs, a subscription receivable and converted outstanding senior secured promissory notes with an aggregate principal value of $1,000,000.&#160; The terms of the Series E
Preferred Stock and related warrants are described under Part II, Item 2 below. </font></p> <p><font size="2" face="Times New Roman">Based on our current cash position and assuming (a) currently planned expenditures and level of operations, (b)
continuation of product sales and (c) expected royalty and licensing proceeds; we believe we will require approximately $2 million of additional cash for operations for the next twelve months. We believe increased sales of HSS and NeoPlanar products
may provide a portion of this cash. We believe that any required investment capital will be available to us, but there can be no guarantee that we will be able to raise funds on terms acceptable to us, or at all. We have significant flexibility to
adjust the level of research and development and selling and administrative expenses based on the availability of resources. However reductions in expenditures could delay development and adversely affect our ability to generate future revenues.
</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 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. Accordingly, there can be no assurance that our current expectations regarding required financial resources will prove to be accurate. 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> <font size="2" face="Times New Roman"><b>Contractual Commitments and Commercial Commitments<br> </b>The following table summarizes our contractual obligations,
including purchase commitments at March 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flow in future periods:</font></p> <p align="center"> <font size="2" face="Times New Roman">Payments Due by
Period</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="54%" valign="bottom"> <p><font size="1" face="Times New Roman"><b>Contractual Obligations</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Less than 1 <br> Year</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>1-3 Year</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>4-5 Years</b></font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td>
<td width="9%" colspan="2" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>After 5 Years</b></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="7%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Capital leases</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="7%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">9,110</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">28,497</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" 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">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p> <font size="2" face="Times New Roman">Operating lease</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="7%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">63,964</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Employment agreements</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="7%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">386,000</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">536,250</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p> <font size="2" face="Times New Roman">Convertible promissory notes due December 31, 2003</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="7%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">2,569,890</font></p> </td>
<td width="2%" valign="bottom"> <p> <font size="2" face="Times New Roman"><sup>(1)</sup></font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom" bgcolor="#cceeff"> <p><font size="2" face="Times New Roman">Senior secured promissory notes due December 31, 2004</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="7%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,159,726</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="7%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" 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><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="7%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">3,028,964</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">1,724,473</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p> <font size="2" face="Times New Roman">$</font></p> </td>
<td width="8%" valign="bottom" bgcolor="#cceeff"> <p align=right> <font size="2" face="Times New Roman">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="2%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" 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">&#151;&nbsp;&nbsp;</font></p> </td>
<td width="1%" valign="bottom" bgcolor="#cceeff"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="54%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="7%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="2%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="1%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="8%" valign="bottom"> <hr size="3" width="100%" noshade color=black> </td>
<td width="1%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;&nbsp;Assumes notes are not
sooner converted to common shares.</font></p> <p> <font size="2" face="Times New Roman"><b>Employment Agreements<br> </b>The Company has entered into four employment agreements with executive officers and key employees. These agreements are each for
90 days to three-year terms expiring from May 2003 to October 2005.&#160; Certain of the 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> <p align="center"> <font size="2" face="Times New Roman">17</font></p>

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 <p> <font size="2" face="Times New Roman"><b>New Accounting Pronouncements<br> </b>A number of new pronouncements have been issued for future implementation as discussed in the footnotes to our interim financial
statements (see page 7, 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 statements.</font></p> <p> <font size="2"
face="Times New Roman"><b>Business Risks<br> </b>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 on Form 10-K for the fiscal year ended September
30, 2002, including our financial statements and the related notes.</font></p> <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.
Our independent auditors have raised substantial doubt about our ability to continue as a going concern.<br> </b>We have incurred significant operating losses and anticipate continued losses in fiscal 2003. At March 31, 2003 we had an accumulated
deficit of $31,725,995. Due to our net losses and our need for additional capital to sustain operations, our independent auditors have noted in their report on our financial statements a substantial doubt about our ability to continue as a going
concern. We need to generate additional revenue to be profitable in future periods. Failure to achieve profitability, or maintain profitability if achieved, may cause our stock price to decline. </font></p> <p><font size="2"
face="Times New Roman"><b>We will need additional capital to support our operations during the next twelve months. If additional capital is not available, we may have to curtail or cease operations. <br> </b>Our current plans indicate we will need
approximately $2.0 million in additional capital to support our planned level of operations for the next twelve months. Due to our need for additional capital and our net losses, our independent auditors have noted in their report on our financial
statements a substantial doubt about our ability to continue as a going concern. A portion of these funds may be generated from operations from licensing and HSS product sales. 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. These factors include: </font></p>
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<tr>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="95%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="95%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">our success in producing and selling HSS and NeoPlanar products to customers;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">our progress with research and development; and</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">the costs and timing of obtaining new patent rights.</font></p> </td> </tr> </table> <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. 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. 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> <p> <font size="2" face="Times New Roman"><b>We have substantial debt which adversely affects us.<br> </b>We have a substantial amount of debt, including the following as
of March 31, 2003:</font></p>
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<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">$1.0 million in senior secured promissory notes due December 31, 2004.</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">$2.025 million in convertible subordinated promissory notes due December 31, 2003.</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">The substantial
amount of our indebtedness impacts us in a number of ways:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">We have to dedicate a portion of cash flow from operations to interest payments on the senior secured promissory notes, which reduces funds available for other
purposes.</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="86%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">18</font></p>

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<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">We may not have sufficient funds to pay quarterly interest payments on the senior secured promissory notes, which could lead to a default.</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="86%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">The existing debt may make it difficult for us to obtain additional financing for working capital or other purposes.</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="86%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">If we default on the senior secured promissory notes, the holders could take control of all of our accounts receivable, equipment, goods, instruments and inventory.</font></p>
</td> </tr> </table> <p> <font size="2" face="Times New Roman">These factors generally place us at a disadvantage to our less leveraged competitors. Any or all of these factors could cause our stock price to decline.</font></p> <p> <font size="2"
face="Times New Roman"><b>We may not have sufficient funds to pay the balance on promissory notes due December 31, 2003 and December 31, 2004.&#160; <br> </b>We have issued convertible subordinated promissory notes in the aggregate face amount of
$2.025 million which mature on December 31, 2003 and senior secured promissory notes in the aggregate face amount of $1.0 million which mature on December 31, 2004, and if they are not sooner paid or, in the case of the convertible notes, converted,
we will owe $2,569,890 in principal and accrued interest on December 31, 2003 and $1,159,726 due on December 31, 2004.</font></p> <p><font size="2" face="Times New Roman">We have a right to force conversion of the amounts due under the convertible
subordinated promissory notes to common shares at conversion price of $2.00 per share, but 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. The convertible note holders may voluntarily 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. If our stock price is below $2.00 per share at March 31, 2003, it is unlikely any remaining holders will elect to convert, and the notes will be due and payable unless they are renegotiated. 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. During the last 30 trading days, the closing sale price of our common shares has ranged from $3.12 to $3.70. </font></p> <p>
<font size="2" face="Times New Roman">We may not have sufficient funds available to make the required maturity payments.&#160; If we do not have sufficient funds, one or more note holders could declare its note in default.&#160; The senior secured
promissory notes are secured by our accounts receivable, equipment, goods, instruments and inventory.&#160; If we default on the payment of such notes, the holders will have the right to take control of all of the assets which secure the
notes.</font></p> <p> <font size="2" face="Times New Roman">Although the convertible subordinated notes are unsecured, those note holders could obtain a judgment and enforce that judgment by taking control of some or all of our assets.&#160; Upon
default, note holders could also commence involuntary bankruptcy proceedings, which could significantly impair our business and the value of your stock.&#160; Even if we do have sufficient funds to pay those notes at maturity, 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.</font></p> <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. <br> </b>Our HSS, NeoPlanar,
PureBass and HIDA 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, manufacturing problems, competition, obsolescence, loss of key technical personnel and other factors. Our revenues from our sound technology have been limited 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. We have also experienced manufacturing quality control
problems with some of our initial commercial HSS units, and we may not be able to resolve future manufacturing problems in a timely and cost-effective manner. Products employing our sound technology 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> <p><font size="2" face="Times New Roman"><b>Our portable consumer products have been the primary source of our historical
revenues. You cannot rely on period-to-period comparisons of our results of operations as an indication of future performance. </b></font></p> <p align="center"> <font size="2" face="Times New Roman">19</font></p>

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 <p> <font size="2" face="Times New Roman">We have derived most of our historical revenues from the sale of portable consumer electronics products. We expect future revenues will primarily be generated from our
proprietary sound reproduction and other electronic technologies, but there can be no assurance we will achieve substantial revenues from these technologies. If we do not achieve substantial revenues from these technologies, you may not be able to
rely on period-to-period comparisons of our results of operations as an indication of future performance. </font></p> <p> <font size="2" face="Times New Roman"><b>We do not have the ability to predict future operating results. Our quarterly and
annual revenues will likely be subject to fluctuations caused by many factors, any of which could result in our failure to achieve our revenue expectations. <br> </b>Our historical revenues derived almost exclusively from portable consumer products,
and we expect a majority of future revenues to be generated from our sound reproduction technologies. Revenues from our sound reproduction technologies are 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>
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<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">our ability to develop and license our sound reproduction technologies or our ability to supply components to customers, distributors or OEMs;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">market acceptance of and changes in demand for products of our licensees;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">unpredictable volume and timing of customer orders;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">production delays by customers, distributors, OEMs or by us or our suppliers;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">seasonal fluctuations in sales;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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;</font></p> </td> </tr>
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<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
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<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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; and</font></p> </td> </tr>
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<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="92%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" 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> <font size="2" face="Times New Roman">Some or all of these factors could adversely affect demand for OEM products incorporating our sound reproduction technologies, and therefore adversely affect our future operating results.
</font></p> <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. We do not have the ability to predict future operating results with any certainty. </font></p> <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. <br> </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>
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<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" 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="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="86%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" 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="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="86%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="10%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="86%" valign="top"> <p> <font size="2" face="Times New Roman">the timing of personnel and consultant hiring.</font></p> </td> </tr> </table> <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. <br> </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 </font></p> <p align="center"> <font size="2" face="Times New Roman">20</font></p>

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 <p> <font size="2" face="Times New Roman">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 HSS and HIDA for which there are no established markets. As a result, our technologies,
even if successful, may become obsolete before we recoup our investment. </font></p> <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. <br>
</b>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 operations. 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> <p><font size="2" face="Times New Roman"><b>We may not be successful in obtaining the necessary licenses required for us to sell some of our products abroad. <br> </b>Licenses for the export of certain
of our products may be required from government agencies in accordance with various statutory authorities, including the Export Administration Act of 1979, the International Emergency Economic Powers Act, the Trading with the Enemy Act of 1917 and
the Arms Export Control Act of 1976.&#160; We may not be able obtain the necessary licenses in order to conduct business abroad.&#160; In the case of certain sales of defense equipment and services to foreign governments, the U.S. Department of
State must notify Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing these sales.&#160; During that time, Congress may take action to block the proposed sale.&#160; Failure to receive required
licenses or authorization would hinder our ability to sell our products outside the United States.</font></p> <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. <br> </b>Technological competition from other and longer established electronic and loudspeaker manufacturers is 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 programs 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> <p> <font
size="2" face="Times New Roman"><b>Commercialization of our sound technologies depends on collaborations with 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. <br> </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 products that include our sound technologies. </font></p> <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> <p> <font size="2" face="Times New Roman"><b>We are dependent on outside suppliers, including HST, Inc. Disruptions in supply could adversely affect us. <br> </b>We have developed a strategic manufacturing relationship with
HST, Inc. providing for sub-contract manufacturing of our HSS and NeoPlanar products. The loss or disruption of HST, Inc. as a supplier could have a negative impact on our financial condition and results of operations. We also have a manufacturing
arrangement with Amtec Manufacturing for our PureBass subwoofer units. These are sole supplier arrangements, and the loss or a disruption of supply could have a negative impact on our ability to introduce these technologies in volume. Once
introduced in volume, the loss or disruption of supply could reduce future revenues, adversely affecting financial condition and results of operations. </font></p> <p> <font size="2" face="Times New Roman"><b>Any inability to adequately protect our
proprietary technologies could harm our competitive position. <br> </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 </font></p> <p align="center"> <font size="2" face="Times New Roman">21</font></p>

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 <p> <font size="2" face="Times New Roman">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 negative effect on our business prospects.
</font></p> <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. <br> </b>Our performance is substantially dependent on the
performance of our executive officers and key technical employees, including Elwood G. Norris, our Chairman, and James M. Irish our CEO. 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, and we may not
be able to attract, 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 cause our business, operating
results or financial condition to suffer. </font></p> <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. <br> </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.&#160; </font></p> <p> <font size="2" face="Times New Roman"><b>Our convertible subordinated note financing may result in dilution to
our common stockholders.<br> </b>Dilution of the per share value of our common shares could result from the conversion of most or all of the convertible subordinated notes we sold in September and October of 2001. Holders of these notes may convert
the principal balance of these notes and all accrued interest into shares of our common stock at a conversion price of $2.00. The conversion price may be adjusted downward if we sell securities for less than an effective price of $2.00 per
share.&#160; We have the right to require conversion of the notes after our stock trades above $5.00 per share for five consecutive trading days and we have an effective registration statement for the resale of the conversion shares.&#160; We intend
to exercise this right as soon as we are able.&#160; In addition, the purchasers in these transactions received warrants to purchase one common share for each $2.00 in note principal purchased.&#160; The exercise price is $2.00 per share, subject to
downward adjustment if we sell securities for less than an effective price of $2.00 per share.&#160; We initially issued $2.025 million in principal amount of convertible subordinated notes, which as of March 31, 2003 were convertible into an
aggregate of 1,193,738 common shares, and 1,012,500 warrants, all of which are outstanding.&#160; The 12% convertible subordinated notes are due December 31, 2003, and accrue interest at 12% per annum.</font></p> <p><font size="2"
face="Times New Roman">Holders of our common stock could experience substantial dilution form the conversion of the convertible subordinated notes and exercise of the related warrants. In the event the conversion or exercise price is lower than the
actual trading price on the day of conversion or exercise, the holder could immediately sell all of its converted common shares and exercised warrant shares, which would have a dilutive effect on the value of the outstanding common shares.&#160;
Even the mere perception of eventual sales of common shares issued on the conversion of the convertible subordinated notes or exercise of the related warrants could lead to a decline in the trading price of our common stock.</font></p> <p> <font
size="2" face="Times New Roman"><b>Our Series D and Series E Preferred Stock financings may result in dilution to our common stockholders.&#160; The holders of Series D and Series E Preferred Stock will receive more common shares on conversion if
the market price of our common stock declines.<br> </b>Dilution of the per share value of our common shares could result from the conversion of the outstanding Series D and Series E Preferred Stock. In May 2002, we issued a total of 235,400 shares
of our Series D Preferred Stock. 180,400 shares have been converted into 683,344 common shares and 55,000 shares remain outstanding as of May 7, 2003. We have also issued 343,250 shares of Series E Preferred Stock.</font></p> <p align="center">
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 <p> <font size="2" face="Times New Roman">The holders of our outstanding shares of Series D Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to the lower of $4.50 or
90% of volume-weighted average price of our common stock for the five trading days prior to conversion.&#160; The conversion rate cannot however be lower than lower than $2.00.&#160; The $2.00 floor price may however be adjusted downward if we sell
securities for less than an effective price of $2.00 per share. As of May 7, 2003, the outstanding 55,000 shares of Series D Preferred Stock are convertible into an aggregate of 193,598 common shares.&#160; In addition, the Series D Preferred Stock
purchasers received warrants to purchase 2.2 common shares for each share of Series D Preferred Stock purchased.&#160; The exercise price of the warrants was initially $4.50 per share, but was reduced to $3.01 per share as a result of anti-dilution
provisions in the warrants. The exercise price will be subject to further reduction if we sell securities for less than an effective price of $3.01 per share.</font></p> <p><font size="2" face="Times New Roman">The holders of our outstanding shares
of Series E Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to the lower of $3.25 or 90% of volume-weighted average price of our common stock for the five trading days prior to conversion.&#160;
The conversion rate cannot however be lower than $3.25 before September 30, 2003, or lower than $2.00 after such date. As of May 7, 2003, the 343,250 outstanding shares of Series E Preferred Stock are convertible into an aggregate of 1,067,782
common shares.&#160; In addition, the Series E Preferred Stock purchasers received warrants to purchase 1.5 common shares for each share of Series E Preferred Stock purchased at an exercise price of $3.25 per share.&#160; </font></p> <p> <font
size="2" face="Times New Roman">Holders of our common stock could experience substantial dilution from the conversion of the Series D and Series E Preferred Stock and exercise of the related warrants. As a result of the floating conversion price,
the holders of Series D and Series E Preferred Stock will receive more common shares on conversion if the price of our common shares declines.&#160; To the extent that the Series D or Series E stockholders convert and then sell their common shares,
the common stock price may decrease due to the additional shares in the market.&#160; This could allow the Series D or Series E stockholders to receive greater amounts of common stock, the sales of which would further depress the stock price.&#160;
Furthermore, the significant downward pressure on the trading price of our common stock as Series D and Series E Preferred Stock and related warrant holders convert or exercise these securities and sell the common shares received could encourage
short sales by the holders of Series D and Series E Preferred Stock and the related warrants, or other stockholders. This would place further downward pressure on the trading price of our common stock.&#160; Even the mere perception of eventual
sales of common shares issued on the conversion of the Series D and Series E Preferred Stock or exercise of the related warrants could lead to a decline in the trading price of our common stock. Our stock price is volatile and may continue to be
volatile in the future.</font></p> <p> <font size="2" face="Times New Roman">Our common stock trades on the NASDAQ SmallCap 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: </font></p>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" 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 anticipated or actual operating results;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" 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">developments concerning our sound reproduction technologies;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" 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">technological innovations or setbacks by us or our competitors;</font></p> </td> </tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" 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">conditions in the consumer electronics market;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" 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">announcements of merger or acquisition transactions; and</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="5%" 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">other events or factors and general economic and market conditions.</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">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> <p>
<a name="tx122_6"></a> <font size="2" face="Times New Roman"><b>Item 3. Quantitative and Qualitative Disclosures about Market Risk</b></font></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 cash of $1,866,335 at March 31, 2003. Based on this balance, a change of one percent in interest rate would cause a change in interest income of $18,663. 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 align="center"> <font size="2" face="Times New Roman">23</font></p>

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 <p> <font size="2" face="Times New Roman">We have long-term debt of $1,000,000 earning an 8% fixed interest rate, this rate is not affected by the change in the market. At the present time we do not have any
significant foreign sales or foreign currency transactions.</font></p> <p>
<a name="tx122_7"></a> <font size="2" face="Times New Roman"><b>Item 4. Controls and Procedures </b></font></p>
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<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">(a)</font></p> </td>
<td width="91%" valign="top"> <p> <font size="2" face="Times New Roman">Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), within 90 days of the filing date of this report. Based on their evaluation, our
principal executive officer and our principal financial officer concluded that our disclosure controls and procedures are effective.</font></p> </td> </tr>
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<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="91%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p><font size="2" face="Times New Roman">(b)</font></p> </td>
<td width="91%" valign="top"> <p> <font size="2" face="Times New Roman">There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.</font></p> </td> </tr> </table> <p>
<a name="tx122_8"></a> <font size="2" face="Times New Roman"><b>PART II. OTHER INFORMATION</b></font></p> <p>
<a name="tx122_9"></a> <font size="2" face="Times New Roman"><b>Item 1. Legal Proceedings</b></font></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="tx122_10"></a> <font size="2" face="Times New Roman"><b>Item 2. Changes in Securities</b></font></p> <p> <font size="2" face="Times New Roman">(a)&nbsp;&nbsp;Not applicable </font></p> <p> <font size="2"
face="Times New Roman">(b)&nbsp;&nbsp;As more particularly described below, we issued 343,250 shares of Series E Preferred Stock during the quarter ended March 31, 2003.&#160; The Series E Preferred Stock is entitled to a liquidation preference over
the common stock equal to the purchase price of the Series E Preferred Stock increased by 6% per annum. The Series E Preferred Stock is also entitled to a cash dividend equal 6% of the liquidation preference when, as and if a cash dividend is
declared on the common stock.&#160;&#160;&#160; The Series E Preferred Stock dividend must be paid in preference and priority to a dividend on the common stock. The liquidation preference could materially diminish the rights of the common
stockholders in the event of a liquidation, and the dividend preference will impair our ability to declare a dividend on the common stock were we to choose to do so. At this time, we do not intend to declare dividends on the common stock in the
foreseeable future. </font></p> <p><font size="2" face="Times New Roman">(c)&nbsp;&nbsp;The following is a description of the equity securities sold by us during the second fiscal quarter ended March 31, 2003 that were not registered under the
Securities Act:</font></p> <p> <font size="2" face="Times New Roman">During the quarter ended March 31, 2003, we sold in a private offering $3,432,500 of Series E Preferred Stock, par value $.00001, at $10.00 per share to a limited number of
investors.&#160; In connection with the Series E financing, we amended our 8% Senior Secured Promissory Notes:</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">to allow the holders of the senior notes to convert all or a portion of the principal balance of the senior notes into Series E Preferred Stock; and</font></p> </td> </tr>
<tr>
<td width="4%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="top"> <p> <font size="2" face="Times New Roman">&#149;</font></p> </td>
<td width="92%" valign="top"> <p> <font size="2" face="Times New Roman">to extend the due date of the unconverted balance of the senior notes from December 31, 2003 to December 31, 2004.</font></p> </td> </tr> </table> <p> <font size="2"
face="Times New Roman">We raised an aggregate of $2,432,500 in new cash and converted senior notes with an aggregate value of $1,000,000. A total of $1,000,000 in principal amount of the senior notes remains outstanding.&#160; The amendment to the
senior notes also clarified that senior note balances converted to Series E Preferred Stock would not be included for purposes of determining whether mandatory redemption of the remaining senior note balance is required.</font></p> <p> <font
size="2" face="Times New Roman">The purchase price of the 343,250 shares of Series E Preferred Stock, increased by $0.60 per share per year, may be converted at the election of a Series E Preferred shareholder one or more times into fully paid and
non-assessable shares of common stock at a conversion price of $3.25.&#160; If after September 30, 2003, 90% of the volume weighted average price of our common stock for the five trading days prior to conversion (the &#147;Discount Market
Price&#148;) is less than $3.25, the conversion price will be reduced to the Discount Market Price; provided, however, that the conversion price cannot be below $2.00 per share.&#160; We may call the Series E Preferred Stock for conversion if the
market price of our common </font></p> <p align="center"><font size="2" face="Times New Roman">24</font></p>

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 <p> <font size="2" face="Times New Roman">stock exceeds $9.50 per shares for ten consecutive trading days and certain conditions are met.&#160; The Series E Preferred Stock will be subject to mandatory conversion on
December 31, 2006.</font></p> <p> <font size="2" face="Times New Roman">Each purchaser of Series E Preferred Stock was also granted a warrant to purchase 1.5 shares of common stock for each share of Series E Preferred Stock purchased, exercisable
until December 31, 2007 at a price of $3.25 per share.&#160; In connection with the Series E financing, we issued warrants exercisable for an aggregate of 514,875 shares.</font></p> <p> <font size="2" face="Times New Roman">The Series E financing
resulted in a repricing of the 517,880 warrants previously issued in connection with our Series D Preferred Stock financing from $4.50 per share to $3.01 per share in accordance with repricing provisions of such warrants.</font></p> <p> <font
size="2" face="Times New Roman">The Series E Preferred and the related warrants were offered and sold without the registration under the Securities Act to a limited number of accredited investors in reliance upon the exemption provided by Rule 506
of Regulation D thereunder, and to a limited number of foreign investors in sales outside the United States in accordance with Regulation S thereunder. An appropriate legend was placed on the Series E Preferred Stock and the warrants and will be
placed upon the shares issuable upon conversion of the Series E Preferred Stock or upon exercise of the warrants unless registered under the Securities Act prior to issuance. We have agreed to file a registration statement covering the stock
issuable upon conversion of the Series E Preferred Stock and exercise of the warrants on or before May 31, 2003. The 8% Senior Secured Notes were modified without registration under the Securities Act in reliance on Section 3(a)(9) of the Securities
Act. The modification involved solely existing security holders and no commission or other remuneration was paid or given directly or indirectly for soliciting such modification.</font></p> <p> <font size="2" face="Times New Roman">Net proceeds from
the Series E financing of $2,266,278 (excluding estimated finders fees, offering costs and the value of converted senior notes) are intended primarily for working capital.&#160; </font></p> <p><font size="2" face="Times New Roman">During the quarter
ended March 31, 2003, we issued 54,922 shares to each of Stephen M. Williams and David Graebener pursuant to the terms of an Asset Purchase Agreement dated April 11, 2000. These shares were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended. Each recipient of shares was a senior level employee of the company who had access to the kind of information normally provided in a prospectus.</font></p> <p>
<a name="tx122_11"></a> <font size="2" face="Times New Roman"><b>Item 3. Defaults Upon Senior Securities<br> </b>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable</font></p> <p>
<a name="tx122_12"></a> <font size="2" face="Times New Roman"><b>Item 4. Submission of Matters to a Vote of Security Holders<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>Not applicable</font></p> <p>
<a name="tx122_13"></a> <font size="2" face="Times New Roman"><b>Item 5. Other Information<br> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>Not applicable </font></p> <p>
<a name="tx122_14"></a> <font size="2" face="Times New Roman"><b>Item 6. Exhibits and Reports on Form 8-K</b></font></p> <p> <font size="2" face="Times New Roman"><b>(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Exhibits:</b></font></p>
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<td width="6%" colspan="2" valign="top"> <p> <font size="2" face="Times New Roman">10.1</font></p> </td>
<td width="88%" valign="top"> <p> <font size="2" face="Times New Roman">Form of Series E Preferred Stock and Warrant Purchase Agreement. Filed as Exhibit 4.1 on Form 8-K filed March 6, 2003.</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p> <font size="2" face="Times New Roman">10.2</font></p> </td>
<td width="88%" valign="top"> <p> <font size="2" face="Times New Roman">Certificate of Designation of Series E Preferred Stock filed with Delaware on February&nbsp;28, 2003. Filed as Exhibit 4.2 on Form 8-K filed March 6, 2003.</font></p> </td>
</tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">10.3</font></p> </td>
<td width="88%" valign="top"> <p> <font size="2" face="Times New Roman">Form of Common Stock Warrant. Filed as Exhibit 4.3 on Form 8-K filed March 6, 2003.</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p> <font size="2" face="Times New Roman">10.4</font></p> </td>
<td width="88%" valign="top"> <p> <font size="2" face="Times New Roman">Form of Amendment to 8% Senior Secured Promissory Note. Filed as Exhibit 4.6 on Form 8-K filed March 6, 2003.</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p> <font size="2" face="Times New Roman">10.5</font></p> </td>
<td width="88%" valign="top"> <p> <font size="2" face="Times New Roman">Employment agreement/offer letter of James M. Irish dated January 27, 2003. *</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="6%" colspan="2" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="88%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="6%" valign="top"> <p> <font size="2" face="Times New Roman">99.1</font></p> </td>
<td width="3%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="91%" colspan="2" valign="top"> <p> <font size="2" face="Times New Roman">Certification of Chief Executive Officer and Principal Financial Officer.</font></p> </td> </tr>
<tr>
<td width=43 style='border:none'></td>
<td width=22></td>
<td width=22></td>
<td width=635></td> </tr> </table> <p><font size="2" face="Times New Roman">* Filed concurrently herewith.</font></p> <p><font size="2" face="Times New Roman"><b>Reports on Form 8-K<br>
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</b>On March 6, 2003, we filed a Form 8-K containing disclosure in Item 5.</font></p> <p align="center"> <font size="2" face="Times New Roman">25</font></p>

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<a name="tx122_15"></a> <font size="2" face="Times New Roman"><b>SIGNATURES</b></font></p> <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>
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<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="47%" colspan="2" valign="bottom"> <p> <font size="2" face="Times New Roman">A<small>MERICAN</small> T<small>ECHNOLOGY</small> C<small>ORPORATION</small></font></p> </td> </tr>
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<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="47%" colspan="2" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
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<td width="52%" valign="bottom"> <p> <font size="2" face="Times New Roman">Date:&#160; May 14, 2003</font></p> </td>
<td width="4%" valign="bottom"> <p> <font size="2" face="Times New Roman">By:</font></p> </td>
<td width="42%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman">/s/ R<small>EN&Eacute;E</small> W<small>ARDEN</small></font></p> </td> </tr>
<tr>
<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="42%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td> </tr>
<tr>
<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="4%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="42%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Ren&eacute;e</b></font> <font size="1" face="Times New Roman"><b> Warden, Chief Accounting<br> Officer, Treasurer and Corporate Secretary<br> (Principal
Financial and<br> Accounting Officer and duly<br> authorized to sign on behalf<br> of the Registrant)</b></font></p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">26</font></p>

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 <p align="center"> <font size="2" face="Times New Roman"><b>CERTIFICATIONS</b></font></p>
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<tr>
<td width="100%" colspan="2" valign="top"> <p> <font size="2" face="Times New Roman">I, James M. Irish, certify that:</font></p> </td> </tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
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<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">1.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">I have reviewed this quarterly report on Form 10-Q of American Technology Corporation;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">2.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">3.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">4.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">The registrant&#146;s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14) for the registrant and have:</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="2" face="Times New Roman">a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly report is being prepared;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">b) evaluated the effectiveness of the registrant&#146;s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and</font></p> </td> </tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;</font></p> </td> </tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">5.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">The registrant&#146;s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant&#146;s auditors and the audit committee of
registrant&#146;s board of directors (or persons performing the equivalent functions):</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant&#146;s ability to record, process, summarize and
report financial data and have identified for the registrant&#146;s auditors any material weaknesses in internal controls; and</font></p> </td> </tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="2" face="Times New Roman">b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant&#146;s internal controls; and</font></p> </td>
</tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
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<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">6.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">The registrant&#146;s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.</font></p> </td> </tr> </table> <p> <font
size="2" face="Times New Roman">Dated: May 13, 2003</font></p>
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<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="39%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman">/s/ J<small>AMES</small> M. I<small>RISH</small></font></p> </td>
<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="39%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="39%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>James M. Irish, <br> Chief Executive Officer (Principal Executive Officer)</b></font></p> </td>
<td width="52%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p align="center"> <font size="2" face="Times New Roman">27</font></p>

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<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="100%" colspan="2" valign="top"> <p><font size="2" face="Times New Roman">I, Renee Warden, certify that:</font></p> </td> </tr>
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<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">1.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">I have reviewed this quarterly report on Form 10-Q of American Technology Corporation;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">2.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">3.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">4.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">The registrant&#146;s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14) for the registrant and have:</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="2" face="Times New Roman">a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this quarterly report is being prepared;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">b) evaluated the effectiveness of the registrant&#146;s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">5.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">The registrant&#146;s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant&#146;s auditors and the audit committee of
registrant&#146;s board of directors (or persons performing the equivalent functions):</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant&#146;s ability to record, process, summarize and
report financial data and have identified for the registrant&#146;s auditors any material weaknesses in internal controls; and</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="2" face="Times New Roman">b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant&#146;s internal controls; and</font></p> </td>
</tr>
<tr>
<td width="5%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="95%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="5%" valign="top"> <p> <font size="2" face="Times New Roman">6.</font></p> </td>
<td width="95%" valign="top"> <p> <font size="2" face="Times New Roman">The registrant&#146;s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.</font></p> </td> </tr> </table> <p> <font
size="2" face="Times New Roman">Dated: May 13, 2003</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="42%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman">/s/ R<small>ENEE</small> W<small>ARDEN</small></font></p> </td>
<td width="49%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="42%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="49%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="42%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>Renee Warden, <br> Chief Accounting Officer, <br> Treasurer and Corporate Secretary (Principal Financial Officer)</b></font></p> </td>
<td width="49%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p align="center"> <font size="2" face="Times New Roman">28</font></p>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.5
<SEQUENCE>3
<FILENAME>dex105.htm
<DESCRIPTION>JAMES IRISH ENGAGEMENT LETTER
<TEXT>
<HTML><HEAD>
<TITLE>James Irish Engagement Letter</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
  <p align=right><font size="2" face="Times New Roman">Exhibit 10.5</font></p> <p> <font size="2" face="Times New Roman">January 27, 2003</font></p> <p> <font size="2" face="Times New Roman">James Irish<br> 12437 Tom
Dolley<br> Truckee, CA 96161</font></p> <p> <font size="2" face="Times New Roman">Dear James,</font></p> <p> <font size="2" face="Times New Roman">American Technology Corporation (&#147;ATC&#148;) is pleased to present to you with this 90-day
engagement letter under the following terms and conditions: <i>After completion of 90-day probationary period a formal 3 year employment agreement will be written to incorporate, but not limited to, the terms and conditions specifically listed
below.</i></font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">1) Starting date:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">February 10, 2003</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">2) Base salary:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">$150,000</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">3) Stock options:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">You will receive options as part of the compensation package from the Company. The option price will be closing bid price on date of employment. You will receive a Stock Option
Grant for 100,000 shares, vesting as follows: 25% after 90 day probationary period, and 25% thereafter annually on anniversary date over a three year period.</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="2" face="Times New Roman">4) Insurance:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">Medical and dental coverage. ATC will provide coverage in terms stated in our Policy Manual. Medical and Dental premiums for employee and dependents are covered 100%. These
benefits commence on March 1, 2003.</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">5) Temporary Living:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">Employee shall receive, an allowance no greater then $25,000 annually for temporary housing. The Company to sign lease agreement.</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">6) Relocation allowance:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">The employee shall receive $20,000 maximum for moving expenditures incurred as part of his relocation.</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">7) Auto Allowance:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">$500.00 per month beginning immediately.</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">8) Vacation/Holiday time:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">The Company observes 9 paid holidays per calendar year. Vacation days are known as personal days off (&#147;PDO&#148;) are accrued per pay period. This engagement letter
entitles you to accrue 3 weeks for the first year and 4 weeks thereafter, with a maximum of 200 hours accrued as per the Company policy.</font></p> </td> </tr> </table> <BR>

<p Style='page-break-before:always'>
<HR  SIZE="3" COLOR="#999999" WIDTH="100%" ALIGN="CENTER">
  <p align=right> <font size="2" face="Times New Roman">Exhibit 10.5</font></p> <p> <font size="2" face="Times New Roman">&nbsp;</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">9) Bonus:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">To be determined by the Compensation Committee and approved by Board of Directors after 90-day probationary period.</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="78%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="21%" valign="top"> <p> <font size="2" face="Times New Roman">10) 401k Plan:</font></p> </td>
<td width="78%" valign="top"> <p> <font size="2" face="Times New Roman">A 401K plan is available with multiple investment options and a company match.</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">Your title with ATC will
be the Chief Executive Officer where by you will report directly to the Board of Directors. You will also be classified as a Section 16 filer and be required to submit information regarding your current holdings of ATC shares to the Securities and
Exchange Commission (&#147;SEC&#148;) accordingly. </font></p> <p> <font size="2" face="Times New Roman">Please sign this engagement letter in the space provided below signifying your having read and accepted the terms herein. A copy has been
provided for your records.</font></p> <p> <font size="2" face="Times New Roman">We all look forward to your joining American Technology Corporations Team with expectation and anticipation.</font></p> <p> <font size="2"
face="Times New Roman">Sincerely,</font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="23%" valign="bottom"> <p align=center> <font size="2" face="Times New Roman">/s/ E<small>LWOOD</small> G. N<small>ORRIS</small></font></p> </td>
<td width="76%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="23%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="76%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr>
<tr>
<td width="23%" valign="bottom"> <p align="center"><font size="1" face="Times New Roman"><b>Elwood G. Norris<br> Chairman</b></font></p> </td>
<td width="76%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <BR>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td colspan="4" valign="bottom"> <hr size="2" width="100%" noshade color=black> </td> </tr>
<tr>
<td width="23%" valign="bottom">&nbsp;</td>
<td width="27%" valign="bottom">&nbsp;</td>
<td width="16%" valign="bottom">&nbsp;</td>
<td width="32%" valign="bottom">&nbsp;</td> </tr>
<tr>
<td width="23%" valign="bottom"> <p align=center><font size="2" face="Times New Roman">/s/ J<small>AMES</small> I<small>RISH</small></font></p> </td>
<td width="27%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="16%" valign="bottom"> <p><font size="2" face="Times New Roman">January 27, 2003</font></p> </td>
<td width="32%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="23%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="27%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="16%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="32%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="23%" valign="bottom"> <p align=center><font size="1" face="Times New Roman"><b>James Irish</b></font></p> </td>
<td width="27%" valign="bottom"> <p style="margin-left:1em; text-indent:-1em"><font size="1">&nbsp;</font></p> </td>
<td width="16%" valign="bottom"> <p align="center"><font size="2" face="Times New Roman">Date:</font></p> </td>
<td width="32%" valign="bottom"> <p><font size="1">&nbsp;</font></p> </td> </tr> </table> <p><font size="2" face="Times New Roman">cc:&nbsp;&nbsp;Human resources</font></p> <p><font size="1" face="Times new roman">&nbsp;</font></p>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>4
<FILENAME>dex991.htm
<DESCRIPTION>SECTION 906 CERTIFICATIONS
<TEXT>
<HTML><HEAD>
<TITLE>Section 906 Certifications</TITLE>
</HEAD>
<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"><b>CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER<br>
PURSUANT TO<br> 18 U.S.C. SECTION 1350,<br> AS ADOPTED PURSUANT TO<br> SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002</b></font></p> <p> <font size="2" face="Times New Roman">Each of the undersigned hereby certifies, in accordance with 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an officer of American Technology Corporation (the &#147;Company&#148;), that, to his or her knowledge, the Quarterly Report of the Company on Form
10-Q for the period ended March 31, 2003, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the
financial condition and results of operation of the Company.</font></p> <p> <font size="2" face="Times New Roman">Dated: May 13, 2003 </font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="36%" valign="bottom"> <p align="center"> <font size="2" face="Times New Roman">/s/ J<small>AMES</small> M. I<small>RISH</small></font></p> </td>
<td width="55%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td>
<td width="36%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="55%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="36%" valign="bottom"> <p align="center"> <font size="1" face="Times New Roman"><b>James M. Irish, <br> Chief Executive Officer&#160; (Principal Executive Officer)</b></font></p> </td>
<td width="55%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p> <font size="2" face="Times New Roman">Dated: May 13, 2003 </font></p>
<table align="center" border="0" style="border-collapse:collapse" cellspacing="0" cellpadding="0" width="100%">
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="36%" valign="bottom"> <p align="center"><font size="2" face="Times New Roman">/s/ R<small>ENEE</small> W<small>ARDEN</small></font></p> </td>
<td width="55%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="36%" valign="bottom"> <hr size="1" width="100%" noshade color=black> </td>
<td width="55%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr>
<tr>
<td width="8%" valign="top"> <p><font size="1">&nbsp;</font></p> </td>
<td width="36%" valign="bottom"> <p align="center"><font size="1" face="Times New Roman"><b>Renee Warden, <br> Chief Accounting Officer,<br> Treasurer and Corporate Secretary (Principal Financial Officer)</b></font></p> </td>
<td width="55%" valign="bottom"> <p><font size="1" face="Times new roman">&nbsp;</font></p> </td> </tr> </table> <p align="center"><font size="2" face="Times New Roman">&nbsp;</font></p>
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</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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